As filed with the Securities and Exchange Commission on January 16, 1998.
Registration No. 333-43327
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM S-4
REGISTRATION STATEMENT
Under The Securities Act of 1933
ISSUER OF SENIOR DEBENTURES REGISTERED HEREBY
COMFORCE Corporation
(Exact name of registrant as specified in its charter)
Delaware 7361 36 - 2262248
(State or other (Primary Standard (I.R.S Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
--------------------
COMFORCE Corporation
2001 Marcus Avenue
Lake Success, New York 11042
(516) 328-7300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
--------------------
Christopher P. Franco
Chief Executive Officer
COMFORCE Corporation
2001 Marcus Avenue
Lake Success, New York 11042
(516) 328-7300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------
Copy to:
David G. Edwards, Esquire
Doepken Keevican & Weiss Professional Corporation
58th Floor, USX Tower
600 Grant Street
Pittsburgh, Pennsylvania 15219-2703
(412) 355-2600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------
<PAGE>
(Cover page continued)
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Offering Price Per Aggregate Offering Registration Fee
Registered Unit Price (1) (2)(3)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
15% Senior PIK $20,000,000 100% $20,000,000 $5,900
Debentures due 2009,
Series B
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</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(f)(2).
(2) Calculated pursuant to Rule 457(f)(2).
(3) This registration fee was paid by the Company in connection with the
initial filing of its Registration Statement on December 24, 1997.
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 16, 1998
PRELIMINARY PROSPECTUS
COMFORCE CORPORATION
OFFER TO EXCHANGE
15% SENIOR SECURED PIK DEBENTURES DUE 2009, SERIES B
FOR 15% SENIOR SECURED PIK DEBENTURES DUE 2009, SERIES A.
-----------------------
The Exchange Offer will expire at 5:00 P.M., New York City time, on
March 27, 1998, unless extended.
-----------------------
COMFORCE Corporation, a Delaware corporation ("COMFORCE"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus and
the accompanying Letter of Transmittal, to exchange (the "Debentures Exchange
Offer") its 15% Senior Secured PIK Debentures, Series B (the "New Senior
Debentures" or the "Exchange Senior Debentures") for an equal principal amount
of its outstanding 15% Senior Secured PIK Debentures, Series A (the "Old Senior
Debentures" or the "Unregistered Senior Debentures") (the Old Senior Debentures
and the New Senior Debentures are collectively referred to as the "Senior
Debentures"), of which an aggregate principal amount of $20,000,000 is
outstanding as of the date hereof. The form and the terms of the New Senior
Debentures will be the same in all material respects as the form and terms of
the Old Senior Debentures, except that (i) the New Senior Debentures will be
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and hence will not bear legends restricting the transfer thereof and (ii)
holders of the New Senior Debentures will not be entitled to certain rights of
holders of Old Senior Debentures under the Exchange Offer and Registration
Rights Agreement dated as of November 26, 1997 relating to the Old Senior
Debentures (the "Debentures Registration Rights Agreement"), which will
terminate upon consummation of the Debentures Exchange Offer. See "The
Debentures Exchange Offer--Purpose and Effect of the Debentures Exchange Offer."
The New Senior Debentures will be initially issued as a single, permanent global
certificate. See "Book-Entry; Delivery and Form" and "Description of Senior
Debentures."
(continued on next page)
-----------------------
See "Risk Factors" on Page 31 for a Description of Certain Risks to Be
Considered by Holders Who Tender Their Old Senior Debentures for New Senior
Debentures.
-----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------
The date of this Prospectus is ______________.
<PAGE>
(continued from previous page)
The Old Senior Debentures were issued on November 26, 1997 as part of a
series of transactions (the "Transactions"), consisting of (i) the offer and
sale (the "Units Offering") by COMFORCE of 20,000 Units (the "Units"), each Unit
consisting of $1,000 in principal amount of Old Senior Debentures and 8.45
Warrants (the "Warrants"), each to purchase one share of the common stock of
COMFORCE, (ii) the offer and sale (the "Notes Offering") by COMFORCE Operating,
Inc. ("COI"), a wholly owned subsidiary of COMFORCE, of $110,000,000 in
principal amount of 12% Senior Notes due 2007, Series A (the "Old Notes" or the
"Unregistered Notes"), (iii) COMFORCE's acquisition (the "Uniforce Acquisition")
of Uniforce Services, Inc. ("Uniforce") through a tender offer and a merger of a
wholly-owned subsidiary of COI with and into Uniforce, the cash portion of which
was funded using a portion of the proceeds of the Notes Offering and (iv) the
refinancing (the "Refinancing") of certain existing indebtedness of COMFORCE and
Uniforce using the remainder of the net proceeds of the Notes Offering, the net
proceeds of the Units Offering and the net proceeds of a new bank credit
facility (the "New Credit Facility"). Simultaneously with the Debentures
Exchange Offer, COI is conducting an offer (the "Notes Exchange Offer") to
exchange the Old Notes for 12% Senior Notes due 2007, Series B (the "New Notes"
or the "Exchange Notes," and, collectively with the Old Notes, the "Notes"), as
required by the Exchange Offer and Registration Rights Agreement dated as of
November 26, 1997 relating to the Old Notes (the "Notes Registration Rights
Agreement"). The Debentures Exchange Offer and the Notes Exchange Offer are
collectively referred to herein as the "Exchange Offers", and the Debentures
Registration Rights Agreement and the Notes Registration Rights Agreement are
collectively referred to herein as the "Registration Rights Agreements." The Old
Notes and the Old Senior Debentures are sometimes referred to herein
collectively as the "Unregistered Securities." The New Notes and the New Senior
Debentures are sometimes referred to herein collectively as the "Exchange
Securities." Unless otherwise defined in this Prospectus, the "Company" means
COMFORCE and its subsidiaries after giving effect to the Uniforce Acquisition.
The Old Senior Debentures were issued and sold in a transaction exempt from
the registration requirements of the Securities Act and may not be offered or
sold in the United States unless so registered or pursuant to an applicable
exemption under the Securities Act. The New Senior Debentures are being offered
herewith in order to satisfy certain obligations of the Company contained in the
Debentures Registration Rights Agreement. Based on no-action letters issued by
the staff of the Securities and Exchange Commission (the "Commission") to third
parties, the Company believes that the New Senior Debentures to be issued
pursuant to the Debentures Exchange Offer may be offered for resale, resold and
otherwise transferred by holders thereof (other than (i) a broker-dealer who
purchases such Exchange Senior Debentures from COMFORCE to resell pursuant to
Rule 144A or any other available exemption under the Securities Act, or (ii) a
person that is an "affiliate" of COMFORCE within the meaning of Rule 405 under
the Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Senior
Debentures are acquired in the ordinary course of such holders' business and
such holders have no arrangement with any person to participate in the
distribution of such Exchange Senior Debentures. However, COMFORCE has not
sought a no-action letter with respect to the Debentures Exchange Offer, and
there can be no assurance the staff of the Commission would make a similar
determination with respect to the Debentures Exchange Offer. Eligible holders
wishing to accept the Debentures Exchange Offer must represent to COMFORCE that
such conditions have been met. Each broker-dealer that receives Exchange Senior
Debentures for its own account pursuant to the Debentures Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Senior Debentures. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act. A
broker-dealer may nonetheless be deemed to be an "underwriter" under the
Securities Act notwithstanding such disclaimer. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Senior Debentures received in exchange for
Unregistered Senior Debentures where such Unregistered Senior Debentures were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. COMFORCE has agreed that, for a period of 180 days after the
Expiration Date (as defined herein), it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Holders of Old Senior Debentures whose Old Senior Debentures are not
tendered and accepted in the Debentures Exchange Offer will continue to hold
such Old Senior Debentures and will be entitled to all the rights and
preferences and will be subject to the limitations applicable thereto under the
indenture governing the Senior Debentures. Following consummation of the
Debentures Exchange Offer, the holders of Old Senior Debentures will continue to
be subject to the existing restrictions upon transfer thereof, and COMFORCE will
have no further
2
<PAGE>
obligation to such holders to provide for the registration under the Securities
Act of the Old Senior Debentures held by them. The New Senior Debentures will
evidence the same debt as the Old Senior Debentures and will be entitled to the
benefits of the indenture (the "Senior Indenture"), dated as of November 26,
1997, governing the Senior Debentures.
Interest on the Senior Debentures is payable semi-annually on June 1 and
December 1 of each year, commencing June 1, 1998. Interest on the Senior
Debentures is payable either in cash or in additional Senior Debentures, at the
option of the Company, until December 1, 2002, and thereafter is payable in
cash. The Senior Debentures will mature on December 1, 2009. The Company may
redeem the Senior Debentures, in whole or in part, at any time, at the
redemption prices set forth herein, together with accrued and unpaid interest,
if any, to the date of redemption. In addition, at any time and from time to
time, the Company may, subject to certain requirements, redeem up to 100% of the
aggregate principal amount of the Senior Debentures, with the cash proceeds of
one or more Equity Offerings (as defined) at the redemption prices set forth
herein, together with accrued and unpaid interest, if any, to the date of
redemption. The Senior Debentures are not subject to any sinking fund
requirement. Upon the occurrence of a Change of Control (as defined), the
Company will be required to make an offer to repurchase the Senior Debentures at
a price equal to 101% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of repurchase. See "Description of Senior
Debentures-Optional Redemption" and "-Change of Control."
The Senior Debentures are direct and unconditional senior secured
obligations of COMFORCE and are secured by a pledge by COMFORCE of all of the
issued and outstanding common stock of COI. The payment obligations of COMFORCE
under the Senior Debentures will at all times rank at least equal in priority of
payment with all existing and future Indebtedness (as defined) of COMFORCE. The
Senior Indenture permits COMFORCE to incur additional Indebtedness (including
secured indebtedness and other additional senior indebtedness) subject to
certain limitations. As of September 30, 1997, on a pro forma basis after giving
effect to the Transactions, the aggregate principal amount of COMFORCE's
outstanding senior indebtedness would have been approximately $20.0 million. The
Senior Debentures are structurally subordinated to all indebtedness of
COMFORCE's direct and indirect subsidiaries and effectively subordinated to all
future secured indebtedness of COMFORCE. As of September 30, 1997, on a pro
forma basis, after giving effect to the Transactions, (i) COMFORCE had no
outstanding secured indebtedness (other than indebtedness under the Senior
Debentures) and (ii) the aggregate amount of the outstanding liabilities of
subsidiaries of COMFORCE to which holders of Senior Debentures would be
structurally subordinated would have been $169.6 million (including $147.8
million of indebtedness). See "Description of Senior Debentures" and
"Description of Other Indebtedness."
The Debentures Exchange Offer is not conditioned on any minimum aggregate
amount of Old Senior Debentures being tendered for exchange. The Company will
accept for exchange any and all validly tendered Unregistered Senior Debentures
not withdrawn prior to 5:00 p.m., New York City time, on March 27, 1998 unless
extended by the Company, (the "Expiration Date"). Tenders of Unregistered Senior
Debentures may be withdrawn at any time prior to the Expiration Date. The
Debentures Exchange Offer is subject to certain customary conditions. See "The
Debentures Exchange Offer--Conditions." The Company has agreed to pay all
expenses incident to the Debentures Exchange Offer. The Company will not receive
any proceeds from the Debentures Exchange Offer.
The Unregistered Senior Debentures constitute securities for which there is
no established trading market. Any Unregistered Senior Debentures not tendered
and accepted in the Debentures Exchange Offer will remain outstanding. The
Company does not currently intend to list the Exchange Senior Debentures on any
securities exchange. To the extent that any Unregistered Senior Debentures are
tendered and accepted in the Debentures Exchange Offer, a holder's ability to
sell untendered Unregistered Senior Debentures could be adversely affected. No
assurances can be given as to the liquidity of the trading market for either the
Unregistered Senior Debentures or the Exchange Senior Debentures.
THE DEBENTURES EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY
ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD SENIOR DEBENTURES IN ANY
JURISDICTION IN WHICH THE DEBENTURES EXCHANGE OFFER OR THE ACCEPTANCE THEREOF
WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH
JURISDICTION.
3
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Senior Debentures (the
"Debentures Registration Statement") offered hereby. As permitted by the rules
and regulations of the Commission, this Prospectus omits certain information,
exhibits and undertakings contained in the Debentures Registration Statement.
For further information with respect to the Company and the Exchange Senior
Debentures offered hereby, reference is made to the Debentures Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof. The Registration Statement (and the
exhibits and schedules thereto), as well as the periodic reports and other
information filed by the Company with the Commission, may be inspected and
copied at the public reference section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, Suite 1300, New York,
New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Such information can also be reviewed through the Commission's Electronic Data
Gathering, Analysis and Retrieval System which is publicly available through the
Commission's Web Site (http:www.sec.gov). Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement, each
such statement being qualified by such reference.
Pursuant to the Senior Indenture, the Company has agreed to furnish to The
Bank of New York, as trustee for the Senior Debentures (the "Debentures
Trustee") and to registered holders of the Senior Debentures, without cost to
the Debentures Trustee or such registered holders, copies of all reports and
other information that would be required to be filed by the Company with the
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), whether or not the Company is then required to file reports with the
Commission.
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and "Business" and
elsewhere constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements of the
Company, or industry results, to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such risks, uncertainties and other important factors include, among
others: potential inability of the Company to integrate acquired businesses;
uncertainties inherent in executing the Company's acquisition strategy; the
effect of existing and emerging competition; limited experience of the Company's
officers in managing rapid growth; the loss of any significant customers;
general economic and business conditions; competition for qualified staffing
personnel; and the possible adverse effects on earnings resulting from
amortization of goodwill relating to acquisitions. See "Risk Factors."
IMPORTANT
To properly tender Unregistered Senior Debentures, the following procedures
must be followed:
o Each beneficial owner owning interests in Unregistered Senior Debentures
("Beneficial Owner") through a DTC Participant (as defined) must instruct
such DTC Participant to cause Unregistered Senior Debentures to be tendered
in accordance with the procedures set forth in this Prospectus and in the
applicable Letter of Transmittal.
o Each participant (a "DTC Participant") in the Depository Trust Company
("DTC") holding Unregistered Senior Debentures through DTC must (i)
electronically transmit its acceptance to DTC through the DTC
4
<PAGE>
Automated Tender Offer Program ("ATOP"), for which the transaction will be
eligible, and DTC will then edit and verify the acceptance, execute a
book-entry delivery to the account of The Bank of New York (the "Debentures
Exchange Agent") at DTC and send an Agent's Message (as defined) to the
Debentures Exchange Agent for its acceptance, or (ii) comply with the
guaranteed delivery procedures set forth under "Debentures Exchange
Offer--Guaranteed Delivery Procedures." By tendering through ATOP, DTC
Participants will expressly acknowledge receipt of the accompanying Letter
of Transmittal and agree to be bound by its terms and the Company will be
able to enforce such agreement against such DTC participants.
o Each registered owner of certificated Unregistered Senior Debentures (a
"Holder") must (i) complete and sign the accompanying Letter of
Transmittal, and mail or deliver such Letter of Transmittal, and all other
documents required by the Letter of Transmittal, together with
certificate(s) representing all tendered Unregistered Senior Debentures, to
the Debentures Exchange Agent at its address set forth under "Debentures
Exchange Offer-- Debentures Exchange Agent," or (ii) comply with the
guaranteed delivery procedures set forth under "Debentures Exchange
Offer--Guaranteed Delivery Procedures."
For purposes of this Prospectus, "Tendering Holder" shall mean (i) each DTC
Participant that has properly transmitted (and not properly withdrawn) its
acceptance through ATOP and in respect of which DTC has sent an Agent's Message,
(ii) each Holder that has timely delivered to the Debentures Exchange Agent (and
not properly withdrawn) a properly completed and duly executed Letter of
Transmittal, and any other documents required by the Letter of Transmittal,
together with certificate(s) representing all tendered Unregistered Senior
Debentures, or (iii) each DTC Participant or Holder that has complied with the
guaranteed delivery procedures set forth herein.
The information in this Prospectus concerning DTC and their book-entry
systems has been obtained by the Company from sources that the Company believes
to be reliable, and the Company takes no responsibility for the accuracy
thereof.
5
<PAGE>
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus and is qualified in its entirety by the more detailed
information and financial statements and the related notes thereto appearing
elsewhere in this Prospectus. Prospective investors are urged to read this
Prospectus in its entirety before investing in the New Notes or the New Senior
Debentures. Unless the context otherwise requires, (i) "COMFORCE" means COMFORCE
Corporation or, where the context requires, COMFORCE Corporation and its
subsidiaries prior to the Uniforce Acquisition, (ii) "Uniforce" means Uniforce
Services, Inc. and its subsidiaries prior to the Uniforce Acquisition, (iii)
"COI" means COMFORCE Operating, Inc., a Delaware corporation which is
wholly-owned by COMFORCE, and its subsidiaries following the Uniforce
Acquisition, and (iv) the "Company" means COMFORCE Corporation, a Delaware
corporation, and its subsidiaries following the Uniforce Acquisition. As a
consequence of the formation of COI and the effective transfer of the assets of
the Subsidiaries thereto, for financial reporting purposes, COI is deemed to
have become a new reporting entity. On a pro forma basis, the Senior Debentures
of the Company have been "pushed down" to the financial statements of COI, and
the PIK Preferred Stock (as defined) of COI has been eliminated. Accordingly, on
a pro forma basis, the financial statements of the Company and COI are the same.
The Company
The Company is a leading provider of specialty staffing, consulting and
outsourcing solutions primarily to Fortune 500 companies for their information
technology ("IT"), telecommunications, scientific and engineering-related needs.
Through its network of 86 offices (55 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 7,800 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 160,000
highly skilled employees. The Company had pro forma net sales and Adjusted
EBITDA (as defined) of $379.3 million and $22.4 million, respectively, for the
twelve-month period ended September 30, 1997.
The Company's senior management team of Christopher P. Franco, James L.
Paterek and Michael Ferrentino established COMFORCE in 1995 to capitalize on the
consolidation opportunities in the specialty staffing and consulting industry.
Since the initial acquisition of COMFORCE Telecom Inc. in October 1995 until
prior to the acquisition of Uniforce in November 1997, this management team has
successfully acquired and integrated seven specialty staffing companies with
1995 annual sales of approximately $175.2 million. These companies had histories
of profitable growth, and COMFORCE has continued this growth during 1996 and
1997 after completing the acquisitions. COMFORCE's net sales and EBITDA (as
defined) increased by 16.7% and 30.9%, respectively, for the nine months ended
September 30, 1997 on a pro forma basis.
On November 26, 1997, COMFORCE completed a tender offer pursuant to which
it acquired, through an indirect wholly-owned subsidiary, approximately 96.5%
the issued and outstanding common stock of Uniforce. On December 3, 1997, as the
result of a merger, Uniforce became an indirect wholly-owned subsidiary of
COMFORCE. 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 pro forma net sales for the
twelve months ended September 30, 1997 of $171.7 million. Uniforce's net sales
and EBITDA increased by 25.6% and 19.3%, respectively, for the nine months ended
September 30, 1997 on a pro forma basis. The Company's net sales and EBITDA
increased by 20.6% and 24.1%, respectively, for the nine months ended September
30, 1997 on a pro forma combined basis. 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.
COI was incorporated in Delaware in October 1997. The Company was
incorporated in Illinois in 1954 and became a Delaware corporation through its
merger with a Delaware subsidiary in 1969. It maintains its headquarters
6
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at 2001 Marcus Avenue, Lake Success, New York 11042. The Company's telephone
number is (516) 328-7300 and its address on the World Wide Web is
www.comforce.com.
The Company operates through four divisions, as described below:
COMFORCE Information Technologies. The Company's IT division provides
highly skilled programmers, help desk personnel, systems consultants and
analysts, software engineers and project managers for a wide range of technical
assignments, including client server, mainframe, Year 2000, desktop services,
internet/intranet and MIS. The IT division also provides payrolling services in
addition to these staffing solutions to certain of its IT customers. The
Company's principal IT customers include Microsoft, BellSouth, Boeing
Information Services, Kodak, Tyson Foods, First Union Corporation, NationsBanc
and MCI. 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 which the Company
believes will increase 20% to 25% per year. 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. For the twelve-month period ended September 30,
1997, the IT division had pro forma net sales of $117.9 million.
COMFORCE Telecom. The Company's Telecom division provides skilled personnel
to plan, design, engineer, install and maintain wireless and wireline
telecommunications systems, including cellular, PCS, microwave, radio, satellite
and other networks. 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 Wireless,
NORTEL, Harris, Lucent Technologies, Reltec, ALCATEL, Motorola, Sprint PCS and
Omnipoint. The Company expects this division to continue to grow significantly
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. For the twelve-month period ended September 30, 1997, the
Telecom division had pro forma net sales of $31.2 million.
COMFORCE Staffing Services. The Company's Staffing Services division
operates in two areas, Technical Services and Professional Services. The Company
provides Technical staffing solutions and, in some cases, payrolling services to
a group of technology-intensive clients working in the areas of aerospace,
avionics, electronics, laser and weapons technology, environmental safety and
alternative energy source development. The Company's Technical Services business
is generally conducted through long-term, high-volume contracts that are not
subject to fixed prices and require low administrative overhead. The Company
offers Professional staffing services through 10 Company-owned and 31 licensed
locations that provide services including medical office staffing solutions,
office automation personnel, customer service/call center personnel and
laboratory professionals. The Staffing Services division's principal Technical
Services customers include Boeing, Westinghouse, McDonnell Douglas and the
National Research Laboratories at Los Alamos, Sandia and Lawrence Livermore. The
Staffing Services division's Professional Services customers include R.R.
Donnelley, Estee Lauder and Dial, as well as many smaller companies such as
independent medical providers and accounting firms. 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. For the
twelve-month period ended September 30, 1997, the Staffing Services division had
pro forma net sales of $168.3 million, of which $47.5 million related to sales
by licensees.
COMFORCE Financial Services. The Company's Financial Services division
provides payroll funding services and back office support to approximately 100
independent consulting and staffing companies and provides consulting and
related payrolling services to clients in connection with their use of
independent contractors. The Financial Services division significantly benefits
from Uniforce's sophisticated back office operations, as well as Uniforce's
substantial investment in the PeopleSoft(R) software package, which the Company
believes will become the industry standard. For the twelve-month period ended
September 30, 1997, the Financial Services division had pro forma net sales of
$61.9 million.
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The Contingent Staffing and Consulting Industry
The contingent staffing and consulting industry has evolved into a
permanent and significant component of the staffing plans of many corporations.
Corporate restructuring, downsizing, increased government regulations governing
employee relations, advances in technology and the desire by many companies to
shift employee costs from a fixed to a variable expense and to reduce
administrative overhead have resulted in the use of a wide range of staffing and
outsourcing alternatives by businesses. The number of temporary workers as a
percentage of total employment in the United States has increased from 0.2% in
1972 to more than 2% in 1996, based on statistics published by the U.S. Bureau
of Labor Statistics. The contingent staffing and consulting industry has grown
rapidly in the 1990s, and industry analysts expect this growth to continue. The
U. S. market for staffing services grew at a compound annual rate of
approximately 16.3% from approximately $20.5 billion in 1991 to approximately
$43.6 billion in 1996, according to statistics published by the National
Association of Temporary and Staffing Services ("NATSS"), a staffing industry
trade association.
Staffing firms that recruit contingent employees generally fall into two
major categories: (i) "specialty" staffing and consulting firms, which
specialize in one or a few specialty fields, such as the Company's IT and
Telecom sectors and portions of its Technical services sector, and (ii)
"traditional" staffing firms, which tend to supply primarily clerical or light
industrial personnel. The specialty staffing and consulting sector of the
industry has represented an area of more rapid growth that has tended to
generate higher margins than more traditional staffing services. Taxable
revenues attributable to supplying personnel in the specialty staffing and
consulting sector have increased from $5.1 billion in 1990 to $7.4 billion in
1993 and $10.0 billion in 1994, an annual growth rate of 35.1% between 1993 and
1994 and 18.3% over the four-year period, based on information published by the
Census Bureau. The Company believes that the IT portion of the specialty
staffing and consulting sector will grow at a rate of 20%to 25% annually over
the next few years. In addition, the Company believes that, although the
contingent staffing industry as a whole has tended to be cyclical, the specialty
staffing and consulting sector may continue to grow during economic downturns
because technological changes will continue to necessitate spending for both
infrastructure and to retain employees skilled in new technologies. In recent
years, there has been intense competition to attract the limited number of
qualified personnel with the skills and experience necessary to meet the
specialty staffing and consulting requirements of clients. The Company believes
that it is increasingly important for a staffing firm to be able to provide
interesting assignments with high-profile clients that offer employees the
opportunity to enhance their skills and marketability, as well as to offer
competitive wages and benefits packages.
Larger users of staffing services are increasingly demanding centralized
staffing services through national contracts with a few preferred providers. In
part as a result of this trend toward national contracts, the highly fragmented
industry is also currently experiencing a trend toward consolidation. These
trends have increased the need for staffing firms to be able to provide highly
qualified contingent staffers offering a broad range of services on a
nation-wide or international basis and also to provide value-added services such
as training capabilities, management services and the ability to effectively
utilize technology in the recruiting, training and hiring of contingent
staffers.
Business Strengths
o Emphasis on Specialty Staffing and Consulting Sectors. The Company
provides high-quality, creative staffing and consulting solutions to companies
with dynamic needs in specialty high technology areas. Through its focused
acquisition program, the Company has increased its presence in the high-growth
IT, telecommunications, scientific and engineering-related sectors. The Company
adopted this strategy to capitalize on these areas, which generally produce
higher profit margins and experience lower turnover rates and less cyclicality
than more traditional staffing industry sectors. The Uniforce Acquisition
enhances and expands the Company's presence in these specialty areas, which
represented a majority of the Company's net sales on a pro forma basis for the
twelve-month period ended September 30, 1997.
o High-Quality Customer Base. The Company benefits from established,
long-standing relationships with a broad customer base which includes many
Fortune 500 clients. The Company provides staffing services to over
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2,300 companies in diverse industries throughout the United States and
internationally and has an excellent customer retention record. The Company's
principal customers include many dynamic businesses in growing industries that
have an increasing need for contingent employees. The Company's key customers
include Boeing, Microsoft, Sun Microsystems, BellSouth and Los Alamos National
Laboratory. None of the Company's customers accounts for more than 10% of sales
on a pro forma combined basis.
o Critical Mass. Through its history of successful acquisitions, the
Company has broadened and added to its line of services, expanded its geographic
presence and increased annual net sales to $379.3 million for the twelve-month
period ended September 30, 1997 on a pro forma combined basis. The Company now
provides staffing and consulting services to over 2,300 customers through its
network of 86 offices in 27 states. The Company believes it has achieved a
critical mass necessary to compete successfully for national vendor accounts as
well as further expand its presence in regional markets.
o Highly Skilled Labor Force. The Company believes its labor force of
approximately 7,800 highly skilled billable employees provides a competitive
advantage in servicing the specialty staffing and consulting needs of its
customers. The Company believes it experiences low employee turnover and is able
to attract and recruit high-quality staffing personnel by providing attractive
assignments with high-profile customers, highly competitive compensation
packages, tailored benefit plans and value-added training opportunities. The
Company draws personnel for assignments from its extensive proprietary database
of over 160,000 prospective employees.
o Highly Efficient Back Office Operations. The Uniforce Acquisition brings
to the Company Uniforce's back office operation, which the Company believes is
one of the most advanced and efficient in the industry. Based in Woodbury, New
York, the sophisticated operation is the centerpiece of the Company's back
office structure. Currently servicing approximately $680 million of annual
"system-wide" revenues on a pro forma combined basis (including approximately
$300 million generated by other staffing firms and processed by the Company),
the back office system has the capacity to enable the Company to grow
significantly. The Company believes that this back office processing capability
also will enable the Company to continue to effectively integrate acquisitions
and realize significant operating efficiencies.
o Broad Offering of Services. The Company believes its ability to provide a
wide range of high-quality staffing and consulting solutions gives it a
competitive advantage as larger customers consolidate their purchasing of
staffing and consulting services. The Company is able to provide a wide variety
of contingent employees including highly specialized IT and telecommunications
professionals, scientists and researchers, skilled medical office support staff,
legal and accounting personnel and other support staff and light industrial
employees. The Company also provides a variety of value added services,
including (i) training for the Company's billable workforce; (ii) outsourcing
management services such as the Company's RightSourcing(sm), Needs Analysis and
Vendor-on-Premises programs; (iii) consulting services to assist clients in
connection with their use of independent contractors; and (iv) innovative uses
of the Internet and other technology, including the Company's Homework(sm)
program. The Company also provides smaller, independent staffing companies with
funding and back office support services. The Company believes its range of
services also provides significant cross-selling opportunities.
o Reputation as Successful Consolidator. The Company has established a
strong reputation as a successful consolidator in the contingent staffing and
consulting industry through its acquisition of eight specialty staffing and
consulting companies since 1995. The Uniforce Acquisition, the most recent of
these acquisitions, enhances this reputation. The Company's management has
integrated its prior acquisitions with minimal staff turnover and an excellent
customer retention record and expects that the integration of Uniforce's
operations will follow this pattern. The Company is positioned for further
growth through acquisitions with additional borrowing capacity under the New
Credit Facility and the ability to use its publicly traded common stock to fund
all or part of acquisition costs. The Company believes its advanced back office
capabilities will assist it in integrating future acquisitions quickly and
efficiently.
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Business Strategy
Management's growth strategy includes the following principal elements:
o Emphasize Internal Growth. The Company intends 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 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 Employee Recruiting and Training. 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 and training efforts. 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 and other
technology in its recruiting and training efforts and intends to further develop
its use of such technology-based recruiting and training capabilities.
o 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. The
Company is positioned to build on its solid reputation as a successful
consolidator in the industry with the improved, more permanent capitalization
resulting from the completion in November 1997 of the Units Offering and the
Notes Offering, additional borrowing capacity under the New Credit Facility and
the ability to use the Company's publicly traded common stock to fund all or
part of acquisition costs. Management believes that, as the Company grows
through acquisitions, it improves its ability to secure larger contracts.
o 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 will 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.
The Uniforce Acquisition
On August 13, 1997, COMFORCE, COMFORCE Columbus, Inc., an indirect
wholly-owned subsidiary of COMFORCE (the "Subsidiary"), and Uniforce executed an
Agreement and Plan of Merger (the "Merger Agreement") which provided for the
acquisition of Uniforce by the Company. Pursuant to the Merger Agreement,
COMFORCE caused the Subsidiary to commence a tender offer on October 27, 1997
(the "Tender Offer") to acquire all of the
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outstanding Uniforce Common Stock for a per share price of $28.00 in cash and
0.5217 shares of COMFORCE's Common Stock (collectively the "Per Share
Consideration").
On November 26, 1997, following the expiration of the Tender Offer at
midnight on November 25, 1997, COMFORCE accepted all 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, COMFORCE completed the merger of Uniforce and the Subsidiary (the
"Merger"), and made available for payment to the holders of the remaining shares
of Uniforce Common Stock (who did not tender their stock) cash and stock equal
in amount to the Per Share Consideration. In addition, as required under the
Merger Agreement, COMFORCE 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.
The Company currently expects that it will incur a restructuring charge in
the fourth quarter of 1997, in connection with certain potential severance and
other costs related to the integration of COMFORCE and Uniforce. Management
currently believes that such restructuring charge will be approximately $2.0
million; however, no assurance can be given that any such charge, if incurred,
will not exceed such amount.
The Transactions
The Company financed the Uniforce Acquisition with $93.6 million of the
proceeds of the Notes Offering and with approximately 1.6 million shares of
COMFORCE Common Stock. In the Refinancing, the Company repaid COMFORCE's
outstanding credit facility (the "Prior Credit Facility") and Uniforce's
outstanding term loan and credit facility (the "Uniforce Credit Facility") with
the remaining net proceeds of the Notes Offering and the net proceeds of the
Units Offering, together with approximately $37.0 million of borrowings under
the New Credit Facility. The Uniforce Acquisition, the Notes Offering, the Units
Offering and the Refinancing are collectively referred to as the "Transactions."
The Prior Acquisitions and Refinancings
From October 1995 until the completion of the Uniforce Acquisition in
November 1997, COMFORCE completed acquisitions (the "Prior Acquisitions") of
seven staffing and consulting companies: (i) COMFORCE Telecom, Inc. ("COMFORCE
Telecom"), which provides Telecom staffing and consulting services and was
acquired in October 1995; (ii) Williams Communications Services, Inc.
("Williams"), which provides Telecom staffing and consulting services and was
acquired in March 1996; (iii) RRA, Inc., Project Staffing Support Team, Inc. and
DataTech Technical Services, Inc. (collectively, "RRA"), which provides
Technical staffing services and was acquired in May 1996; (iv) Force Five, Inc.
("Force Five"), which provides IT staffing and consulting services and was
acquired in August 1996; (v) AZATAR Computer Systems, Inc. ("AZATAR"), which
provides IT staffing and consulting services and was acquired in November 1996;
(vi) Continental Field Services Corporation and Progressive Telecom, Inc.
(collectively, "Continental"), which provides Telecom staffing and consulting
services and was acquired in November 1996; and (vii) RHO Company, Incorporated
("Rhotech"), which provides Technical staffing services and IT staffing and
consulting services and was acquired in February 1997. In addition, Uniforce
acquired Montare International (the "Montare Acquisition"), which provides IT
staffing and consulting services, in May 1996.
On June 25, 1997, COMFORCE entered into the Prior Credit Facility, a
portion of the proceeds of which were used to repay $5.4 million in borrowings
under a short-term credit facility and to redeem $25.2 million in principal
amount of COMFORCE's Subordinated Convertible Debentures (the "Old Subordinated
Debentures"). The Old Subordinated Debentures had been issued in February and
March 1997 in part in exchange for a portion of COMFORCE's Series F Preferred
Stock. Such transactions are hereinafter referred to as the "Prior
Refinancings."
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The Notes Exchange Offer
Old Notes....................... The Old Notes were sold by COI on November 26,
1997, to NatWest Capital Markets Limited
("NatWest" or the "Initial Purchaser")
pursuant to a Notes Purchase Agreement, dated
November 19, 1997 (the "Note Purchase
Agreement"). The Initial Purchaser
subsequently resold the Notes to qualified
institutional buyers pursuant to Rule 144A
under the Securities Act or institutional
"accredited investors" (as defined in Rule 501
(a)(1), (2), (3) or (7) of Regulation D under
the Securities Act).
Notes Registration Rights
Agreement..................... Pursuant to the Note Purchase Agreement, COI
and the Initial Purchaser entered into the
Notes Registration Rights Agreement, which
grants the holders of the Old Notes certain
exchange and registration rights. The Notes
Exchange Offer is intended to satisfy such
exchange and registration rights which
terminate upon the consummation of the Notes
Exchange Offer.
Securities Offered.............. $110,000,000 aggregate principal amount of 12%
Senior Notes due 2007, Series B.
The Notes Exchange
Offer......................... COI is offering to exchange (i) $1,000
principal amount of New Notes for each $1,000
principal amount of Old Notes that are
properly tendered and accepted. COI will issue
Exchange Notes on or promptly after the
Expiration Date. As of the date hereof, there
is $110,000,000 aggregate principal amount of
Old Notes outstanding. The terms of the
Exchange Notes are identical in all material
respects to the terms of the Unregistered
Notes for which they may be exchanged pursuant
to the Notes Exchange Offer, except that the
Exchange Notes are freely transferable by
holders thereof (other than as provided
herein), and are not subject to any covenant
restricting transfer absent registration under
the Securities Act. See "The Notes Exchange
Offer." The Notes Exchange Offer is not
conditioned upon any minimum aggregate
principal amount of Old Notes being tendered
for exchange.
Based on no-action letters issued by the staff
of the Commission to third parties with
respect to similar transactions, COI believes
that the Exchange Notes issued pursuant to the
Notes Exchange Offer in exchange for
Unregistered Notes may be offered for resale,
resold and otherwise transferred by holders
thereof (other than (i) a broker-dealer who
purchases such Exchange Notes from COI to
resell pursuant to Rule 144A or any other
available exemption under the Securities Act,
or (ii) a person that is an "affiliate" of COI
within the meaning of Rule 405 of the
Securities Act) without compliance with the
registration and prospectus delivery
requirements of the Securities Act, provided
that such Exchange Notes are acquired in the
ordinary course of such holders' business and
such holders are not engaged in, have no
arrangement or understanding with any person
to participate in, and do not intend to engage
in, any distribution of the Exchange Notes.
However, COI has not sought a no-action letter
with respect to the Notes Exchange Offer, and
there can be no assurance that the staff of
the Commission would make a similar
determination with respect to the Notes
Exchange Offer.
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Each holder of Exchange Notes, other than a
broker-dealer, must represent that such
conditions have been met. In addition, each
broker-dealer that receives Exchange Notes for
its own account pursuant to the Notes Exchange
Offer must acknowledge that it will deliver a
prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal
accompanying this Prospectus states that by so
acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning
of the Securities Act. A broker-dealer may
nonetheless be deemed to be an "underwriter"
under the Securities Act notwithstanding such
disclaimer. This Prospectus, as it may be
amended or supplemented from time to time, may
be used by a broker-dealer in connection with
resales of Exchange Notes received in exchange
for Unregistered Notes where such Unregistered
Notes were acquired by such broker-dealer as a
result of market-making activities or other
trading activities. Pursuant to the Notes
Registration Rights Agreement, COI has agreed
that, for a period of 180 days after the
Expiration Date, it will make this Prospectus
available to any broker-dealer for use in
connection with any such resale. See "The
Notes Exchange Offer-- Purpose and Effect of
the Notes Exchange Offer" and "Plan of
Distribution."
Any holder who tenders in the Notes Exchange
Offer with the intention to participate, or
for the purpose of participating, in a
distribution of the Exchange Notes could not
rely on the position of the staff of the
Commission enunciated in no-action letters
and, in the absence of an applicable
exemption, must comply with the registration
and prospectus delivery requirements of the
Securities Act in connection with any resale
transaction. Failure to comply with such
requirements in such instance may result in
such holder incurring liability under the
Securities Act for which the holder is not
indemnified by COI.
Expiration Date................. 5:00 p.m., New York City time, on March 27,
1998, unless the Notes Exchange Offer is
extended, in which case the term "Expiration
Date" means the latest date and time to which
the Notes Exchange Offer is extended. See "The
Notes Exchange Offer--Expiration Date;
Extensions; Amendments."
Accrued Interest
on the Exchange
Notes......................... Each Exchange Note will bear interest from the
most recent date to which interest has been
paid on the Unregistered Notes or, if no
interest has been paid on such Unregistered
Notes, from November 26, 1997.
Notes Exchange Date............. As soon as practicable after the close of the
Notes Exchange Offer, COI will accept for
exchange all Unregistered Notes properly
tendered and not validly withdrawn prior to
5:00 p.m., New York City time, on the
Expiration Date. See "The Notes Exchange
Offer--Withdrawal of Tenders."
Conditions to the
Notes Exchange
Offer......................... The Notes Exchange Offer is subject to
customary conditions, certain of which may be
waived by COI. COI reserves the right to
terminate or amend the Notes Exchange Offer at
any time prior to the Expiration Date upon the
occurrence of any such condition. The Notes
Exchange Offer is not conditioned on any
minimum aggregate principal amount of Old
Notes being tendered for exchange. See "The
Notes Exchange Offer--Conditions."
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Consequences of Failure
to Exchange................... Any Unregistered Notes not tendered pursuant
to the Notes Exchange Offer will remain
outstanding and continue to accrue interest.
Such Unregistered Notes will remain
"restricted securities" under the Securities
Act, subject to the transfer restrictions
described herein. As a result, the liquidity
of the market for such Unregistered Notes
could be adversely affected upon completion of
the Notes Exchange Offer. See "Risk
Factors--Consequences of Failure to Exchange"
and "The Notes Exchange Offer--Consequences of
Failure to Exchange."
Certain Federal Income
Tax Considerations............ The exchange pursuant to the Notes Exchange
Offer should not be a taxable event for
federal income tax purposes. See "Certain U.S.
Federal Income Tax Considerations."
Use of Proceeds................. There will be no cash proceeds to COI from the
Notes Exchange Offer. See "Use of Proceeds."
Procedures for Tendering Unregistered Notes
Tendering Unregistered
Notes......................... Each beneficial owner owning interests in
Unregistered Notes ("Beneficial Owner")
through a DTC Participant (as defined) must
instruct such DTC Participant to cause
Unregistered Notes to be tendered in
accordance with the procedures set forth in
this Prospectus and in the GREEN Letter of
Transmittal. See "The Notes Exchange
Offer--Procedures for Tendering--Unregistered
Notes held by DTC." Each participant (a "DTC
Participant") in the Depository Trust Company
("DTC") holding Unregistered Notes through DTC
must (i) electronically transmit its
acceptance to DTC through the DTC Automated
Tender Offer Program ("ATOP"), for which the
transaction will be eligible, and DTC will
then edit and verify the acceptance, execute a
book-entry delivery to the Notes Exchange
Agent's account at DTC and send an Agent's
Message (as defined herein) to the Notes
Exchange Agent for its acceptance, or (ii)
comply with the guaranteed delivery procedures
set forth in this Prospectus and in the GREEN
Letter of Transmittal. By tendering through
ATOP, DTC Participants will expressly
acknowledge receipt of the accompanying Letter
of Transmittal and agree to be bound by its
terms and COI will be able to enforce such
agreement against such DTC participants. See
"The Notes Exchange Offer--Procedures for
Tendering--Unregistered Notes held by DTC,"
and "--Guaranteed Delivery Procedures--
Unregistered Notes held by DTC."
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Each Holder must (i) complete and sign a GREEN
Letter of Transmittal, and mail or deliver
such Letter of Transmittal, and all other
documents required by such Letter of
Transmittal, together with certificate(s)
representing all tendered Unregistered Notes,
to the Notes Exchange Agent at its address set
forth in this Prospectus and in such Letter of
Transmittal, or (ii) comply with the
guaranteed delivery procedures set forth in
this Prospectus. See "The Notes Exchange
Offer--Procedures for Tendering," "--Notes
Exchange Agent," and "--Guaranteed Delivery
Procedures--Unregistered Notes held by
Holders." By tendering, each holder will
represent to the COI that, among other things,
(i) it is not an affiliate of COI, (ii) it is
not a broker-dealer tendering Unregistered
Notes acquired directly from COI for its own
account, (iii) the Exchange Notes acquired
pursuant to the Notes Exchange Offer are being
obtained in the ordinary course of business of
such holder and (iv) it has no arrangements or
understandings with any person to participate
in the Notes Exchange Offer for the purpose of
distributing the Exchange Notes. See "The
Notes Exchange Offer--Procedures for
Tendering."
Guaranteed Delivery
Procedures.................... DTC Participants holding Unregistered Notes
through DTC who wish to cause their
Unregistered Notes to be tendered, but who
cannot transmit their acceptances through ATOP
prior to the Expiration Date, may effect a
tender in accordance with the procedures set
forth in this Prospectus and in the GREEN
Letter of Transmittal. See "Notes Exchange
Offer--Guaranteed Delivery Procedures."
Holders who wish to tender their Unregistered
Notes but (i) whose Unregistered Notes are not
immediately available and will not be
available for tendering prior to the
Expiration Date, or (ii) who cannot deliver
their Unregistered Notes, the GREEN Letter of
Transmittal, or any other required documents
to the Notes Exchange Agent prior to the
Expiration Date, may effect a tender in
accordance with the procedures set forth in
this Prospectus. See "The Notes Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal Rights............... The tender of Unregistered Notes pursuant to
the Notes Exchange Offer may be withdrawn at
any time prior to 5:00 p.m., New York City
time, on the Expiration Date, in accordance
with the procedures set forth in this
Prospectus. See "The Notes Exchange
Offer--Withdrawal of Tenders."
Notes Exchange Agent............ The Wilmington Trust Company is serving as
Exchange Agent in connection with the Exchange
Offer for the Notes. See "The Notes Exchange
Offer--Exchange Agent."
Notes Shelf Registration
Statement..................... Under certain circumstances described in the
Notes Registration Rights Agreement, certain
holders of Unregistered Notes (including
holders who are not permitted to participate
in the Notes Exchange Offer) may require the
Company to file and use best efforts to cause
to become effective, a shelf registration
statement under the Securities Act, which
would cover resales of Unregistered Notes by
such holders. See "Notes Exchange
Offer--Purpose and Effect of the Notes
Exchange Offer."
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The Notes
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions relating to the Old Notes.
The New Notes will bear interest from the most recent date to which interest has
been paid on the Old Notes or, if no interest has been paid on the Old Notes,
from November 26, 1997. Accordingly, registered holders of New Notes on the
relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid on the Old Notes or, if no interest
has been paid, from November 26, 1997. Old Notes accepted for exchange will
cease to accrue interest from and after the date of consummation of the Notes
Exchange Offer. Holders whose Old Notes are accepted for exchange will not
receive any payment in respect of interest on such Old Notes otherwise payable
on any interest payment date the record date for which occurs on or after
consummation of the Notes Exchange Offer.
Maturity........................ December 1, 2007.
Interest Payment Dates.......... June 1 and December 1 of each year, commencing
on June 1, 1998.
Sinking Fund.................... None.
Ranking......................... The Notes are senior unsecured obligations of
COI and will 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
are effectively subordinated to any secured
debt of COI, to the extent of the of assets
serving as security therefor, and structurally
subordinated to all liabilities COI's direct
and indirect subsidiaries. As of September 30,
1997, on a pro forma basis after giving effect
to the Transactions, the aggregate principal
amount of outstanding secured indebtedness to
which the Notes are effectively subordinated,
to the extent of the assets serving as
security therefor, would have been
approximately $37.8 million, and the aggregate
amount of outstanding liabilities of
subsidiaries of COI to which holders of Notes
are structurally subordinated would have been
approximately $59.6 million (including $37.8
million of Indebtedness). See "Description of
Notes - Ranking."
Optional Redemption............. Except as described below and under "Change of
Control", COI may not redeem the Notes prior
to December 1, 2002. On or after such date,
COI may redeem the Notes, in whole or in part,
at any time at the redemption prices set forth
herein, together with accrued and unpaid
interest, if any, to the date of redemption.
In addition, at any time and from time to time
on or 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 112.000% of the principal amount to
be redeemed, together with accrued and unpaid
interest, if any, to the date of redemption,
provided that at least 65% of the aggregate
principal amount of the Notes issued through
the date of such redemption under the Notes
Indenture remains outstanding immediately
after each such redemption. See "Description
of Notes - Optional Redemption."
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Change of Control............... Upon the occurrence of 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. See "Description of Notes
- Optional Redemption" and "Change of
Control."
Restrictive Covenants........... The Notes Indenture 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) tes investments,
(iv) sales of assets and subsidiary stock, (v)
transactions with affilia of and (vi)
consolidations, mergers and transfers of all
or substantially all the assets COI. The Notes
Indenture also prohibits certain restrictions
on distributions from subsidiaries. However,
all of these limitations and prohibitions are
subject to a number of important
qualifications and exceptions. See
"Description of Notes-Certain Covenants."
Exchange Offer and
Registration................. Pursuant to the Notes Registration Rights
Agreement, COI agreed to use its best efforts
to (i) file, within 30 days after the date of
original issuance of the Notes (the "Issue
Date"), a registration statement (the "Notes
Exchange Offer Registration Statement") with
respect to the Notes Exchange Offer, (ii)
cause such Notes Exchange Offer Registration
Statement to be declared effective within 90
days after the Issue Date and (iii) consummate
the Notes Exchange Offer within 130 days after
the Issue Date. In the event that COI does not
comply with certain covenants set forth in the
Notes Registration Rights Agreement, COI is to
pay certain liquidated damages to the holders
of the Old Notes. See "The Notes Exchange
Offer."
For a more complete description of the Notes, see "Description of the Notes."
The Debentures Exchange Offer
Old Senior Debentures.......... Units, which were comprised in part of the Old
Senior Debentures, were sold by the Company on
November 26, 1997, to NatWest pursuant to a
Units Purchase Agreement dated November 19,
1997 (the "Units Purchase Agreement"). NatWest
subsequently resold the Units to qualified
institutional buyers pursuant to Rule 144A
under the Securities Act or institutional
"accredited investors" (as defined in the Rule
501 (a)(1), (2), (3) or (7) of Regulation D
under the Securities Act).
Debentures
Registration Rights
Agreement.................... Pursuant to the Units Purchase Agreement, the
Company and NatWest entered into the
Debentures Registration Rights Agreement,
which grants the holders of the Old Senior
Debentures certain exchange and registration
rights. The Debentures Exchange Offer is
intended to satisfy such exchange and
registration rights which terminate upon the
consummation of the Debentures Exchange Offer.
Securities Offered............. $20,000,000 aggregate principal amount of 15%
Senior Secured PIK Debentures due 2009, Series
B.
17
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<PAGE>
- --------------------------------------------------------------------------------
The Debentures
Exchange Offer................. The Company is offering to exchange $1,000
principal amount of New Senior Debentures for
each $1,000 principal amount of Old Senior
Debentures that are properly tendered and
accepted. The Company will issue Exchange
Senior Debentures on or promptly after the
Expiration Date. As of the date hereof, there
is $20,000,000 aggregate principal amount of
Old Senior Debentures outstanding. The terms
of the Exchange Senior Debentures are
identical in all material respects to the
terms of the Unregistered Senior Debentures
for which they may be exchanged pursuant to
the Debentures Exchange Offer, except that the
Exchange Senior Debentures are freely
transferable by holders thereof (other than as
provided herein), and are not subject to any
covenant restricting transfer absent
registration under the Securities Act. See
"The Debentures Exchange Offer." The
Debentures Exchange Offer is not conditioned
upon any minimum aggregate principal amount of
Old Senior Debentures or any minimum aggregate
principal amount of Old Senior Debentures
being tendered for exchange.
Based on no-action letters issued by the staff
of the Commission to third parties with
respect to similar transactions, the Company
believes that the Exchange Senior Debentures
issued pursuant to the Debentures Exchange
Offer in exchange for Unregistered Senior
Debentures may be offered for resale, resold
and otherwise transferred by holders thereof
(other than (i) a broker-dealer who purchases
such Exchange Senior Debentures from the
Company to resell pursuant to Rule 144A or any
other available exemption under the Securities
Act, or (ii) a person that is an "affiliate"
of the Company within the meaning of Rule 405
of the Securities Act) without compliance with
the registration and prospectus delivery
requirements of the Securities Act, provided
that such Exchange Senior Debentures are
acquired in the ordinary course of such
holders' business and such holders are not
engaged in, have no arrangement or
understanding with any person to participate
in, and do not intend to engage in, any
distribution of the Exchange Senior
Debentures. However, the Company has not
sought a no-action letter with respect to the
Debentures Exchange Offer, and there can be no
assurance that the staff of the Commission
would make a similar determination with
respect to the Debentures Exchange Offer. Each
holder of Exchange Senior Debentures, other
than a broker-dealer, must represent that such
conditions have been met. In addition, each
broker-dealer that receives Exchange Senior
Debentures for its own account pursuant to the
Debentures Exchange Offer must acknowledge
that it will deliver a prospectus in
connection with any resale of such Exchange
Senior Debentures. The Letter of Transmittal
accompanying this Prospectus states that by so
acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning
of the Securities Act. A broker-dealer may
nonetheless be deemed to be an "underwriter"
under the Securities Act notwithstanding such
disclaimer. This Prospectus, as it may be
amended or supplemented from time to time, may
be used by a broker-dealer in connection with
resales of Exchange Senior Debentures received
in exchange for Unregistered Senior Debentures
where such Unregistered Senior Debentures were
acquired by such broker-dealer as a result of
market-making activities or other trading
activities. Pursuant to the Debentures
Registration Rights Agreement, the Company has
agreed that, for a period of 180 days after
the Expiration Date, it will make this
Prospectus available to any broker-dealer for
use in connection with any such resale. See
"The Debentures Exchange Offer-- Purpose and
Effect of the Debentures Exchange Offer" and
"Plan of Distribution."
18
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<PAGE>
- --------------------------------------------------------------------------------
Any holder who tenders in the Debentures
Exchange Offer with the intention to
participate, or for the purpose of
participating, in a distribution of the
Exchange Senior Debentures could not rely on
the position of the staff of the Commission
enunciated in no-action letters and, in the
absence of an applicable exemption, must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction.
Failure to comply with such requirements in
such instance may result in such holder
incurring liability under the Securities Act
for which the holder is not indemnified by the
Company.
Expiration Date................ 5:00 p.m., New York City time, on March 27,
1998, unless the Debentures Exchange Offer is
extended, in which case the term "Expiration
Date" means the latest date and time to which
the Debentures Exchange Offer is extended. See
"The Debentures Exchange Offer--Expiration
Date; Extensions; Amendments."
Accrued Interest
on the Exchange
Senior Debentures.............. Each Exchange Senior Debenture will bear
interest from the most recent date to which
interest has been paid on the Unregistered
Senior Debentures or, if no interest has been
paid on such Unregistered Senior Debentures,
from November 26, 1997.
Exchange Date.................. As soon as practicable after the close of the
Debentures Exchange Offer, the Company will
accept for exchange all Unregistered Senior
Debentures properly tendered and not validly
withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. See "The
Debentures Exchange Offer--Withdrawal of
Tenders."
Conditions to the
Debentures
Exchange Offer................. The Debentures Exchange Offer is subject to
customary conditions, certain of which may be
waived by the Company. The Company reserves
the right to terminate or amend the Debentures
Exchange Offer at any time prior to the
Expiration Date upon the occurrence of any
such condition. The Debentures Exchange Offer
is not conditioned on any minimum aggregate
principal amount of Old Senior Debentures
being tendered for exchange. See "The
Debentures Exchange Offer--Conditions."
Consequences of Failure
to Exchange................. Any Unregistered Senior Debentures not
tendered pursuant to the Debentures Exchange
Offer will remain outstanding and continue to
accrue interest. Such Unregistered Senior
Debentures will remain "restricted securities"
under the Securities Act, subject to the
transfer restrictions described herein. As a
result, the liquidity of the market for such
Unregistered Senior Debentures could be
adversely affected upon completion of the
Debentures Exchange Offer. See "Risk Factors--
Consequences of Failure to Exchange" and "The
Debentures Exchange Offer--Consequences of
Failure to Exchange."
Certain Federal Income
Tax Considerations.......... The exchange pursuant to the Debentures
Exchange Offer should not be a taxable event
for federal income tax purposes. See "Certain
U.S. Federal Income Tax Considerations."
19
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<PAGE>
- --------------------------------------------------------------------------------
Use of Proceeds................ There will be no cash proceeds to the Company
from the Debentures Exchange Offer. See "Use
of Proceeds."
Procedures for Tendering Unregistered Senior Debentures
Tendering Unregistered
Senior Debentures............. Each beneficial owner owning interests in
Unregistered Senior Debentures ("Beneficial
Owner") through a DTC Participant must
instruct such DTC Participant to cause
Unregistered Senior Debentures to be tendered
in accordance with the procedures set forth in
this Prospectus and in the BLUE Letter of
Transmittal. See "The Debentures Exchange
Offer--Procedures for Tendering--Unregistered
Senior Debentures held by DTC." Each DTC
Participant holding Unregistered Senior
Debentures through DTC must (i) electronically
transmit its acceptance to DTC through ATOP,
for which the transaction will be eligible,
and DTC will then edit and verify the
acceptance, execute a book-entry delivery to
the Debentures Exchange Agent's account at DTC
and send an Agent's Message (as defined
herein) to the Debenture Exchange Agent for
its acceptance, or (ii) comply with the
guaranteed delivery procedures set forth in
this Prospectus and in BLUE Letter of
Transmittal. By tendering through ATOP, DTC
Participants will expressly acknowledge
receipt of the accompanying Letter of
Transmittal and agree to be bound by its terms
and the Company will be able to enforce such
agreement against such DTC participants. See
"The Debentures Exchange Offer--Procedures for
Tendering--Unregistered Senior Debentures held
by DTC," and "--Guaranteed Delivery
Procedures--Unregistered Senior Debentures
held by DTC."
Each Holder must (i) complete and sign a BLUE
Letter of Transmittal, and mail or deliver
such Letter of Transmittal, and all other
documents required by such Letter of
Transmittal, together with certificate(s)
representing all tendered Unregistered Senior
Debentures, to the Debentures Exchange Agent
at its address set forth in this Prospectus
and in such Letter of Transmittal, or (ii)
comply with the guaranteed delivery procedures
set forth in this Prospectus. See "The
Debentures Exchange Offer--Procedures for
Tendering," "--Debentures Exchange Agent," and
"--Guaranteed Delivery Procedures--
Unregistered Senior Debentures held by
Holders." By tendering, each holder will
represent to the Company that, among other
things, (i) it is not an affiliate of the
Company, (ii) it is not a broker-dealer
tendering Unregistered Senior Debentures
acquired directly from the Company for its own
account, (iii) the Exchange Senior Debentures
acquired pursuant to the Debentures Exchange
Offer are being obtained in the ordinary
course of business of such holder and (iv) it
has no arrangements or understandings with any
person to participate in the Debentures
Exchange Offer for the purpose of distributing
the Exchange Senior Debentures. See "The
Debentures Exchange Offer--Procedures for
Tendering."
20
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<PAGE>
- --------------------------------------------------------------------------------
Guaranteed Delivery
Procedures.................... DTC Participants holding Unregistered Senior
Debentures through DTC who wish to cause their
Unregistered Senior Debentures to be tendered,
but who cannot transmit their acceptances
through ATOP prior to the Expiration Date, may
effect a tender in accordance with the
procedures set forth in this Prospectus and in
the BLUE Letter of Transmittal. See
"Debentures Exchange Offer--Guaranteed
Delivery Procedures." Holders who wish to
tender their Unregistered Senior Debentures
but (i) whose Unregistered Senior Debentures
are not immediately available and will not be
available for tendering prior to the
Expiration Date, or (ii) who cannot deliver
their Unregistered Senior Debentures, the BLUE
Letter of Transmittal, or any other required
documents to the Debentures Exchange Agent
prior to the Expiration Date, may effect a
tender in accordance with the procedures set
forth in this Prospectus. See "The Debentures
Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights............... The tender of Unregistered Senior Debentures
pursuant to the Debentures Exchange Offer may
be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date, in
accordance with the procedures set forth in
this Prospectus. See "The Debentures Exchange
Offer--Withdrawal of Tenders."
Debentures Exchange
Agent......................... The Bank of New York is serving as Exchange
Agent in connection with the Exchange Offer
for the Senior Debentures. See "The Debentures
Exchange Offer--Debentures Exchange Agent."
Debentures Shelf
Registration Statement........ Under certain circumstances described in the
Debentures Registration Rights Agreement,
certain holders of Unregistered Senior
Debentures (including holders who are not
permitted to participate in the Debentures
Exchange Offer) may require the Company to
file and use best efforts to cause to become
effective, a shelf registration statement
under the Securities Act, which would cover
resales of Unregistered Senior Debentures by
such holders. See "Debentures Exchange
Offer--Purpose and Effect of the Debentures
Exchange Offer."
The Senior Debentures
The terms of the New Senior Debentures and the Old Senior Debentures are
identical in all material respects, except for certain transfer restrictions
relating to the Old Senior Debentures. The New Senior Debentures will bear
interest from the most recent date to which interest has been paid on the Old
Senior Debentures or, if no interest has been paid on the Old Senior Debentures,
from November 26, 1997. Accordingly, registered holders of New Senior Debentures
on the relevant record date for the first interest payment date following the
consummation of the Debentures Exchange Offer will receive interest accruing
from the most recent date to which interest has been paid on the Old Senior
Debentures or, if no interest has been paid, from November 26, 1997. Old Senior
Debentures accepted for exchange will cease to accrue interest from and after
the date of consummation of the Debentures Exchange Offer. Holders whose Old
Senior Debentures are accepted for exchange will not receive any payment in
respect of interest on such Senior Debentures otherwise payable on any interest
payment date the record date for which occurs on or after consummation of the
Debentures Exchange Offer.
Mandatory Redemption........... December 1, 2009.
21
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<PAGE>
- --------------------------------------------------------------------------------
Interest Payment Dates......... June 1 and December 1 of each year, commencing
on June 1, 1998.
Sinking Fund................... None.
Ranking and Security........... The Senior Debentures constitute direct and
unconditional senior secured obligations of
COMFORCE and are secured by a pledge by
COMFORCE of all of the issued and outstanding
common stock of COI, a wholly-owned subsidiary
of COMFORCE. The payment obligations of
COMFORCE under the Senior Debentures will at
all times as rank at least equal in priority
of payment with all existing and future
Indebtedness ( defined) of COMFORCE. The
Senior Indenture permits COMFORCE to incur
additional Indebtedness (including secured
indebtedness and other additional senior
indebtedness) subject to certain limitations.
As of September 30, 1997, on a pro forma basis
after giving effect to the Transactions, the
aggregate principal amount of COMFORCE's
outstanding senior indebtedness would have
been approximately $20.0 million. The Senior
Debentures are structurally subordinated to
all indebtedness of COMFORCE's direct and
indirect subsidiaries and effectively
subordinated to all future secured
indebtedness of COMFORCE. As of September 30,
1997, on a pro forma basis, after giving
effect to the Transactions, (i) COMFORCE had
no outstanding secured indebtedness (other
than the Senior Debentures) and (ii) the
aggregate amount of outstanding liabilities of
subsidiaries of COMFORCE to which holders of
Senior Debentures are structurally
subordinated would have been $169.6 million
(including $147.8 million of indebtedness).
See "Description of Senior Debentures -
Ranking."
Optional Redemption............ The Company may redeem the Senior Debentures,
in whole or in part, at any time at the
redemption prices set forth herein, together
with accrued and unpaid interest, if any, to
the date of redemption. In addition, at any
time and from time to time the Company may,
subject to certain requirements, redeem up to
100% of the aggregate principal amount of the
Senior Debentures with the cash proceeds
received from one or more Equity Offerings at
the redemption prices set forth herein,
together with accrued and unpaid interest, if
any, to the date of redemption. See
"Description of Senior Debentures - Optional
Redemption."
Change of Control.............. Upon the occurrence of a Change of Control,
the Company will be required to make an offer
to repurchase the Senior Debentures at a price
equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if
any, to the date of repurchase. See
"Description of Senior Debentures - Optional
Redemption" and "Change of Control."
Restrictive Covenants.......... The Senior Indenture 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 and (vi) consolidations, mergers
and transfers of all or substantially all the
assets of the Company. The Senior Indenture
also prohibits certain restrictions on
distributions from Subsidiaries. However, all
of these limitations and prohibitions are
subject to a number of important
qualifications and exceptions. See
"Description of Senior Debentures - Certain
Covenants."
22
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<PAGE>
- --------------------------------------------------------------------------------
Exchange Offer and
Registration................ Pursuant to the Debentures Registration Rights
Agreement, the Company agreed to f the use its
best efforts to (i) file, within 30 days after
the date of original issuance o Senior
Debentures (the "Issue Date"), a registration
statement (the "Debentures Exchange Offer
Registration Statement") with respect to the
Debentures Exchange Offer, (ii) cause such
Debentures Exchange Offer Registration
Statement to be declared effective within 90
days after the Issue Date and (iii) consummate
the Debentures Exchange Offer within 130 days
after the Issue Date. In the event that the
Company does not comply with certain covenants
set forth in the Debentures Registration
Rights Agreement, the Company is obligated to
pay certain liquidated damages to the holders
of the Senior Debentures. See "Debentures
Exchange Offer."
Original Issue Discount........ The Senior Debentures were issued at an
original issue discount for United States
federal income tax purposes. Thus, although
cash interest will not be payable on the
Senior Debentures prior to December 1, 2002
original issue discount (i.e., the difference
between the sum of all principal and interest
payable on the Senior Debentures and the
portion of the issue price of the Units
allocable to the Senior Debentures) will
accrue from the issue date of the Senior
Debentures and will be included as interest
income periodically (including periods ending
prior to December 1, 2002) in a U.S. Holder's
(defined in "Certain United States Federal
Income Tax Consequences") gross income for
United States federal income tax purposes in
advance of receipt of the cash payments to
which the income is attributable. See "Certain
United States Federal Income Tax
Consequences."
For a more complete description of the Senior Debentures, see "Description of
Senior Debentures."
The Units
Issuance of Units............... The Old Senior Debentures were issued by
COMFORCE as part of 20,000 Units each
consisting of $1,000 principal amount of 15%
Senior Secured PIK Debentures and 8.45
Warrants, each to purchase one share of
COMFORCE's Common Stock (the "Common Stock"),
representing, in the aggregate, approximately
one percent of COMFORCE's Common Stock on a
fully diluted basis.
Separability.................... The Senior Debentures and the Warrants will be
separately transferable, subject to compliance
with applicable securities laws, on the
earliest to occur of (i) February 24, 1998,
(ii) such earlier date as may be determined by
the Initial Purchaser with the consent of the
Company, (iii) in the event of a Change of
Control, the date the Company mails notice
thereof to holders of the Units, and (iv) the
effective date of a registration statement for
a registered exchange offer for the Senior
Debentures (the "Separability Date").
The Warrants
Warrants........................ On November 26, 1997, as part of the Units,
the Company issued 169,000 Warrants, which
when exercised entitle the holders thereof to
acquire an aggregate of 169,000 shares of
Common Stock, representing approximately one
percent of the Company's Common Stock
outstanding on a fully-diluted basis.
Expiration Date................. The Warrants expire on December 1, 2009.
23
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<PAGE>
- --------------------------------------------------------------------------------
Exercise........................ Each Warrant entitles the holder to acquire,
on or after the Exercise Date and 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 five trading days ended November 18,
1997), subject to adjustment from time to time
upon the occurrence of certain changes in
Common Stock, certain Common Stock
distributions, certain issuances of options or
convertible securities, certain dividends and
distributions and certain other increases in
the number of shares of Common Stock.
"Exercise Date" means November 28, 1997.
Rights as Stockholders.......... Holders of Warrants do not, by virtue of being
such holders, have any rights of stockholders
of the Company.
Registration Rights............. Pursuant to a Warrant Registration Rights
Agreement dated as of November 26, 1997 (the
"Warrant Registration Rights Agreement,") the
Company has agreed to file a registration
statement under the Securities Act covering
the resale of the shares of Common Stock
issuable upon exercise of the Warrants (the
"Warrant Shares") by the holders thereof and
to use its reasonable efforts to cause the
registration statement to be declared
effective on or before 130 days after the
Issue Date and to remain effective, subject to
certain exceptions, until the second
anniversary of the Issue Date. See
"Description of Warrants - Registration
Rights."
Antidilution.................... The number of shares of Common Stock for
which, and the price per share at which, a
Warrant is exercisable are subject to
adjustment upon the occurrence of certain
events described in the warrant agreement (the
"Warrant Agreement"), dated November 26, 1997,
by and between the Company and The Bank of New
York, as warrant agent (the "Warrant Agent").
Risk Factors
Investors should consider all of the information in this Prospectus before
tendering their Old Notes or Old Senior Debentures in an Exchange Offer and, in
particular, should evaluate the specific factors set forth under "Risk Factors"
for risks involved with an investment in the New Notes and the New Senior
Debentures.
24
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<PAGE>
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Summary Unaudited Pro Forma Combined Financial Data of the Company
The following table sets forth certain summary unaudited pro forma combined
financial data of the Company for the periods ended and as of the dates
indicated and are derived from and described in the Unaudited Pro Forma Combined
Financial Statements beginning on page F-2. The summary unaudited pro forma
combined statement of operations data give effect to the Transactions, the Prior
Acquisitions and the Montare Acquisition as if they had occurred at the
beginning of the periods indicated. The summary unaudited pro forma combined
balance sheet data give effect to the Transactions as if they had occurred on
September 30, 1997. The summary unaudited pro forma combined financial data do
not purport to represent what the Company's results of operations or financial
condition would have actually been had the Transactions and the Prior
Acquisitions been consummated as of such dates or to project the Company's
results of operations or financial condition for any future period.
<TABLE>
<CAPTION>
Twelve Months
Ended Nine Months Ended Year Ended
September 30, September 30, December 31,
1997 1997 1996 1996
---- ---- ---- ----
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales .......................................................... $ 379,269 $ 294,355 $ 244,149 $ 329,063
Gross profit ....................................................... 59,688 45,268 39,295 53,715
Selling, general and administrative expense (1) .................... 40,991 30,691 27,384 37,684
Depreciation and amortization ...................................... 4,925 3,714 3,639 4,850
Operating income ................................................... 13,772 10,863 8,272 11,181
Interest expense, net .............................................. 20,370 15,278 15,278 20,370
Net loss attributable to common shareholders ....................... $ (8,758) $ (7,045) $ (5,122) $ (6,835)
========= ========= ========= =========
Net loss per share ................................................. $ (0.57) $ (0.45) $ (0.40) $ (0.51)
========= ========= ========= =========
Weighted average shares outstanding ('000s) ........................ 15,343 15,512 12,980 13,527
Net loss per share as adjusted (8) ................................. $ (0.34) $ (0.23) $ (0.40) $ (0.51)
========= ========= ========= =========
Other Data:
EBITDA (2) ......................................................... $ 19,526 $ 15,046 $ 12,120 $ 16,600
Adjusted EBITDA (3) ................................................ 22,443 17,088 14,745 20,100
Capital expenditures ............................................... 2,933 1,633 958 2,258
Ratio of adjusted EBITDA to total interest expense (3)(4) .......... 1.1x 1.2x 1.0x 1.0x
Ratio of adjusted EBITDA to cash interest expense (3)(5) ........... 1.4 1.4 1.2 1.2
Ratio of total debt to adjusted EBITDA (3)(6) ...................... 7.5 -- -- --
Ratio of cash-pay debt to adjusted
EBITDA (3)(7) ...................................................... 6.6 -- -- --
Adjusted EBITDA margin (2) ......................................... 5.9% 5.8% 6.0% 6.1%
<CAPTION>
September 30,
1997
----
<S> <C>
Balance Sheet Data:
Working capital .................................................... $ 58,208
Accounts receivable ................................................ 73,069
Intangible assets, net ............................................. 131,387
Total assets ....................................................... 229,042
Total debt, including current maturities ........................... 167,781
Series F convertible preferred stock ............................... 1
Stockholders' equity ............................................... 39,475
</TABLE>
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25
<PAGE>
(1) Selling, general and administrative expense includes legal settlement costs
and merger-related costs of $829,000, $469,000, $209,000 and $569,000 for
the twelve-month period ended September 30, 1997, the nine-month period
ended September 30, 1997, the nine-month period ended September 30, 1996
and the year ended December 31, 1996, respectively. See the Unaudited Pro
Forma Combined Financial Statements beginning on page F-2.
(2) EBITDA represents operating income plus depreciation and amortization plus
the adjustment for the legal settlement and merger-related costs described
in note (1) above. Management believes that EBITDA is a measure commonly
used by analysts and investors to determine a company's ability to incur
and service its debt. EBITDA should not be considered as an alternative to,
or more meaningful than, net income (as determined in accordance with
Generally Accepted Accounting Principles ("GAAP")), as a measure of a
company's operating results or cash flows (as determined in accordance with
GAAP), or as a measure of a company's liquidity.
(3) Adjusted to include management's estimate of $1 million and $2.5 million of
identified annual cost savings from the acquisition of Rhotech and
Uniforce, respectively, related to (i) personnel-related and other cost
savings at Rhotech and Uniforce, (ii) elimination of public company
expenses at Uniforce and (iii) integration of back office operations.
Rhotech was acquired on February 28, 1997 and the effects of cost savings
for the twelve-month period ended September 30, 1997 and the nine-month
period ended September 30, 1997 are prorated accordingly. Adjusted EBITDA
margin is calculated as Adjusted EBITDA as a percentage of net sales.
(4) For purposes of calculating this ratio, total interest expense excludes the
estimated amortization of deferred financing costs of $525,000 and $700,000
for the nine-month and twelve-month periods presented, respectively.
(5) For purposes of calculating this ratio, cash interest expense excludes
pay-in-kind interest on the Senior Debentures and amortization of deferred
financing costs described in note (4) above.
(6) For the purposes of calculating this ratio, total debt includes long-term
debt, current maturities and capital lease obligations.
(7) For the purposes of calculating this ratio, cash-pay debt represents total
debt less outstanding principal amounts under the Senior Debentures.
(8) Adjusted to exclude $5.8 million of bridge financing costs related to the
Prior Refinancings in the twelve-month and the nine-month periods ended
September 30, 1997.
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Management's Discussion of Summary Pro Forma Results
Since October 1995, COMFORCE has acquired eight contingent staffing
companies (including the acquisition of Uniforce in November 1997) and the
operations of COMFORCE conducted prior to October 1995 were discontinued in
September 1995. Consequently, the discussion and comparison of COMFORCE's
historical results of operations under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" does not address the results of
all of the acquired businesses for the periods presented. Accordingly, set forth
below is a discussion of certain unaudited pro forma financial data for
COMFORCE, Uniforce and the Company as if certain acquired businesses were
acquired by the respective company as of January 1, 1995. However, since the
unaudited pro forma financial data discussed below and elsewhere in this
Prospectus reflects the combined operating results of the recently acquired
businesses during periods when they were not under common control or management,
such data may not be indicative of the Company's future results or of the
results that such businesses might have achieved if operated as a combined
entity during such periods.
Summary Unaudited Pro Forma Combined Financial Data of COMFORCE, Uniforce and
the Company
<TABLE>
<CAPTION>
Twelve Months Nine Months Ended Years Ended
Ended September 30, September 30, December 31,
------------- ------------
1997 1997 1996 1996 1995
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Pro Forma-COMFORCE(1):
Net sales ..................................... $207,558 $161,402 $138,282 $184,438 $175,202
Gross profit .................................. 26,042 19,764 17,146 23,424 21,709
EBITDA (2) .................................... 8,498 6,642 5,073 6,929 7,248
Gross margin (3) .............................. 12.5% 12.2% 12.4% 12.7% 12.4%
EBITDA margin (2) ............................. 4.1 4.1 3.7 3.8 4.1
Pro Forma-Uniforce(4):
Net sales ..................................... $171,711 $132,953 $105,867 $144,625 $139,999
Gross profit .................................. 33,646 25,504 22,149 30,291 28,617
EBITDA (2) .................................... 11,028 8,404 7,047 9,671 7,716
Gross margin (3) .............................. 19.6% 19.2% 20.9% 20.9% 20.4%
EBITDA margin (2) ............................. 6.4 6.3 6.7 6.7 5.5
Pro Forma-The Company (5):
Net sales ..................................... $379,269 $294,355 $244,149 $329,063 $315,201
Gross profit .................................. 59,688 45,268 39,295 53,715 50,326
EBITDA (2) .................................... 19,526 15,046 12,120 16,600 14,964
Gross margin (3) .............................. 15.7% 15.4% 16.1% 16.3% 16.0%
EBITDA margin (2) ............................. 5.2 5.1 5.0 5.0 4.7
</TABLE>
- ----------
(1) Unaudited pro forma financial data for COMFORCE includes the Prior
Acquisitions as if such acquisitions had occurred at the beginning of the
respective periods. The pro forma EBITDA of COMFORCE excludes (i) legal
settlement costs included in selling, general and administrative expense of
$244,000, $244,000, $209,000 and $209,000 for the twelve-month period ended
September 30, 1997, the nine-month period ended September 30, 1997, the
nine-month period ended September 30, 1996 and the year ended December 31,
1996, respectively, and (ii) non-recurring charges for the year ended
December 31, 1995 of (x) a compensation charge of $3,425,000 related to the
issuance of a 35% common stock interest in COMFORCE to certain individuals
to manage COMFORCE's entry into, and development of, the telecommunications
and computer staffing business and (y) a management fee of $1,140,000 paid
by COMFORCE Telecom to its former parent company prior to its acquisition
by COMFORCE.
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(2) EBITDA represents operating income plus depreciation and amortization plus
the adjustment for the non-recurring charges and legal settlement costs
described in notes (1) and (4). Management believes that EBITDA is a
measure commonly used by analysts and investors to determine a company's
ability to service its debt. EBITDA should not be considered as an
alternative to, or more meaningful than, net income, as determined in
accordance with GAAP, as a measure of the Company's operating results or
cash flows (as determined in accordance with GAAP) or as a measure of the
Company's liquidity. EBITDA margin is calculated as EBITDA as a percentage
of net sales.
(3) Gross margin is calculated as gross profit as a percentage of net sales.
(4) Unaudited pro forma financial data for Uniforce includes the Montare
Acquisition as if such acquisition had occurred at the beginning of the
respective periods. EBITDA of Uniforce excludes legal settlement and
merger-related costs aggregating $585,000 for the twelve-month period ended
September 30, 1997, $360,000 of legal settlement costs for the year ended
December 31, 1996, and $225,000 of merger-related costs for the nine-month
period ended September 30, 1997.
(5) Unaudited pro forma combined financial data includes the results of pro
forma COMFORCE and Uniforce combined.
28
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<PAGE>
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Comparison of Pro Forma Results for the Nine Months Ended September 30, 1997 as
Compared to the Nine Months Ended September 30, 1996
The 16.7% increase in COMFORCE's pro forma net sales for the nine months
ended September 30, 1997 as compared to the same period in 1996 was principally
attributable to increased sales of technical and IT services to an existing
customer of Rhotech, as well as growth throughout all of the sectors served by
COMFORCE. The 25.6% increase in Uniforce's pro forma net sales for the nine
months ended September 30, 1997 as compared to the same period in 1996 was
principally attributable to growth in recruited and non-recruited IT work
performed by Uniforce, increased sales of financial services and growth in
Uniforce's other operations. Pro forma net sales for the Company increased 20.6%
for the nine months ended September 30, 1997 as compared to the same period in
1996 for the reasons noted above.
COMFORCE's pro forma gross profit for the nine months ended September 30,
1997 increased 15.3% from the same period in 1996, principally due to increased
1997 sales as noted above. COMFORCE's gross margin decline from 12.4% for the
nine months ended September 30, 1996 to 12.2% for the nine months ended
September 30, 1997 was principally due to additional fringe benefits and related
expenses required at Rhotech prior to its acquisition by COMFORCE. Uniforce's
pro forma gross profit for the nine months ended September 30, 1997 increased
15.1% from the same period in 1996 due to increased 1997 sales as noted above.
Uniforce's gross margin decline from 20.9% for the nine months ended September
30, 1996 to 19.2% for the nine months ended September 30, 1997 was principally
due to growth in Uniforce's non-recruited IT contracts and its independent
contractor consulting services which historically generate lower margins than
its contracts in other sectors. Uniforce's gross margins for these periods were
higher than COMFORCE's gross margins, principally as a result of the financial
and back office administrative services performed by Uniforce, which generate
significantly higher gross margins than other contingent staffing services
performed by either company. The Company's pro forma gross profit increased
15.2% for the nine months ended September 30, 1997 as compared to the same
period in 1996, principally due to the increased 1997 sales for each of COMFORCE
and Uniforce noted above. The Company's gross margin declined from 16.1% to
15.4% for the nine months ended September 30, 1997 as compared to the same
period in 1996, principally due to the decline in Uniforce's gross margins noted
above.
COMFORCE's pro forma EBITDA increased 30.9% for the nine months ended
September 30, 1997 as compared to the same period in 1996, and its pro forma
EBITDA margin increased from 3.7% for the 1996 period to 4.1% for the 1997
period, principally due to lower incremental selling, general and administrative
costs related to the increase in net sales noted above. Uniforce's pro forma
EBITDA increased 19.3% for the nine months ended September 30, 1997 as compared
to the same period in 1996, principally due to the increase in net sales noted
above. Uniforce's pro forma EBITDA margin decreased from 6.7% for the 1996
period to 6.3% for the 1997 period, principally as a result of the reduced gross
profit margins noted above, partially offset by lower incremental selling,
general and administrative expenses. Although Uniforce's EBITDA margins for
these periods were higher than those of COMFORCE, this difference is
substantially less than the difference in gross margins between the two
companies due to higher administrative expenses relative to net sales at
Uniforce's businesses. The Company's pro forma EBITDA increased 24.1% for the
nine months ended September 30, 1997 as compared to the same period in 1996, and
its pro forma EBITDA margin increased from 5.0% to 5.1% for these periods, for
the reasons noted above.
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<PAGE>
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Comparison of Pro Forma Results for the Year Ended December 31, 1996 as Compared
to the Year Ended December 31, 1995
The 5.3% increase in COMFORCE's pro forma net sales for the year ended
December 31, 1996 as compared to 1995 was principally attributable to growth
throughout all of the sectors served by COMFORCE, partially offset by a
reduction in revenues of approximately $7.7 million at Rhotech resulting from
the decision by Rhotech's prior management to eliminate certain non-technical
service contracts which did not meet minimum gross margin requirements.
Excluding Rhotech, pro forma net sales would have increased 7.8% in 1996 as
compared to 1995. The 3.3% increase in Uniforce's pro forma net sales for 1996
as compared to 1995 was principally attributable to growth in recruited IT work
and increased sales of financial services, partially offset by reduced sales in
licensed offices of $15.5 million, principally due to the reduction in the
number of licensed offices resulting from licensee contract buyouts in late
1995. Excluding the impact of reduced sales in licensed offices, pro forma net
sales would have increased 16.2% in 1996 as compared to 1995. Pro forma net
sales for the Company increased 4.4% for 1996 as compared to 1995 for the
reasons noted above. Excluding Rhotech and the impact from the licensee buyouts
of Uniforce noted above, pro forma net sales for the Company would have
increased 12.6% in 1996 as compared to 1995.
COMFORCE's pro forma gross profit for the year ended December 31, 1996
increased 7.9% from 1995, principally due to the increase in net sales noted
above. COMFORCE's gross margin increase from 12.4% in 1995 to 12.7% in 1996 was
principally attributable to continued growth in COMFORCE's higher margin IT and
telecommunications businesses. Uniforce's pro forma gross profit for the year
ended December 31, 1996 increased 5.9% from 1995, principally due to increased
1996 sales as noted above. Uniforce's gross margin increase from 20.4% in 1995
to 20.9% in 1996 was principally due to increased sales in higher margin IT and
financial services work. Uniforce's gross margins in 1995 and 1996 were higher
than COMFORCE's gross margins, principally as a result of the financial and back
office administrative services performed by Uniforce, which generate
significantly higher gross margins than other contingent staffing services
performed by either company. The Company's pro forma gross profit increased 6.7%
in 1996 as compared to 1995, principally due to increased 1996 sales for each of
COMFORCE and Uniforce as noted above. The Company's gross margin increase from
16.0% in 1995 to 16.3% in 1996 was principally due to the change in the
Company's overall sales mix noted above.
COMFORCE's pro forma EBITDA decreased 4.4% for the year ended December 31,
1996 as compared to 1995, and its pro forma EBITDA margin decreased from 4.1% in
1995 to 3.8% in 1996, principally due to increased expenses related to opening
new offices, including facility costs, the cost of hiring additional branch
personnel at Rhotech prior to its acquisition by COMFORCE and costs related to
the development of COMFORCE's corporate headquarters. Uniforce's pro forma
EBITDA increased 25.3% for the year ended December 31, 1996 as compared to 1995,
principally due to the increased gross profit and gross profit margin noted
above combined with lower incremental selling, general and administrative costs
related to an increase in net sales. Uniforce's pro forma EBITDA margin
increased from 5.5% in 1995 to 6.7% in 1996, principally as a result of such
lower incremental selling, general and administrative expenses. Although
Uniforce's EBITDA margins for 1995 and 1996 were higher than those of COMFORCE,
this difference is substantially less than the difference in gross margins
between the two companies due to higher administrative expenses related to
Uniforce's businesses. The Company's pro forma EBITDA increased 10.9% in 1996 as
compared to 1995, and its pro forma EBITDA margin increased from 4.7% in 1995 to
5.0% in 1996, principally due to the combined impact of the factors noted above.
30
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<PAGE>
RISK FACTORS
Prospective investors should carefully review the information set forth
below, together with the information and financial data set forth elsewhere in
this Prospectus, before making an investment decision.
Substantial Leverage and Ability to Service Debt
The Company is highly leveraged. After giving pro forma effect to the
Transactions, the Company would have had total indebtedness at September 30,
1997 of approximately $167.8 million (81% of total capitalization), including
$147.8 million of senior indebtedness. See "Selected Historical Financial
Data-COMFORCE Corporation" "Selected Historical Financial Data-Uniforce
Services, Inc.," "Capitalization" and the Unaudited Pro Forma Combined Financial
Statements beginning on page F-2.
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"); (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; (iv) the Company may be particularly vulnerable in the
event of a downturn in its business or in the economy generally; and (v) the
Company will be vulnerable to increases in interest rates to the extent of its
borrowings under the New Credit Facility.
A significant portion of the Company's cash flow is required to service
indebtedness and will not be available for other purposes. After giving pro
forma effect to the Transactions as if they had been consummated on January 1,
1996, the Company's fixed charges exceeded its earnings as a result of the pro
forma loss before income taxes of $9.3 million for the year ended December 31,
1996 and $10.3 million for the nine month period ended September 30, 1997. In
the absence of adequate operating results and cash flows, the Company may be
required to dispose of material assets or operations or refinance its
indebtedness to meet its debt service obligations. There can be no assurance
that the Company will be successful in this regard should such actions become
necessary.
Restrictions Imposed by Terms of the Indebtedness
The terms and conditions of the Notes Indenture, the Senior Indenture and
the New Credit Facility impose restrictions that affect the ability of the
Company and COI to incur debt, make distributions, make acquisitions, create
liens and make capital expenditures. See "The Transactions," "Description of
Notes," "Description of Senior Debentures" and "Description of Other
Indebtedness." Each of the Company and COI is also required to maintain
specified financial ratios and tests and limit its capital expenditures,
affiliate payments and dividends. The restrictive covenants contained in the
Notes Indenture, the Senior Indenture and the New Credit Facility, as well as
the highly leveraged position of each of the Company and COI, could
significantly limit its ability to respond to changing business or economic
conditions or to substantial declines in operating results. The ability of the
Company or COI to comply with the provisions applicable to it in the Senior
Indenture, the Notes Indenture or the New Credit Facility can be affected by
events beyond its control, and there can be no assurance that either the Company
or COI will achieve operating results that will comply with such provisions.
The breach of any such covenants under the New Credit Facility could result
in a default thereunder. In the event of any such default, the Lender could
elect to declare all amounts borrowed or owed under the New Credit Facility,
together with accrued interest and other fees, to be due and payable or to apply
all the available cash to repay such amounts or to collateralize letters of
credit (in which event cash would not be available to fund the Company's
operations or for other purposes). If the amounts borrowed under the New Credit
Facility are not repaid when due, the Lender could proceed against all the
collateral securing such debt. If the indebtedness under the New Credit
Facility, the Notes or the Senior Debentures were to be accelerated, there can
be no assurance that the assets of the
31
<PAGE>
Company or COI would be sufficient to repay such other indebtedness, the Notes
and the Senior Debentures in full. See "Description of Notes," "Description of
Senior Debentures" and "Description of Other Indebtedness."
Ranking of the Notes; Ability to Incur Additional Secured Debt
The Notes are not subordinated to any indebtedness of COI and rank pari
passu with all other unsecured, unsubordinated indebtedness of COI. The Notes
are unsecured and thus, in effect, would rank junior to any secured indebtedness
of COI, including the New Credit Facility, to the extent of the security. COI
has approximately $37.8 million in aggregate principal amount of secured
indebtedness outstanding. In addition, the Notes Indenture permits COI and its
subsidiaries to incur additional secured debt under certain circumstances. Some
or all of such additional indebtedness may rank pari passu with the Notes, and
the holders of such indebtedness may have a claim to assets of COI superior to
that of the holders of the Notes because such additional indebtedness is secured
by liens on assets of COI. Although there are certain limitations on the ability
of COI to incur such secured debt, the incurrence of such additional debt might
adversely affect COI's ability to meet its obligations under the Notes. See
"Description of the Notes-Certain Covenants" and "Description of Other
Indebtedness." In the event of dissolution, liquidation or reorganization of, or
similar proceeding relating to, COI, the secured lenders of COI would be
entitled to receive payment to the extent of the value of their collateral or in
full, whichever is less, prior to any payment in respect of the Notes.
Additionally, the lenders under the New Credit Facility have the benefit of
first priority pledges of the capital stock of each subsidiary of COI. In the
event that such lenders were to foreclose on such assets, assets available to
satisfy the claims of the holders of the Notes would be concommitantly reduced
or eliminated.
Ranking of the Senior Debentures; Ability to Incur Additional Secured Debt
The Senior Debentures are not subordinated to any indebtedness of COMFORCE
and rank pari passu with all other unsubordinated indebtedness of COMFORCE.
COMFORCE has $20.0 million in aggregate principal amount of Senior Debentures
outstanding which constitutes all of COMFORCE's currently outstanding secured
indebtedness. In addition, the Senior Indenture permits COMFORCE and its
subsidiaries to incur additional secured debt under certain circumstances. Some
or all of such additional indebtedness may rank pari passu with the Senior
Debentures. Although there are certain limitations on the ability of COMFORCE to
incur such secured debt, the incurrence of such additional debt might adversely
affect COMFORCE's ability to meet its obligations under the Senior Debentures.
See "Description of the Senior Debentures - Certain Covenants."
Holding Company Structure
Neither the Company nor COI has any business operations or source of income
of its own, and each conducts substantially all of its operations through its
Subsidiaries. The Company will have no material assets other than its investment
in the common stock of COI, its wholly-owned subsidiary, and COI will have no
material assets other than its investment in the common stock of its
Subsidiaries. Each of the Company and COI will be dependent on the cash flow of
its Subsidiaries and distributions thereof from its Subsidiaries in order to
meet its debt service obligations. As a result, the Senior Debentures are
structurally subordinated to the debt of COI and its Subsidiaries, including
without limitation, indebtedness under the New Credit Facility and the Notes and
all other indebtedness of COI and its Subsidiaries (including, without
limitation, trade payables and lease obligations). The Notes are structurally
subordinated to any indebtedness of the Subsidiaries of COI (including, without
limitation, trade payables and lease obligations). As of September 30, 1997,
after giving pro forma effect to the Transactions, the aggregate amount of
liabilities of COI and its Subsidiaries to which holders of Senior Debentures
are structurally subordinated would have been $169.6 million (including $147.8
million of Indebtedness), and the aggregate amount of liabilities of the
Subsidiaries of COI to which holders of the Notes are structurally subordinated
would have been $59.6 million (including $37.8 million of Indebtedness).
32
<PAGE>
Security for the Senior Debentures
COI's capital stock is the only significant asset of COMFORCE and the
dividends on COI's capital stock are the sole source of funds available to
COMFORCE to meet its obligations under the Senior Indenture. See "Description of
Senior Debentures-Ranking and Security." The payment of dividends on COI's
capital stock, however, is significantly restricted by certain covenants
contained in the Notes Indenture and the New Credit Agreement and may be
restricted by other agreements entered into by the Company in the future and by
applicable law. See "Description of Notes-Certain Covenants-Limitation on
Restricted Payments" and "Description of New Credit Agreement." The Senior
Debentures are secured by a pledge of all the issued and outstanding capital
stock of COI. See "Description of Senior Debentures-Security." As of September
30, 1997, on a pro forma basis after giving effect to the Notes Offering, the
New Credit Agreement and the Refinancing, COI would have had stockholder's
equity of $39.5 million. In addition, there is no existing public market for
COI's capital stock, and even if such capital stock could be sold, there can be
no assurance that the proceeds from the sale of such capital stock would be
sufficient to satisfy the amounts due on the Senior Debentures in the event of a
default. Furthermore, the ability of the holders of the Senior Debentures to
realize upon the collateral may be subject to certain bankruptcy law limitations
in the event of a bankruptcy. Absent an acceleration of the Senior Debentures,
COMFORCE will be able to vote, as it sees fit in its own discretion, the stock
of COI. In the event of a bankruptcy or liquidation of COI, the security
interest in COI's capital stock may be of no value to holders of Senior
Debentures because holders of COI's capital stock would be entitled only to the
assets which remained after all indebtedness of COI had been paid in full.
Effect of Fluctuations in the General Economy
Demand for staffing and consulting services is significantly affected by
the general level of economic activity in the country. Companies use staffing
and consulting services to manage personnel costs and changes in staffing needs,
in part due to business fluctuations. When economic activity increases,
employees from staffing and consulting companies are often added before
full-time employees are hired. During such times, there is intense competition
among staffing and consulting companies for qualified personnel for placement.
As economic activity slows, many companies reduce their usage of employees from
staffing and consulting companies before undertaking layoffs of their regular
employees, and the Company may experience more competitive pricing pressure
during such periods of economic downturn. As a result, any significant economic
downturn could have a material adverse effect on the Company's business,
financial condition and results of operations. Similarly, there can be no
assurance that during periods of increased economic activity and higher general
employment levels the Company will be able to recruit and retain sufficient
personnel to meet the needs of its clients. See "The Contingent Staffing and
Consulting Industry."
Absence of Combined Operating History; Potential Inability to Integrate Acquired
Businesses
The Company's contingent staffing and consulting business has been
developed principally through the acquisition of established staffing and
consulting businesses, all of which have been acquired since October 1995. Prior
to their acquisition by the Company, each of these acquired companies operated
as a separate independent entity. The Company has not experienced any
significant difficulties to date in integrating the operations of its acquired
companies. However, the acquisitions in February 1997 of Rhotech (which had 1996
net sales of $85.7 million) and in November 1997 of Uniforce (which had 1996 net
sales of $142.2 million) result in a significant increase in the size of
COMFORCE (which, on a historical basis, had 1996 net sales of $55.9 million).
The significant increase in size, on the basis of net sales, number and location
of offices and nature of operations, may result in more complex problems in
integrating the operations of these entities than the Company has faced with
previous acquisitions. The Company's officers have had limited experience in
managing companies as large and as rapidly growing as the Company. The Company's
strategy of continuing its growth and expansion will place additional demands
upon the Company's current management and will require additional information
systems and management, operational and other financial resources. There can be
no assurance that the Company's management group will be able to adequately
manage the combined entity and effectively implement the Company's strategy or
effectively integrate the businesses acquired. If the Company is unable to hire
and retain the management personnel needed to manage its existing and future
acquired businesses, if such personnel are unable to achieve anticipated
performance levels or if the Company
33
<PAGE>
is unable to implement effective controls, the Company's business, financial
condition and results of operations could be materially adversely affected. See
"Business" and "Management."
Risks Associated with Rationalization of Operations
The Company intends to improve its financial results through the
rationalization of operations. In connection with the Uniforce Acquisition, the
Company expects to reduce operating expenses through the consolidation of back
office activities, branch system rationalization, 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 with the
rationalization of operations or that, when implemented, its efforts will result
in the reduction of operating expenses that is currently anticipated. The
Company's plans will require substantial attention from members of the Company's
management, which will limit the amount of time such members have available to
devote to the Company's day-to-day operations. See "Business" and Note 8 to
"Selected Unaudited Pro Forma Combined Financial Statements."
Future Capital Needs; Uncertainty of Financing
The Company will need to obtain additional financial resources to fund its
strategy of growth through acquisition, geographic expansion and market
development. The Company can give no assurance that (i) additional financing
will be available or, if available, that it will be available on terms
acceptable to the Company, or (ii) the Company's existing capital resources,
including the amounts available for borrowing under the Company's lines of
credit and the Company's cash flow from operations, will either individually or
collectively be sufficient to fund future acquisitions or satisfy the Company's
working capital requirements. There also can be no assurance that the Company or
any of the acquired businesses will generate positive cash flow or that adequate
financing or capital resources will be available as needed or on terms
acceptable to the Company. A lack of available funds may require the Company to
delay, scale back or eliminate all or some of its market development and
acquisition projects and could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Financial Condition, Liquidity and Capital Resources."
Reliance on Acquisitions for Company Growth and Risks Associated with
Acquisitions
The ability of the Company to achieve growth through acquisition will
depend on a number of factors, including the availability of attractive
acquisition opportunities, the availability of funds needed to complete
acquisitions, the availability of working capital needed to fund the operations
of acquired businesses and the effect of existing and emerging competition on
operations. The Company has consummated eight acquisitions since October 1995.
These acquisitions may not achieve levels of revenue, profitability or
productivity comparable to those of the Company's existing operations or may not
otherwise perform as expected. Acquisitions also involve special risks,
including risks associated with unanticipated liabilities and contingencies,
diversion of management attention and possible adverse effects on earnings
resulting from increased goodwill amortization, increased interest costs, the
issuance of additional securities and difficulties related to the integration of
the acquired business. The Company is actively seeking additional acquisition
opportunities, although the Company has no agreements, understandings or plans
regarding any material acquisitions at this time. There can be no assurance that
the Company will be able to successfully identify additional suitable
acquisition candidates, complete additional acquisitions or integrate acquired
businesses into its operations. See "Business-Business Strategy-Pursue External
Growth through Strategic Acquisitions" and "-Acquisitions."
Impact of Pricing Pressure on Margins
Price competition in the contingent staffing and consulting industry is
intense. Pricing pressure from competitors and customers is increasing. The
trend toward larger customers demanding national contracts with a few
34
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preferred providers of staffing and consulting services has resulted, in many
cases, in competitive bidding and determinations based on price, so that margins
on these contracts may be less than the historical margins for providing these
staffers. In addition, the trend toward national contracts may limit the ability
of staffing and consulting firms to pass on all employee costs to customers.
Finally, large, traditional staffing firms have begun to enter the specialty
staffing and consulting sector, and, as a result, margins may decrease,
particularly for the less highly skilled personnel in this sector. There can be
no assurance that the Company will be able to maintain or increase its current
margins, the reduction of which could have a material adverse effect on the
Company's financial condition and results of operations, including cash flow.
See "The Contingent Staffing and Consulting Industry."
Liabilities for Customer and Employee Actions
Contingent staffing and consulting firms are in the business of employing
people and placing them in the workplace of other businesses. An attendant risk
of such activity includes possible claims by customers of employee misconduct or
negligence, including claims of discrimination and harassment, as well as claims
relating to employment of illegal aliens and other similar claims. The Company
has policies and guidelines in place to reduce its exposure to these risks.
However, a failure to follow these policies and guidelines may result in
negative publicity and the payment by the Company of money damages or fines.
Although the Company historically has not had any significant problems in this
area, there can be no assurance that the Company will not experience such
problems in the future. The Company is also exposed to liability with respect to
actions taken by its employees while on assignment, such as damages caused by
employee errors, misuse of customer proprietary information or theft of customer
property. Although the Company maintains insurance, due to the nature of the
Company's assignments, in particular its access to customer information systems
and confidential information, and the potential liability with respect thereto,
there can be no assurance that insurance coverage will continue to be available
or that it will be adequate to cover any such liability. See "Business-Legal
Proceedings."
Increases in Unemployment Insurance Premiums and Workers' Compensation Rates
The Company is required to pay unemployment insurance premiums and workers'
compensation benefits for its billable employees. Unemployment insurance
premiums are set annually by the states in which employees perform services and
could increase as a result of, among other things, increased levels of
unemployment and the lengthening of periods for which unemployment benefits are
available. Workers' compensation costs have increased as various states in which
the Company conducts operations have raised levels of compensation and
liberalized allowable claims. The Company may incur costs related to workers'
compensation claims at rates higher than anticipated if higher than anticipated
losses or an increase in the number or the severity of claims is experienced. In
addition, the Company's costs could increase as the result of any future health
care reforms. Certain federal and state legislative proposals have included
provisions extending health insurance benefits to billable employees who do not
presently receive such benefits. There can be no assurance that the Company will
be able to increase the fees charged to its customers in a sufficient amount to
cover increased costs related to workers' compensation, unemployment insurance
and health care reforms or other employment-related regulatory changes. Further,
there can be no assurance that the Company will be able to obtain or renew
workers' compensation insurance coverage in amounts and types desired at
reasonable premium rates. See "Business-Regulations."
Potential Impairment of Intangible Assets
As of September 30, 1997, on a pro forma basis, 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 forty
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 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
35
<PAGE>
Prospectus, the failure of the Company to generate earnings necessary to support
the amortization charge may result in an impairment of the asset. The resulting
write-off could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Financial Condition,
Liquidity and Capital Resources."
Dependence on Availability of Qualified Staffing Personnel
The Company depends on its ability to attract, train and retain personnel
who possess the skills and experience necessary to meet the staffing and
consulting requirements of its customers. Competition for individuals with
proven skills in certain areas, particularly information technology and
telecommunications, is intense. The Company competes for such individuals with
other contingent staffing and consulting firms, systems integrators, providers
of outsourcing services, computer systems consultants, customers and personnel
agencies. The Company must continually evaluate, train and upgrade its base of
available personnel to keep pace with changing customers' needs and emerging
technologies. There can be no assurance that qualified personnel will continue
to be available to the Company in sufficient numbers and on economic terms
acceptable to the Company. In addition, although the Company's employment
agreements contain non-compete covenants, there can be no assurance that the
Company can effectively enforce such agreements against its former employees.
See "The Contingent Staffing and Consulting Industry" and "Business-Recruiting
of Billable Employees."
Highly Competitive Market
The contingent staffing and consulting industry is highly competitive.
Heightened competition for customers as well as for contingent personnel could
adversely impact the Company's margins. Heightened competition for customers
could result in the Company being unable to maintain its current fee scales
without being able to reduce the personnel costs of its billable employees.
Large, traditional staffing companies have begun to enter the specialty staffing
and consulting sector, and, as a result, margins may decrease, particularly for
the less highly skilled personnel in that sector. Conversely, barriers to entry
to certain types of contingent staffing businesses, particularly the more
traditional sector, are low, and the Company could experience competition from
additional competitors entering the business. Shortages of qualified personnel,
which currently exist in some specialty sectors and could occur in the future,
may result in the Company being unable to fulfill its customers' needs.
Moreover, customers could employ personnel directly (rather than using the
Company's services) to ensure the availability of such personnel. Many of the
Company's competitors have greater marketing, financial and personnel resources
than the Company does and could provide increased competition to the Company.
The Company expects that the level of competition will remain high in the
future, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, in certain markets
the Company has experienced significant pricing pressure from some of its
competitors. See "Business-Competition."
Dependence on Key Personnel
The Company is highly dependent on its management. The Company's success
depends upon the availability and performance of 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. The loss of
services of any of these key persons could have a material adverse effect upon
the Company. The Company has entered into employment agreements with all of such
individuals which include covenants not to engage in a sbusiness similar to that
of the Company for a period of two years after termination of employment for any
reason, as well as customary non-disclosure and employer non-solicitation
provisions. The Company does not maintain key man life insurance on any of these
individuals. See "Management."
Licensing Risks
The Company derives a portion of its net income from licensed operations in
the Professional Services portion of its Staffing Services division. Licensees
may terminate their agreements, resulting in a loss of revenues. While the
36
<PAGE>
Company's licensing agreements contain non-competition covenants, former
licensees may pay the Company an amount based on a predetermined formula and
thereafter continue the operation of the business independently of the Company
and compete with the Company. The licenses are franchises under federal and
state laws and regulations, and the Company must comply with such federal and
state laws and regulations governing the sale of franchises, and with state laws
concerning the ongoing relationship with licensees (including the termination
and non-renewal of such relationships). The Company is subject to the risk of
litigation with licensees pursuant to such laws or otherwise. See
"Business-Licensed Offices."
Fraudulent Conveyance Considerations
The incurrence by the Company of the indebtedness evidenced by the Notes
and the Senior Debentures is subject to review under relevant federal and state
fraudulent conveyance statutes in a bankruptcy or reorganization case or a
lawsuit by or on behalf of creditors of the Company. Under these statutes, if a
court were to find that (a) obligations (such as the Notes or the Senior
Debentures) were incurred with the intent of hindering, delaying or defrauding
present or future creditors, and (b) the Company received less than a reasonably
equivalent value or fair consideration for those obligations and, at the time of
the occurrence of the obligations, the obligor either (i) was insolvent or
rendered insolvent by reason thereof, (ii) was engaged or was about to engage in
a business or transaction for which its remaining unencumbered assets
constituted unreasonably small capital or (iii) intended to or believed that it
would incur debts beyond its ability to pay such debts as they matured or became
due, such court could void the Company's obligations under the Notes and the
Senior Debentures, subordinate the Notes and the Senior Debentures to other
indebtedness of the Company or take other action detrimental to the holders of
the Notes and the Senior Debentures.
The measure of insolvency for purposes of a fraudulent conveyance claim
will vary depending upon the law of the jurisdiction being applied. Generally,
however, a company will be considered insolvent at a particular time if the sum
of its debts at that time is greater than the then fair value of its assets or
if the fair salable value of its assets at that time is less than the amount
that would be required to pay its probable liability on its existing debts as
they become absolute and mature. The Company believes that, after giving effect
to the Transactions, the Company will be (i) neither insolvent nor rendered
insolvent by the incurrence of indebtedness in connection with the Transactions,
(ii) in possession of sufficient capital to run its business effectively and
(iii) incurring debts within its ability to pay as the same mature or become
due.
There can be no assurance, however, as to what standard a court would apply
in order to evaluate the parties' intent or to determine whether the Company was
insolvent at the time of, or rendered insolvent upon consummation of, the
Transactions or the sale of the Notes or the Senior Debentures or that,
regardless of the method of valuation, a court would not determine that the
Company was insolvent at the time of, or rendered insolvent upon consummation
of, the Transactions.
Control by Insiders
Current management of the Company currently controls more than one-quarter
of the Company's outstanding shares of Common Stock. As a result, such persons
are expected to have the ability to significantly influence all issues submitted
to the Company's stockholders including with respect to its management and the
selection of its Board of Directors. Such concentration of ownership could limit
the price that certain investors might be willing to pay in the future for
shares of Common Stock and could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from attempting to
acquire, control of the Company. See "Principal Stockholders."
Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation and Bylaws
authorize the issuance of "blank check" Preferred Stock and the establishment of
advance notice requirements for director nominations and actions to
37
<PAGE>
be taken at stockholder meetings. These provisions could discourage or impede a
tender offer, proxy contest or other similar transaction involving control of
the Company, including transactions in which the stockholders might otherwise
receive a premium for their shares over then current market prices and other
transactions that they may deem to be in their best interests. In particular,
the issuance of preferred stock could have an adverse effect on holders of
Common Stock by delaying or preventing a change in control of the Company,
making removal of the present management of the Company more difficult or
resulting in restrictions upon the payment of dividends and other distributions
to the holders of Common Stock. For example, the Company could issue shares of
preferred stock with extraordinary voting rights or liquidation preferences to
make it more difficult for a hostile acquiror to gain control of the Company. In
addition to the anti-takeover effect of the issuance of preferred stock, holders
of preferred stock have a preferred position over holders of common stock on
liquidation, the right to a fixed or minimum dividend before any dividend is
paid (or accrued) on common stock, and the right to approve certain
extraordinary corporate matters. See "Description of Capital Stock."
No Cash Dividends
The Company anticipates that for the foreseeable future its earnings will
be retained for the operation and expansion of its business and that it will not
pay cash dividends on its Common Stock. In addition, the New Credit Facility
prohibits the payment of cash dividends on the Common Stock without the consent
of the lender, and the Senior Indenture restricts the payment of such dividends.
Limitation on Change of Control
Upon a Change of Control (as defined) the Company will be required to offer
to purchase all of the Senior Debentures, and COI will be required to offer to
purchase all of the Notes, at a price equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase. The
Change of Control purchase feature of the Notes and the Senior Debentures may in
certain circumstances discourage or make more difficult a sale or takeover of
the Company. In particular, a Change of Control may cause an acceleration of
indebtedness under the New Credit Facility and certain other indebtedness, if
any, of the Company and its Subsidiaries, in which case such indebtedness would
be required to be repaid in full before repurchase of the Senior Debentures, and
the Notes would also be required to be paid in full before repurchase of the
Senior Debentures. See "Description of the Notes-Change of Control Offer,"
"Description of Senior Debentures-Change of Control Offer" and "Description of
Other Indebtedness." The inability to repay such indebtedness, if accelerated,
and to purchase all of the tendered Notes and Senior Debentures would constitute
an event of default under the Notes Indenture or the Senior Indenture, as the
case may be. Finally, there can be no assurance that the Company will have funds
available to repurchase the Notes and the Senior Debentures upon the occurrence
of a Change of Control.
Absence of Public Market
Prior to the Exchange Offers, there has been no public market for the
Unregistered Securities. The Unregistered Securities have not been registered
under the Securities Act and will be subject to restrictions on transferability
to the extent that they are not exchanged for Exchange Securities by holders who
are entitled to participate in the applicable Exchange Offer. Certain holders of
Unregistered Securities (other than any such holder that is an affiliate of the
Company or COI, as the case may be, within the meaning of Rule 405 under the
Securities Act) who are not eligible to participate in the applicable Exchange
Offer are entitled to certain registration rights, and the Company or COI, as
the case may be, may be required to file a shelf registration statement with
respect to such Unregistered Securities. The New Notes and New Senior Debentures
will each constitute a new issue of securities with no established trading
market. The Company and COI do not intend to list the Exchange Securities on any
national securities exchange or to seek approval for quotation through any
automated quotation system. The initial purchasers of the Unregistered
Securities currently make a market in the Unregistered Securities, but they are
not obligated to do so and may discontinue such market making at any time. In
addition, such market making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act and may be limited during the Exchange
Offers and the pendency of a shelf registration statement. Accordingly, no
assurance can be given that an active public
38
<PAGE>
or other market will develop for the Exchange Securities or as to the liquidity
of the trading market for the Exchange Securities. Consequently, holders of
Exchange Securities may experience difficulty in reselling the Exchange
Securities or may be unable to sell them at all. If a market for the Exchange
Securities develops, any such market may be discontinued at any time.
If a public trading market develops for the Exchange Securities, future
trading prices of such securities will depend on many factors, including among
other things, prevailing interest rates, the Company's results of operations and
the market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the Exchange Securities may trade at a discount from
their principal amount.
Consequences of Failure to Exchange
Holders of Unregistered Securities who do not exchange their Unregistered
Securities for Exchange Securities pursuant to the applicable Exchange Offer
will continue to be subject to the restrictions on transfer of such securities
as set forth in the legend thereon and in the Prospectus dated November 19, 1997
with respect to the Old Notes or the Prospectus dated November 19, 1997 with
respect to the Old Senior Debentures, as the case may be, because the
Unregistered Securities were issued pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Unregistered Securities
may not be offered or sold unless registered under the Securities Act and
applicable state securities laws, or pursuant to an exemption therefrom, or in a
transaction not subject to the Securities Act and applicable state securities
laws. The Company and COI do not intend to register the Unregistered Securities
under the Securities Act and, after consummation of the Exchange Offers, will
not be obligated to do so except under limited circumstances. See "The Notes
Exchange Offer--Purpose and Effect of the Notes Exchange Offer" and "The
Debentures Exchange Offer--Purpose and Effect of the Debentures Exchange Offer."
Based on an interpretation by the staff of the Commission set forth in no-action
letters issued to third parties, the Company and COI believe that the Exchange
Securities issued pursuant to the Exchange Offers in exchange for Unregistered
Securities may be offered for resale, resold or otherwise transferred by a
holder thereof (other than (i) a broker-dealer who purchases such Exchange
Securities from the Company or COI, as the case may be, to resell pursuant to
Rule 144A or any other available exemption under the Securities Act, or (ii) a
person that is an "affiliate" of the Company or COI, as the case may be, within
the meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such securities are acquired in the ordinary course of such holder's
business, such holder has no arrangement with any person to participate in the
distribution of such securities and neither such holder nor any such other
person is engaging in or intends to engage in a distribution of such securities.
Any holder of Unregistered Securities who tenders in the applicable Exchange
Offer for the purpose of participating in a distribution of the Exchange
Securities may be deemed to have received restricted securities and, if so, will
be required to comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction. Each
broker-dealer that receives Exchange Securities for its own account in exchange
for Unregistered Securities, where such Unregistered Securities were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Securities. See "Plan of Distribution" and "The
Notes Exchange Offer--Procedures for Tendering" and "The Debentures Exchange
Offer--Procedures for Tendering." To the extent the Unregistered Securities are
tendered and accepted in an Exchange Offer, the trading market for untendered
and tendered but unaccepted Unregistered Securities could be adversely affected.
See "The Notes Exchange Offer--Purpose and Effect of the Notes Exchange Offer"
and "The Debentures Exchange Offer--Purpose and Effect of the Debentures
Exchange Offer."
Historical and Pro Forma Losses
COMFORCE had a net loss for the nine months ended September 30, 1997 of
$1.3 million. On a pro forma basis, the Company had net losses for the year
ended December 31, 1996 and the nine months ended September 30, 1997 of $6.7
million and $7.0 million, respectively. No assurance can be given that the
Company's operations will
39
<PAGE>
be profitable in the future. The net loss for the nine months ended September
30, 1997 included $5.8 million of bridge financing costs related to the Prior
Refinancings, which contributed to the loss. See "Unaudited Pro Forma Financial
Statements of COMFORCE Corporation and Subsidiaries."
Risks Related to the Loss of Key Customers
As is common in the staffing industry, the Company's engagements to provide
services to its customers are generally non-exclusive, of a short-term nature
and subject to termination by the customer with little or no notice. On a
historical basis, for 1996, sales to one customer accounted for more than 19% of
COMFORCE's revenues, and for 1995, sales to three customers accounted for 17.3%,
12.6% and 10.1% of COMFORCE's revenues. In addition, on a historical basis, in
each of 1995 and 1996, revenues of COMFORCE's 10 largest customers accounted for
more than 50% of COMFORCE's total revenues. On a pro forma basis (taking into
account the Rhotech and Uniforce acquisitions), in 1996, sales to one customer
accounted for 8% of the Company's revenues, and sales to the 10 largest
customers of the Company accounted for more than 30% of its revenues. The loss
of or a material reduction in the revenues from any of the Company's significant
customers could have an adverse effect on the Company's business, results of
operations and financial condition.
Original Issue Discount
There will be no federal income tax consequences as a result of an exchange
pursuant to either Exchange Offer. Therefore, the same federal tax consequences
apply to the New Senior Debentures as are applicable to the Old Senior
Debentures and to the New Notes as are applicable to the Old Notes.
The Old Senior Debentures were issued at a discount from their principal
amount at maturity. Original issue discount (the difference between the stated
redemption price at maturity of the Senior Debentures and the issue price of the
Senior Debentures) will accrue from the issue date of the Old Senior Debentures
and generally will be includable as interest income in the holder's gross income
for United States federal income tax purposes in advance of the cash payments to
which the income is attributable. For a more detailed discussion of the United
States federal income tax consequences to the holders of the Senior Debentures
of the purchase, ownership and disposition of the Senior Debentures, see
"Certain United States Federal Income Tax Consequences."
If a bankruptcy case is commenced by or against the Company under the
United States Bankruptcy Code (the "Bankruptcy Code") after the issuance of the
Senior Debentures, the claim of a holder of any of the Senior Debentures with
respect to the principal amount thereof may be limited to an amount equal to the
sum of (i) the initial offering price allocable to the Senior Debentures and
(ii) the portion of original issue discount which is not deemed to constitute
"unmatured interest" for purposes of the Bankruptcy Code. Any original issue
discount that was not amortized as of any such bankruptcy filing would
constitute "unmatured interest."
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<PAGE>
USE OF PROCEEDS
The Exchange Offers are intended to satisfy certain of the obligations of
the Company under the Debentures Registration Rights Agreement and COI under the
Notes Registration Rights Agreement. In consideration for issuing the Exchange
Securities contemplated in this Prospectus, the Company will exchange the Old
Senior Debentures for New Senior Debentures and COI will exchange the Old Notes
for New Notes (in each case, in a like principal amount), the form and terms of
which are the same as the form and terms of such Unregistered Securities, except
as otherwise described herein. The Old Senior Debentures surrendered in exchange
for New Senior Debentures and the Old Notes surrendered in exchange for New
Notes will be retired and canceled and cannot be reissued. Accordingly, issuance
of the Exchange Securities will not result in any increase or decrease in the
indebtedness of the Company or COI. As such, no effect has been given to the
Exchange Offers in the pro forma financial statements or capitalization table.
Neither the Company nor COI will receive any proceeds from the Exchange Offers.
The Company used the $130.0 million of gross proceeds from the Notes
Offering and the Units Offering, together with approximately $37.0 million of
borrowings under the New Credit Facility and available cash balances to (i)
finance the $93.6 million cash purchase price for the outstanding equity of
Uniforce, net of proceeds from the exercise of outstanding stock options, (ii)
refinance outstanding COMFORCE indebtedness under the Prior Credit Facility of
$38.1 million, (iii) refinance outstanding Uniforce indebtedness under the
Uniforce Credit Facility of $36.1 million, and (iv) pay $8.0 million of the
estimated fees and expenses associated with the Transactions.
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CAPITALIZATION
The following table sets forth the capitalization as of September 30, 1997
of (i) COMFORCE, (ii) Uniforce and (iii) the Company on a pro forma basis to
reflect the Transactions as if the Transactions had occurred on September 30,
1997. This table should be read in conjunction with the historical consolidated
financial statements of COMFORCE and Uniforce and the related notes thereto and
the other information included elsewhere in this Prospectus. See the Unaudited
Pro Forma Combined Financial Statements beginning on page F-2, "Use of Proceeds"
and "The Transactions."
<TABLE>
<CAPTION>
September 30, 1997
------------------
The Company
COMFORCE Uniforce Pro Forma
-------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Total cash and equivalents ......................... $ 2,670 $ 6,555 $ 2,074
========= ========= =========
Debt:
Senior bank credit facilities ................ $ 36,488 $ 36,098 --
New Credit Facility (1) ...................... -- -- $ 37,000
12% Senior Notes due 2007 .................... -- -- 110,000
15% Senior Secured PIK Debentures due 2009 (2) -- -- 20,000
Capitalized lease obligations ................ -- 781 781
--------- --------- ---------
Total debt .............................. 36,488 36,879 167,781
Stockholders' equity:
Series F preferred stock (3) ................. 1 -- 1
Common stock (4) ............................. 137 51 153
Warrants (2) ................................. -- -- --
Additional paid-in capital ................... 30,485 9,028 42,626
Retained earnings (deficit) .................. (1,677) 30,304 (3,305)
Treasury stock ............................... -- (21,951) --
--------- --------- ---------
Total stockholders' equity .............. 28,946 17,432 39,475
--------- --------- ---------
Total capitalization ......................... $ 65,434 $ 54,311 $ 207,256
========= ========= =========
</TABLE>
- ----------
(1) Total credit facility of $75 million, of which approximately $59 million
would have been available as of September 30, 1997 on a pro forma basis.
(2) The amount outstanding under the Senior Debentures includes $507,000 of
original issue discount ascribed to the value of the Warrants, which value
is excluded from the amount outstanding under the Warrants.
(3) Stated at par value. The Series F preferred stock has a liquidation value
of $500,000.
(4) As of September 30, 1997, the Company had outstanding 13,744,039 shares of
Common Stock, 2,069,030 options at a weighted average exercise price of
$7.64 and 1,923,794 warrants to acquire Common Stock at a weighted average
exercise price of $7.64. The Company issued 1,585,000 additional shares of
Common Stock in the Uniforce Acquisition and 169,000 Warrants in connection
with the Units Offering. On a pro forma basis, after taking into account
the treasury stock method for accounting for warrants and stock options,
the Company will have approximately 16.9 million shares outstanding on a
fully diluted basis.
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HISTORICAL STOCK PRICES AND DIVIDEND POLICY
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:
Prior to Acquisition of COMFORCE Telecom, Inc.:(1)
<TABLE>
<CAPTION>
Low High
--- ----
<S> <C> <C>
Fiscal Year 1995
First Quarter............................................1-15/16 3-7/8
Second Quarter...........................................2 3-1/2
Third Quarter............................................1-9/16 4-3/4
Fourth Quarter (through October 16, 1995)................4-3/8 3-1/4
Following Acquisition of COMFORCE Telecom, Inc.:
Fourth Quarter (commencing October 17, 1995).............9-1/4 3-1/4
Fiscal Year 1996
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...........................................6-1/4 8-7/8
</TABLE>
- ----------
(1) In October 1995 COMFORCE entered the contingent staffing business through
the acquisition of COMFORCE Telecom, Inc. Prior to that time it had been
primarily engaged in the jewelry business under the name The Lori
Corporation.
The last reported sale price of the COMFORCE Common Stock on the American
Stock Exchange on January 15, 1998 was $7.375. As of December 31, 1997, there
were approximately 5,370 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 New Credit
Facility, COMFORCE is prohibited from paying cash dividends on its Common Stock,
and Senior Indenture also restricts the payment of cash dividends. No dividends
have been declared or paid on the COMFORCE Common Stock during 1995, 1996 or
1997.
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SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following selected unaudited pro forma combined financial statements
include the unaudited pro forma statements of operations of COMFORCE and
Uniforce for the periods presented. The selected unaudited pro forma COMFORCE
financial information includes the statement of operations of COMFORCE for the
periods presented after giving effect to the Prior Acquisitions as if they had
occurred at the beginning of the periods indicated. The selected unaudited pro
forma Uniforce financial information for the 1996 periods includes the statement
of operations of Uniforce for the periods presented after giving pro forma
effect to the Montare Acquisition as if it was acquired at the beginning of the
periods indicated. The selected unaudited pro forma combined financial
statements presented below give effect to the Transactions, the Prior
Acquisitions and the Montare Acquisition as if they had occurred at the
beginning of the periods indicated. Such statements have been derived from, and
should be read in conjunction with, the Unaudited Pro Forma Combined Financial
Statements and notes thereto, the separate historical consolidated financial
statements of COMFORCE and Uniforce and the notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing elsewhere in this Prospectus.
44
<PAGE>
COMFORCE CORPORATION
SELECTED UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997 Nine Months Ended September 30, 1996
------------------------------------ ------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma Pro Forma Pro Forma Pro Forma
Comforce Uniforce Adjustments Company Comforce Uniforce Adjustments Company
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net sales ...................... $161,402 $132,953 $ 294,355 $138,282 $105,867 $ 244,149
Cost of sales .................. 141,638 107,449 249,087 121,136 83,718 204,854
-------- -------- --------- -------- -------- ---------
Gross profit ................... 19,764 25,504 45,268 17,146 22,149 39,295
Operating expenses:
Selling, general and
administrative
expense (6) .............. 13,366 17,325 30,691 12,282 15,102 27,384
Depreciation and
amortization ............. 1,317 953 $ 1,444(1) 3,714 1,298 789 $ 1,552(1) 3,639
-------- -------- -------- --------- -------- -------- -------- ---------
14,683 18,278 1,444 34,405 13,580 15,891 1,552 31,023
-------- -------- -------- --------- -------- -------- -------- ---------
Operating income ............... 5,081 7,226 (1,444) 10,863 3,566 6,258 (1,552) 8,272
-------- -------- -------- --------- -------- -------- -------- ---------
Interest expense, net .......... 11,091(2) 15,278 12,553(2) 15,278
Bridge financing costs ......... 5,822
Other expense .................. 31 (58)
-------- --------- -------- ---------
(11,091) 21,131 12,553 15,336
-------- --------- -------- ---------
Loss before income
taxes ....................... (12,535) (10,268) (14,105) (7,064)
-------- --------- -------- ---------
Benefit from income
taxes ....................... (4,721) (3,241) (4,509)(3) (1,960)
-------- --------- -------- ---------
Net loss ....................... (7,814) (7,027) (9,596) (5,104)
-------- --------- -------- ---------
Preferred stock
dividends ................... $ 18(4) $ 18 $ 18(4) $ 18
-------- --------- -------- ---------
Net loss attributable to
common
stockholders ................ $ (7,832) $ (7,045) $ (9,614) $ (5,122)
======== ========= ======== =========
Loss per share ................. $ (0.45) $ (0.40)
========= =========
Weighted average
shares outstanding
(000's) ..................... 15,512(5) 12,980(5)
========= =========
Other Data:
EBITDA (7) ..................... $ 15,046 $ 12,120
Adjusted EBITDA (8) ............ 17,088 14,745
Loss per share as
adjusted (9) ................... $(0.23) $ (0.40)
========= =========
</TABLE>
See notes to selected unaudited pro forma combined financial statements.
45
<PAGE>
COMFORCE CORPORATION
SELECTED UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
Comforce Uniforce Adjustments The Company
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales .................................................... $184,438 $144,625 $ 329,063
Cost of sales ................................................ 161,014 114,334 275,348
-------- -------- ---------
Gross profit ................................................. 23,424 30,291 53,715
Operating expenses:
Selling, general and administrative expense (6) ........... 16,704 20,980 37,684
Depreciation and amortization ............................. 1,736 1,080 $ 2,034(1) 4,850
-------- -------- --------- ---------
18,440 22,060 2,034 42,534
-------- -------- --------- ---------
Operating income ............................................. 4,984 8,231 (2,034) 11,181
======== ======== ========= =========
Interest expense, net ........................................ 16,502(2) 20,370
Other expense ................................................ (82)
--------- ---------
16,502 20,452
--------- ---------
Loss before income taxes ..................................... (18,536) (9,271)
--------- ---------
Benefit from income taxes .................................... (5,937)(3) (2,561)
--------- ---------
Net loss ..................................................... (12,599) (6,710)
--------- ---------
Preferred stock dividends .................................... $ 25(4) $ 25
Accretive dividend on Series F Preferred Stock ............... $ 100(4) $ 100
--------- ---------
Net loss attributable to common stockholders ................. $ (12,724) $ (6,835)
========= =========
Loss per share ............................................... $ (0.51)
=========
Weighted average shares outstanding (000's) .................. 13,527(5)
=========
Other Data:
EBITDA (7) ................................................... $ 16,600
Adjusted EBITDA (8) .......................................... 20,100
Loss per share as adjusted (9) ............................... $ (0.51)
=========
</TABLE>
See notes to selected unaudited pro forma combined financial statements.
46
<PAGE>
COMFORCE Corporation
Notes to Selected Unaudited Pro Forma Combined Financial Statements
(1) Reflects the amortization of goodwill resulting from the acquisition of
Uniforce. The pro forma COMFORCE amortization expense reflects the
amortization of intangibles resulting from its acquisitions during the
period October 17, 1995 through September 30, 1997.
(2) The pro forma adjustment to interest expense reflects interest expense on
the placement of the Notes and Senior Debentures and borrowings under the
New Credit Facility aggregating $167 million. Pro forma interest expense
has been calculated using interest rates of 8.25%, 12.0% and 15.0% per
annum for the New Credit Facility, Notes and Senior Debentures,
respectively, plus the amortization of debt financing costs. Financing
costs do not include the effects of the Warrants.
(3) The pro forma adjustment for income taxes reflects the tax effect of the
pro forma adjustments (excluding non-deductible amortization), the tax
effect of S Corporation earnings treated as C Corporation earnings and the
tax benefit of losses by other entities within the pro forma combined
group.
(4) Pro forma dividends for all periods presented represent dividends and
accretive dividends on $500,000 of Series F preferred stock remaining
outstanding as of September 30, 1997 and deemed outstanding for all periods
presented.
(5) Pro forma weighted average shares include shares issued to finance
acquisition transactions and exclude common stock equivalents as this
effect would be anti-dilutive.
(6) Selling, general and administrative expense includes legal settlement costs
and merger-related costs of $469,000, $209,000 and $569,000 for the
nine-month period ended September 30, 1997, the nine-month period ended
September 30, 1996 and the year ended December 31, 1996, respectively. See
the Unaudited Pro Forma Combined Financial Statements beginning on page
F-2.
(7) EBITDA represents operating income plus depreciation and amortization plus
the adjustment for the legal settlement costs described in note (6) above.
Management believes that EBITDA is a measure commonly used by analysts and
investors to determine a company's ability to incur and service its debt.
EBITDA should not be considered as an alternative to, or more meaningful
than, net income (as determined in accordance with GAAP), as a measure of a
company's operating results or cash flows (as determined in accordance with
GAAP), or as a measure of a company's liquidity.
(8) Adjusted to include management's estimate of $1 million and $2.5 million of
identified annual cost savings from the acquisition of Rhotech and
Uniforce, respectively, related to (i) personnel-related and other cost
savings at Rhotech and Uniforce, (ii) elimination of public company
expenses at Uniforce and (iii) integration of back office operations.
Rhotech was acquired on February 28, 1997 and the effects of cost savings
for the nine-month period ended September 30, 1997 are prorated
accordingly. Adjusted EBITDA margin is calculated as Adjusted EBITDA as a
percentage of net sales.
(9) Adjusted to exclude the $5.8 million of bridge financing costs related to
the Prior Refinancings in the nine-month period ended September 30, 1997.
47
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
COMFORCE CORPORATION
The following table sets forth selected financial data of COMFORCE as of
and for each of the five years in the period ended December 31, 1996 and for the
nine month periods ended September 30, 1997 and 1996. The statement of
operations and balance sheet data as of and for each of the five years in the
period ended December 31, 1996 are derived from COMFORCE's audited historical
consolidated financial statements included elsewhere in this Prospectus. The
statement of operations and balance sheet data as of and for the nine month
periods ended September 30, 1997 and 1996 have been derived from the unaudited
historical financial statements of COMFORCE. In the opinion of management, the
unaudited data includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the data for such periods. Interim
results for the nine month period ended September 30, 1997 are not necessarily
indicative of results that can be expected in future periods. "Other Data," not
directly derived from COMFORCE's financial statements, have been presented to
provide additional analysis. The Selected Historical Financial Data below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Historical Results of Operations-COMFORCE."
"Summary Historical Financial Data-COMFORCE" and the historical financial
statements and notes thereto included elsewhere in this Prospectus.
48
<PAGE>
COMFORCE Corporation (1)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
(unaudited) (in thousands, except per share data)
------------- --------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales ............................... $ 145,986 $ 33,514 $ 55,867 $ 2,387 -- -- --
Cost of sales ........................... 127,227 28,690 47,574 1,818 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Gross profit ............................ 18,759 4,824 8,293 569 -- -- --
Selling, general and
administrative expense ............... 11,842 2,891 5,266 461 $ 966 $ 701 $ 421
Depreciation and amortization ........... 1,241 343 614 362 -- -- --
Stock compensation charge (2) ........... -- -- -- 3,425 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss) ................. 5,676 1,590 2,413 (3,679) (966) (701) (421)
Interest expense, net (3) ............... 7,973 102 201 585 1,316 754 --
Other expense (income) .................. (344) (29) (40) 33 -- 1 --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income
taxes and extraordinary
credit ............................... (1,953) 1,517 2,252 (4,297) (2,282) (1,456) (421)
Provision (credit) for income
taxes ................................ (646) 610 900 35 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations ........................... (1,307) 907 1,352 (4,332) (2,282) (1,456) (421)
Loss from discontinued
operations (4) ....................... -- -- -- (17,211) (16,220) (216) (34,198)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary credit ................. (1,307) 907 1,352 (21,543) (18,502) (1,672) (34,619)
Extraordinary credit, net
discharge or indebtedness (5) ........ -- -- -- 6,657 8,965 22,057 --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ................. (1,307) 907 1,352 (14,886) (9,537) 20,385 (34,619)
Preferred stock dividends ............... 732 -- 325 -- -- -- --
Accretive dividend on Series F
preferred stock ...................... -- 193 665 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)
attributable to common
shares .......................... $ (2,039) $ 714 $ 362 $ (14,886) $ (9,537) $ 20,385 $ (34,619)
========= ========= ========= ========= ========= ========= =========
Net income (loss) per share:
Continuing operations before
accretive dividend ................ $ (0.15) $ 0.06 $ 0.08 $ (0.95) $ (0.72) $ (0.39) $ (0.13)
Discontinued operations .............. -- -- -- (3.74) (5.08) (0.06) (10.86)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary credit and
accretive dividend ................ $ (0.15) $ 0.06 $ 0.08 $ (4.69) $ (5.80) $ (0.45) $ (10.99)
Extraordinary credit ................. -- -- -- 1.45 2.81 6.03 --
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
(unaudited) (in thousands, except per share data)
------------- --------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Accretive dividend on Series
F preferred stock ...................... -- -- (0.05) -- -- -- --
Net income (loss) per
share ................................ $ (0.15) $ 0.06 $ 0.03 $ (3.24) $ (2.99) $ 5.58 $(10.99)
Weighted average shares
outstanding (000's) ....................... 13,256 12,661 12,991 4,596 3,195 3,656 3,149
Other Data:
EBITDA (6) ................................... $ 6,917 $ 1,933 $ 3,027 $ 108 --(10) --(10) --(10)
Capital expenditures ......................... 548 183 329 656 --(10) --(10) --(10)
Ratio of EBITDA to interest
expense ................................... 0.9x 19.0x 15.1x 0.2x --(10) --(10) --(10)
Gross margin (7) ............................. 12.8% 14.4% 14.8% 23.8% --(10) --(10) --(10)
EBITDA margin (6) ............................ 4.7% 5.8% 5.4% 4.5% --(10) --(10) --(10)
Ratio of earnings to fixed
charges ................................... --(8) -- 9.6x(8) --(8)
Balance Sheet Data:
Working capital (deficit) .................... $ 9,103 $ 4,699 $ 8,012 $ (1,697) --(10) --(10) --(10)
Accounts receivable .......................... 26,547 10,081 12,042 1,698 --(10) --(10) --(10)
Intangible assets, net ....................... 38,722 14,036 24,756 4,801 --(10) --(10) --(10)
Total assets (9) ............................. 75,739 26,620 43,366 8,536 --(10) --(10) --(10)
Total debt, including current
maturities ................................ 36,488 3,250 3,850 500 --(10) --(10) --(10)
Preferred stock .............................. 1 2 2 -- --(10) --(10) --(10)
Stockholders' equity ......................... 28,946 18,716 34,744 2,238 --(10) --(10) --(10)
</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 nine months ended September 30, 1996 represent
results of COMFORCE for the entire nine months, results of Williams from
the acquisition date of March 3, 1996 through September 30, 1996 and the
results of RRA from the acquisition date of May 10, 1996 through September
30, 1996. Results for the nine months ended September 30, 1997 represent
results of Rhotech from the acquisition date of February 28, 1997 through
September 30, 1997. COMFORCE's jewelry operations were discontinued
effective as of September 30, 1995. Accordingly, selected financial data of
COMFORCE's jewelry operations for each of the three 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 COMFORCE to certain individuals to manage
COMFORCE's entry into the technical staffing services business.
50
<PAGE>
(3) Includes $5.8 million of bridge financing costs for the nine months ended
September 30, 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 COMFORCE's discontinued jewelry operations effective June 30,
1995 and a provision of $1.6 million for loss on disposal of these
discontinued operations. The loss from discontinued operations for the year
ended December 31, 1994 includes a charge to operations of $10.8 million
representing a write-off of goodwill of COMFORCE's former New Dimensions
subsidiary. The loss from discontinued operations for the year ended
December 31, 1992 includes charges to operations of $8.7 million
representing an impairment of goodwill at December 31, 1992 and $8.5
million representing increased reserves for markdown allowances and
inventory valuation.
(5) The 1995 and 1994 extraordinary credits represent gains from net discharge
of indebtedness under terms of COMFORCE'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 COMFORCE's former New Dimensions subsidiary.
(6) EBITDA represents income (loss) from continuing operations before income
taxes and extraordinary credits plus depreciation and amortization plus the
adjustment for the non-recurring stock compensation charge of $3.4 million
in 1995. Management believes that EBITDA is a measure commonly used by
analysts and investors to determine a company's ability to service and
incur its debt. EBITDA should not be considered as an alternative to, or
more meaningful than, net income (as determined in accordance with GAAP) as
a measure of a company's operating results or cash flows (as determined in
accordance with GAAP) or as a measure of a company's liquidity. EBITDA
margin is calculated as EBITDA as a percentage of net sales.
(7) Gross margin is calculated as gross profit as a percentage of net sales.
(8) The Company's fixed charges exceeded its earnings as a result of loss
before income taxes of $4.3 million for the year ended December 31, 1995
and $2.0 million for the nine month period ended September 30, 1997. For
purposes of the ratios, earnings consist of income from operations and
fixed charges. Fixed charges consist of interest expense, amortization of
debt financing costs and one-third of rental expenses.
(9) As partial consideration for a debt settlement agreement, in December 1994,
COMFORCE's bank lender received all of the assets of COMFORCE's former New
Dimensions subsidiary.
(10) Data not presented as information is not meaningful since COMFORCE was not
in the staffing business during such periods.
SELECTED HISTORICAL FINANCIAL DATA
UNIFORCE SERVICES, INC.
The following table sets forth selected financial data of Uniforce as of
and for each of the five years in the period ended December 31, 1996 and for the
nine-month periods ended September 30, 1997 and 1996. The statement of
operations and balance sheet data as of and for each of the five years in the
period ended December 31, 1996 are derived from Uniforce's audited historical
consolidated financial statements included elsewhere in this Prospectus. The
statement of operations and balance sheet data as of and for the nine-month
periods ended September 30, 1997 and 1996 have been derived from the unaudited
historical financial statements of Uniforce. In the opinion of management, the
unaudited data includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the data for such periods. Interim
results for the nine-month period ended September 30, 1997 are not necessarily
indicative of results that can be expected in future periods. "Other Data," not
directly derived from Uniforce's financial statements, have been presented to
provide additional analysis. The Selected Historical Financial Data below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Historical Results of Operations-Uniforce,"
"Summary Historical Financial Data-Uniforce" and the historical financial
statements and notes thereto included elsewhere in this Prospectus.
51
<PAGE>
Uniforce Services, Inc. (1)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited) (dollars in thousands, except EPS data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales of supplemental staffing services . $127,265 $ 97,804 $134,437 $126,268 $108,486 $81,818 $ 78,916
Service revenues and fees ............... 5,688 5,589 7,714 8,203 6,695 4,324 4,009
-------- -------- -------- -------- -------- ------- --------
Total revenues ....................... 132,953 103,393 142,151 134,471 115,181 86,142 82,925
-------- -------- -------- -------- -------- ------- --------
Cost of supplemental staffing services .. 100,783 76,214 104,685 98,163 83,767 63,489 61,150
Licensees' share of gross margin (2) .... 6,666 5,833 7,977 9,473 9,896 8,793 9,575
-------- -------- -------- -------- -------- ------- --------
Cost of sales ........................ 107,449 82,047 112,662 107,636 93,663 72,282 70,725
-------- -------- -------- -------- -------- ------- --------
Gross profit ............................ 25,504 21,346 29,489 26,835 21,518 13,860 12,200
Selling, general and administration
expense .............................. 17,100 14,556 20,075 19,451 15,731 10,656 9,604
Litigation settlement (3) ............... -- -- 360 -- -- -- --
Merger transaction costs (4) ............ 225 -- -- -- -- -- --
Depreciation and amortization ........... 953 783 1,074 940 941 873 938
-------- -------- -------- -------- -------- ------- --------
Operating income ........................ 7,226 6,007 7,980 6,444 4,846 2,331 1,658
Interest expense (income), net .......... 1,829 1,564 2,170 728 127 (150) (208)
Other expense (income), net ............. (9) (19) (45) (29) (7) 70 47
-------- -------- -------- -------- -------- ------- --------
Income before provision for income
taxes ................................ 5,406 4,462 5,855 5,745 4,726 2,411 1,819
Provision for income taxes .............. 2,126 1,695 2,185 2,182 1,775 918 675
-------- -------- -------- -------- -------- ------- --------
Net income .............................. $ 3,280 $ 2,767 $ 3,670 $ 3,563 $ 2,951 $ 1,493 $ 1,144
======== ======== ======== ======== ======== ======= ========
Net income per share:
Primary .............................. $ 1.02 $ 0.85 $ 1.13 $ 0.83 $ 0.65 $ 0.35 $ 0.26
Fully diluted ........................ 1.00 0.84 -- -- -- -- --
======== ======== ======== ======== ======== ======= ========
Weighted average shares outstanding:
Primary ('000s) ...................... 3,232 3,273 3,258 4,311 4,553 4,307 4,348
Fully diluted ('000s) ................ 3,286 3,293 -- -- -- -- --
Other Data:
EBITDA (5) .............................. $ 8,404 $ 6,790 $ 9,414 $ 7,384 $ 5,787 $ 3,204 $ 2,596
Capital expenditures .................... 1,085 775 1,464 670 592 440 83
Ratio of EBITDA to interest expense
(6) .................................. 4.6x 4.3x 4.3x 10.1x 45.6x NM NM
Gross margin (7) ........................ 19.2% 20.6% 20.7% 20.0% 18.7% 16.1% 14.7%
EBITDA margin (5) ....................... 6.3% 6.6% 6.6% 5.5% 5.0% 3.7% 3.1%
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
-------------------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
(unaudited) (dollars in thousands, except EPS data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ......................... $40,396 $30,953 $29,003 $29,181 $19,281 $17,508 $16,661
Accounts and funding and
service fees receivable, net ............ 46,522 40,584 35,985 35,747 26,286 18,518 16,297
Intangible assets, net .................. 7,375 8,067 7,790 4,347 5,059 2,039 2,047
Total assets ............................ 65,792 57,929 54,969 50,596 41,496 30,235 28,040
Total debt, including current
maturities ........................... 36,880 30,416 27,670 12,509 6,300 -- 1,000
Stockholders' equity .................... 17,432 13,421 14,222 24,160 23,112 20,708 19,852
</TABLE>
- -----------
(1) Results for the year ended December 31, 1996 include results of Montare
from the date of its acquisition, May 17, 1996 through December 31, 1996.
Results for the nine months ended September 30, 1996 include results of
Montare from the acquisition date, May 17, 1996 through September 30, 1996.
Results for the nine months ended September 30, 1997 include the results of
Montare for the entire nine months.
(2) Licensees' share of gross margin is principally based upon a percentage of
the gross margin generated from sales by licensed offices.
(3) In 1996, Uniforce settled litigation with vendors of training films
alleging that Uniforce improperly used and/or copied vendors' tapes.
(4) Represents costs incurred in connection with the Merger and Tender Offer.
(5) EBITDA represents operating income plus depreciation and amortization plus
adjustments for the litigation settlement and merger-related costs
discussed in notes (3) and (4) above. Management believes that EBITDA is a
measure commonly used by analysts and investors to determine a company's
ability to service and incur debt. EBITDA should not be considered as an
alternative to, or more meaningful than, net income (as determined in
accordance with GAAP) as a measure of Uniforce's operating results or cash
flows (as determined in accordance with GAAP) as a measure of Uniforce's
liquidity. EBITDA margin is calculated as EBITDA as a percentage of total
revenues.
(6) Management believes this ratio is a measure commonly used by analysts and
investors to determine a company's ability to service and incur debt.
EBITDA should not be considered as an alternative to, or more meaningful
than, net income (as determined in accordance with GAAP) as a measure of
Uniforce's operating results or cash flows (as determined in accordance
with GAAP) or as a measure of Uniforce's liquidity.
(7) Gross margin is a calculation of gross profit as a percentage of total
revenues.
53
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Set forth below are discussions and analyses of financial condition and
results of operations of COMFORCE and Uniforce by the respective managements of
such companies. Reference is also made to the Unaudited Pro Forma Combined
Financial Statements beginning on page F-2 and the discussion of such pro forma
results under "Prospectus Summary-Discussion of Pro Forma Results." The Company
believes that its future operating results may not be directly comparable to
historical operating results of either COMFORCE or Uniforce because of the
Company's increased size, related cost savings and marketing synergies.
Since October 1995 until prior to the consummation of the Uniforce
Acquisition in November 1997, COMFORCE completed seven acquisitions and Uniforce
completed one acquisition. See "Prospectus Summary-Prior Acquisitions and
Refinancings" and "Business-Acquisitions." Each of the Prior Acquisitions and
the Montare Acquisition has been accounted for on a purchase basis and the
results of operations of each of the businesses acquired have been included in
the acquiring company's historical financial statements from the date of
acquisition. Certain of the Prior Acquisitions provide for contingent payments
by COMFORCE as a part of the purchase consideration based upon the operating
results of the acquired businesses for specified future periods.
The Prior Acquisitions were financed by COMFORCE principally through its
issuance of debt and equity securities and borrowings under bank credit
facilities. As a result, COMFORCE'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 COMFORCE's historical
results of operations set forth below may not be meaningful. See "Prospectus
Summary-Management's Discussion of Summary Pro Forma Results" and "Unaudited Pro
Forma Combined Financial Statements" beginning on page F-2.
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, although the trend in the
IT staffing sector has been toward lower margins generally as this sector
matures and consolidates. Additionally, in certain markets the Company has
experienced significant pricing pressure from some of its competitors.
Consequently, changes in the Company's sales mix can be expected to impact the
overall gross margins generated by the Company.
Staffing personnel placed by the Company are employees of the Company. The
Company is responsible for employee related expenses for its employees,
including workers' compensation, unemployment compensation insurance, Medicare
and Social Security taxes and general payroll expenses. The Company offers
health, dental, disability and life insurance to its billable employees.
Staffing and consulting companies, including the Company, typically pay their
billable employees weekly for their services before receiving payment from their
customers, often resulting in significant outstanding receivables. To the extent
the Company increases revenues through acquisitions and/or internal growth,
these receivables will grow and there will be greater requirements for borrowing
availability under its credit facilities to fund current operations.
In addition, the principal assets of staffing and consulting companies are
typically their relationships with their employees and their customers, rather
than tangible assets. Consequently, amortization of intangibles, principally
goodwill, has increased as a result of the Prior Acquisitions and the Uniforce
Acquisition and can be expected to further increase if the Company continues to
grow through acquisitions. See "Risk Factors-Potential Impairment of Intangible
Assets."
54
<PAGE>
Results of Operations-COMFORCE
Historical financial information for COMFORCE for 1995 and prior years
relates principally to operations discontinued by COMFORCE effective September
30, 1995. Only limited results of COMFORCE's contingent staffing operations
(following COMFORCE's acquisition of COMFORCE Telecom in October 1995) are
reflected in 1995. See "Business-Discontinued Operations."
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Revenues of $146 million for the nine months ended September 30, 1997 were
$112.5 million, or approximately 336% higher than revenues for the nine months
ended September 30, 1996. The increase in 1997 revenues is attributable
principally to COMFORCE's completion of five acquisitions since the end of the
first quarter of 1996.
Cost of revenues for the nine months ended September 30, 1997 was 87.2% of
revenues compared to cost of revenues of 85.6% for the nine months ended
September 30, 1996. The 1997 cost of revenues increase of 1.6% is a result of
COMFORCE's expansion into more mature technical staffing sectors, which
historically generate gross margins substantially lower than telecommunications
and information technology sectors, principally due to the nature of the related
contracts and competition in this sector.
Selling, general and administrative expenses as a percentage of revenue was
8.1% for the nine months ended September 30, 1997, compared to 8.6% for the nine
months ended September 30, 1996. The decrease is principally attributable to the
acquisitions completed during 1996 and 1997 which contributed increased revenues
with lower incremental selling, general and administrative costs.
Operating income for the nine months ended September 30, 1997 was $5.7
million, compared to operating income of $1.6 million for the nine months ended
September 30, 1996. This increase was principally attributable to COMFORCE's
completion of five acquisitions since the end of the first quarter of 1996.
COMFORCE's interest expense for the nine months ended September 30, 1997 is
attributable principally to the amortization of bridge finance costs payable on
the $25.2 million principal amount of Old Subordinated Debentures issued by
COMFORCE in February and March 1997, the proceeds of which were used to
partially fund the acquisition of Rhotech and for working capital purposes. The
Old Subordinated Debentures were refinanced in June 1997.
The income tax reflects a credit for the nine months ended September 30,
1997 for $646,000 on a loss before income taxes of $2 million, compared to taxes
of $610,000 on pretax income of $1.5 million for the nine months ended September
30, 1996. Such credit assumes that the Company will have taxable income in
future periods. The difference between the Federal statutory income tax rate and
the Company's effective tax rate relates primarily to state income taxes and the
nondeductibility of certain intangible assets.
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 of operations for
COMFORCE Telecom in 1996, and approximately 70% is attributable to the
acquisition of five additional staffing business by COMFORCE 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 COMFORCE'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.
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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 COMFORCE's limited operations
in 1995. The stock compensation charge incurred by COMFORCE in 1995 of $3.4
million relates to stock awarded to certain individuals to direct COMFORCE'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 COMFORCE's telecommunications and information technology
sectors.
The income tax provision for the year ended December 31, 1996 was $900,000
on income of $2.3 million compared with an income tax provision of $35,000 on
loss before income taxes and extraordinary credit of $4.3 million for the year
ended December 31, 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
COMFORCE had revenues of $2.4 million for the year ended December 31, 1995.
As a result of COMFORCE's discontinuation of its jewelry operations in September
1995 and the restatement of its financial statements for the year ended December
31, 1994 to reflect such discontinuation, COMFORCE had limited revenues
(commencing with its acquisition of COMFORCE Telecom in October 1995) in 1995
and no revenues in 1994. See "Business-Discontinued Operations."
Cost of revenues for the year ended December 31, 1995 was 76.2% of
revenues.
Selling, general and administrative expenses for the year ended December
31, 1995 were $461,000, compared to selling, general and administrative expenses
for the year ended December 31, 1994 of $966,000. This decrease was principally
due to the elimination of certain costs of the former operations. The stock
compensation charge incurred by COMFORCE in 1995 of $3.4 million relates to
stock awarded to certain individuals to direct COMFORCE's entry into the
technical staffing business.
Operating loss for the year ended December 31, 1995 was $3.7 million
compared to an operating loss of $1.0 million for the year ended December 31,
1994. The increase in operating loss of $2.7 million was principally
attributable to the stock compensation charge of $3.4 million recorded in 1995.
Interest expense for the year ended December 31, 1995 decreased $0.7
million as compared to the year ended December 31, 1994. The 1995 decrease is
principally due to the discharge in 1994 and 1995 of indebtedness under terms of
the bank loan agreements related to COMFORCE's discontinued jewelry operations.
As a result of the discontinuance of its jewelry operations, it has been
determined that COMFORCE will be unable to utilize losses from those businesses
in the future.
Results of Operations-UNIFORCE
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Total revenues increased by $29.6 million or 28.6% from $103.4 million in
the first nine months of 1996 to $133.0 million in the first nine months of
1997. The increases in revenues described throughout this discussion of the
results of Uniforce for the nine months ended September 30, 1997 as compared to
the nine months ended September 30, 1996 were primarily the result of volume
increases relating to new and existing clients.
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Sales of supplemental staffing services increased by $29.5 million for the
first nine months of 1997 as compared to the same period in 1996. PrO Unlimited
sales increased by $8.0 million or 29.0% for the first nine months of 1997 as
compared to the corresponding 1996 period. Uniforce Information Services/Brannon
& Tully sales increased by $11.5 million or 52.8% for the first nine months of
1997 as compared to the corresponding 1996 period. Sales of Montare, a provider
of IT contract professionals, acquired on May 17, 1996, contributed $6.5 million
for the first nine months of 1997 and $2.5 million from the date of acquisition
to September 30, 1996. The remaining increases in sales resulted from general
increases in Uniforce's other operations.
Service revenues and fees increased by 1.8% from $5.6 million for the first
nine months of 1996 to $5.7 million for the first nine months of 1997. Increased
service revenues and fees that were generated by THISCO and its subsidiaries
were offset by the loss of service revenues for the first nine months of 1997
due to the contract termination of one major client and the re-evaluation and
resulting termination of certain less profitable customers of Brentwood.
System-wide sales, which includes sales of associated offices serviced by
THISCO and Brentwood, increased by $49.5 million or 19.6% from $252.6 million in
the first nine months of 1996 to $302.2 million in the first nine months of
1997.
Cost of supplemental staffing services was 79.2% of sales of supplemental
staffing services in the first nine months of 1997 and 77.9% in the first nine
months of 1996. The higher percentage in the first nine months of 1997 was a
result of increased sales of PrO Unlimited, which have a high percentage payroll
expense in relation to sales.
Licensees' share of gross margin is principally based upon a percentage of
the gross margin generated from sales by licensed offices. Gross margin from
such sales of supplemental staffing services amounted to $26.5 million in the
first nine months of 1997 and $21.6 million in the first nine months of 1996.
Licensees' share of gross margin as a percentage of sales of supplemental
staffing services was 25.2% in the first nine months of 1997 and 27.0% in the
first nine months of 1996. The lower share as a percentage of total gross margin
in 1997 was due to increased sales of Uniforce Information Services/Brannon &
Tully and Uniforce Information Services/Montare for which there are no related
licensee distributions and to the increased sales of PrO Unlimited for which
there are limited distributions.
General and administrative expenses increased by $2.5 million or 17.5% for
the first nine months of 1997 as compared to the first nine months of 1996. This
increase resulted principally from higher payroll and recruiting costs with
respect to permanent staff, expenses relating to Uniforce Information
Services/Montare operations (acquired in May 1996), and higher facility costs.
As a percentage of revenues, general and administrative expenses were 12.9% in
the first nine months of 1997 and 14.1% in the first nine months of 1996.
The merger-related costs of $225,000 represent non tax-deductible
transaction costs incurred by Uniforce in connection with the Merger Agreement
described in Note 4 to Uniforce's Consolidated Condensed Financial Statements
for the nine months ended September 30, 1997.
For the first nine months of 1997, net interest expense increased by
$266,000 or 17.0% as compared to the same period in 1996. The increase in
interest expense for the 1997 period compared to 1996 is a result of increased
borrowings throughout 1997 for the acquisition of Montare and increased working
capital requirements due to the continued growth in Uniforce's business.
As a result of the factors discussed above, for the first nine months, net
earnings increased by 18.6% from $2.8 million ($.85 per share on a primary
basis) in 1996 to $3.3 million ($1.02 per share on a primary basis) in 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues increased by 5.7% from $134.5 million in 1995 to $142.2
million in 1996. The increases in revenues described throughout this discussion
of the results of Uniforce for the year ended December 31, 1996 as
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compared to the year ended December 31, 1995 were primarily the result of volume
increases relating to new and existing clients.
Sales of supplemental staffing services increased by 6.5%, or $8.2 million,
in 1996 as compared to 1995. PrO Unlimited sales increased by $13.1 million or
52.9% in 1996, and Uniforce Information Services/Brannon & Tully sales increased
by $4.8 million or 18.9%, in 1996 as compared to 1995. Contributing to the
increase in sales was Uniforce's acquisition in May 1996 of certain assets of
Montare, a provider of IT contract professionals. This acquisition contributed
$4.2 million of sales from May 17, 1996 through year end. These increases were
offset by a $15.5 million decrease in sales of licensed offices, principally due
to a reduction in the number of licensed offices as a result of contract buyouts
by two of its operators.
Service revenues and fees decreased by 6.0% from $8.2 million in 1995 to
$7.7 million in 1996. This decline was the result of increased service revenues
and fees generated by THISCO, one of Uniforce's subsidiaries, being more than
offset by certain Licensee service revenues and fees relating to the contract
buyouts noted above which were recorded in 1995.
System-wide sales, which include sales of Associated Offices serviced by
two of Uniforce's subsidiaries, THISCO and Brentwood, increased $34.8 million,
or 11.3%, from $307.1 million in 1995 to $341.9 million in 1996.
Cost of supplemental staffing services was 77.9% of sales of supplemental
staffing services during 1996 as compared to 77.7% in 1995. The higher
percentage in 1996 was the result of increased sales by PrO Unlimited, which
have a high percentage of payroll expense in relation to sales.
Licensees' share of gross margin is principally based upon a percentage of
the gross margin generated from sales by licensed offices. The gross margin from
sales of supplemental staffing services amounted to $29.8 million and $28.1
million for 1996 and 1995, respectively. Licensees' share of gross margin as a
percentage of sales of supplemental staffing services was 26.8% for 1996 as
compared to 33.7% in 1995. The lower share as a percentage of gross margin in
1996 is due to lower Licensee sales, increased sales of Uniforce Information
Services/Brannon & Tully and Uniforce Information Services/Montare, for which
there are no related Licensee distributions, and to the increased sales of PrO
Unlimited for which there are limited distributions.
General and administrative expenses increased by 3.2%, or $624,000, in 1996
as compared to 1995. The increase resulted principally from expenses relating to
the operations of Uniforce Information Services/Montare. Further contributing to
the increase were higher facility costs, payroll and recruiting costs with
respect to permanent staff and costs relating to the implementation of a new
payroll and billing system. These increases were offset by a reduction in
Uniforce's provision for bad debts and, after giving consideration to certain
insurance coverages, a reduction of professional costs associated with certain
litigation.
In January 1996, various vendors of training films filed an action against
Uniforce. The plaintiffs alleged that Uniforce improperly used and/or copied
plaintiffs' tapes. Uniforce incurred a charge of $360,000 in settling this
matter.
Net interest expense increased by $1.4 million during 1996. The increase in
1996 as compared to 1995 is a result of increased borrowings used for the
repurchase of 1,250,000 shares of Uniforce Common Stock in the tender offer, the
acquisition of Montare International and increased working capital required due
to the continued growth in Uniforce's business.
There was no material difference in the effective income tax rate in 1996
as compared to 1995.
As a result of the factors discussed above, net earnings increased by 3.0%
from $3.6 million in 1995 to $3.7 million in 1996.
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Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues increased by 16.7% from $115.2 million in 1994 to $134.5
million, in 1995. The increases in revenues described throughout this discussion
of the results of Uniforce for the year ended December 31, 1995 as compared to
the year ended December 31, 1994 were primarily the result of volume increases
relating to new and existing clients.
Sales of supplemental staffing services increased by 16.4% or $17.8 million
in 1995 as compared to 1994. These increases resulted principally from
Uniforce's acquisition in April 1994 of certain assets of Brannon & Tully. This
acquisition contributed $25.5 million of sales in 1995 as compared to $12.4
million for the period from April 18, 1994 to December 31, 1994. This
acquisition has had a favorable impact on Uniforce's results of operations and
its ability to develop higher margin professional services. Sales by Uniforce's
subsidiaries, PrO Unlimited, and to a lesser degree LabForce, continued to
increase as Uniforce emphasized the marketing of these services. The sales of
PrO Unlimited increased by $9.9 million in 1995 as compared to 1994.
Service revenues and fees increased by 22.5% from $6.7 million in 1994 to
$8.2 million in 1995. Service revenues and fees generated by THISCO and
Brentwood increased by $1.0 million in 1995 compared to 1994. Also contributing
to this increase were certain Licensee service revenues and fees which increased
by $494,000 in 1995 as compared to 1994.
In addition, system-wide sales, which include sales of Associated Offices
serviced by THISCO and Brentwood, increased by 22.9%, from $249.8 million in
1994 to $307.1 million in 1995.
Cost of supplemental staffing services was 77.7% of sales of supplemental
staffing services during 1995 as compared to 77.2% in 1994. The higher
percentage in 1995 was the result of increased sales by PrO Unlimited, which
have a high percentage of payroll expense in relation to sales.
Licensees' share of gross margin is principally based upon a percentage of
the gross margin generated from sales by licensed offices. The gross margin from
sales of supplemental staffing services amounted to $28.1 million and $24.7
million for 1995 and 1994, respectively. Licensees' share of gross margin as a
percentage of sales of supplemental staffing services was 33.7% for 1995 as
compared to 40.0% in 1994. The lower share as a percentage of gross margin in
1995 is due, in part, to the sales of Uniforce Information Services/Brannon &
Tully for which there are no related Licensee distributions, and to PrO
Unlimited for which there are limited distributions.
General and administrative expenses increased by 23.6% or $3.7 million in
1995 as compared to 1994. As a percentage of revenues, general and
administrative expenses were 14.5% and 13.7% for 1995 and 1994, respectively.
These increases resulted principally from compensation and overhead expenses
relating to Uniforce Information Services/Brannon & Tully operations. Further
contributing to the increase were higher expenses relating to payroll costs with
respect to permanent staff offset by savings in staff recruiting costs and
increased legal fees relating to certain litigation. In addition, the provision
for possible losses on receivables, notes receivable and other assets increased
in 1995 as compared to 1994.
Net interest expense increased by $601,000 during 1995. The increase in
1995 as compared to 1994 is a direct result of increased borrowings used for the
acquisition of Brannon & Tully and to meet working capital requirements due to
the increased system-wide sales.
There was no material difference in the effective income tax rate in 1995
as compared to 1994.
As a result of the factors discussed above, net earnings increased by 20.8%
from $3.0 million in 1994 to $3.6 million in 1995.
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Financial Condition, Liquidity and Capital Resources
The Company
The total amount of funds required to effect the Uniforce Acquisition was
approximately $93.6 million. The total amount of funds required to refinance the
Prior Credit Facility and the Uniforce Credit Facility, provide for working
capital and pay fees and expenses incurred in connection with the Uniforce
Acquisition was approximately $80.6 million. These costs were funded from the
proceeds of the Notes Offering, the Units Offering and the New Credit Facility
and available cash from operations.
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
borrowing 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 "Risk Factors," could
prevent the Company from realizing these objectives.
As of December 18, 1997, the Company had outstanding $20 million in
principal amount of Senior Debentures issued by COMFORCE 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 8.75%. See "Description of the
Senior Debentures," "Description of the Notes" and "Description of Other
Indebtedness."
As of September 30, 1997, approximately $131.4 million, or 57% of the
Company's pro forma total assets were intangible assets. These pro forma
intangible assets substantially represent amounts attributable to goodwill
recorded in connection with the Company's acquisitions and will be amortized
over a five to 40 year period, resulting in an annual charge of approximately
$4.0 million. Various factors could impact the Company's ability to generate the
earnings necessary to support this amortization schedule, including those
described under "Risk Factors-Potential Impairment of Intangible Assets." 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.
COMFORCE is obligated under various acquisition agreements to make earn-out
payments to the sellers of acquired companies, subject to the acquired
companies' meeting certain contractual requirements. For calendar year 1997,
sellers are entitled to earn-out payments of $521,000, all of which have been
paid. The maximum amount of the remaining potential earn-out payments is $5.0
million in cash and $4.5 million in stock payable in the three-year period from
1998 to 2000. COMFORCE cannot currently estimate whether it will be obligated to
pay the maximum amount; however, COMFORCE 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.
COMFORCE
During the first nine months of 1997, COMFORCE's primary sources of funds
to meet working capital needs were from operations, funds made available through
COMFORCE's $25.2 million offering of Old Subordinated Debentures in February and
March 1997 and borrowings under a short-term credit facility with U.S. Bank
entered into in February 1997 which provided for up to $7.5 million in
availability and through the Prior Credit Facility
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entered into in June 1997. A portion of the net proceeds from the offering of
the Old Subordinated Debentures was also used to fund COMFORCE's acquisition of
Rhotech in February 1997. On June 25, 1997, COMFORCE completed the $40 million
Prior Credit Facility. The Prior Credit Facility consisted of a revolving credit
facility of up to $20 million and a $20 million term loan. COMFORCE utilized all
of the proceeds of the term loan and a portion of the availability under the
revolving credit facility to redeem the Old Subordinated Debentures. Additional
funds available under the revolving credit facility were used to retire the
existing $7.5 million revolving credit facility with U.S. Bank. The Prior Credit
Facility was repaid in full in connection with the Transactions.
Cash and cash equivalents decreased $938,000 during the nine months ended
September 30, 1997. Cash flows of $2.8 million used in operating activities and
cash flows of $15.2 million used by investing activities were in excess of cash
flows provided by financing activities of $17.1 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 Rhotech. Cash flows from
financing activities were principally attributable to net proceeds available to
COMFORCE in connection with its sale of the Old Subordinated Debentures (which
were redeemed on June 25, 1997) and net borrowings under the credit facility
with U.S. Bank (which was repaid on June 25, 1997) and net borrowings under the
Prior Credit Facility (which was repaid on November 26, 1997). The Old
Subordinated Debentures were redeemed and the net borrowings under the credit
facility with U.S. Bank were repaid with proceeds from the Prior Credit Facility
(as described in Note 4 to COMFORCE's Consolidated Condensed Financial
Statements for the nine months ended September 30, 1997).
Uniforce
As of September 30, 1997, Uniforce's working capital increased to $40.4
million, as compared to $29.0 million at December 31, 1996. The increase in
system-wide sales, which include sales of associated offices, during the first
nine months of 1997 resulted in increases in accounts and funding and service
fees receivable. The increase in accounts receivable and funding and service
fees receivable was largely financed through Uniforce's long term credit
facility. In addition, working capital increased due to the continuing
profitable operations of Uniforce.
During the first nine months of 1997, Uniforce paid quarterly cash
dividends on shares of its Common Stock at $.03 per share (or $273,000). During
1996, Uniforce paid quarterly cash dividends on shares of its Common Stock of
$0.03 per share (or $363,000).
During the first nine months of 1997, Uniforce's primary sources of funds
to meet working capital needs were from operations and borrowings under the
Uniforce Credit Facility which consisted of a revolving credit facility of up to
$46.0 million and $5.7 million in term loans. The Uniforce Credit Facility was
repaid on November 26, 1997 in connection with the Transactions.
In January 1996, Uniforce successfully completed its offer to purchase
1,250,000 shares of Uniforce Common Stock at $11.25 per share. The total amount
required to purchase such shares was $14.1 million, exclusive of related fees
and other expenses. The purchase price and related expenses were funded with
borrowings available under the Uniforce Credit Facility.
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.
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Other Matters
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"), which establishes standards for computing and presenting
earnings per share. SFAS No. 128 will be effective for financial statements
issued for periods ending after December 15, 1997. Earlier application is not
permitted. Management has not yet evaluated the effects of this change on the
Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 becomes effective in fiscal 1999. Management
has not yet evaluated the effects of this change on the Company's financial
statements.
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 CONTINGENT STAFFING AND CONSULTING INDUSTRY
General
The contingent staffing and consulting industry has evolved into a
permanent and significant component of the staffing plans of many corporations.
The number of temporary workers as a percentage of total employment in the
United States has increased from 0.2% in 1972 to more than 2% in 1996, based on
statistics published by the U.S. Bureau of Labor Statistics. The contingent
staffing and consulting industry has grown rapidly in the 1990s, and industry
analysts expect this growth to continue. The U.S. market for staffing services
grew at a compound annual rate of approximately 16.3% from approximately $20.5
billion in 1991 to approximately $43.6 billion in 1996, based on statistics
published by the NATSS.
Corporate restructuring, downsizing, increased government regulations
governing employee relations, advances in technology, and the desire by many
companies to shift employee costs from a fixed to a variable expense have
resulted in the use of a wide range of staffing alternatives by businesses. In
addition, the reluctance of corporations to risk liability upon the discharge of
employees has led to an increase in companies using staffing services as a means
of evaluating the qualifications of personnel before hiring them on a full-time
basis. In addition, entrants into the labor force increasingly look to such
assignments as a way to build experience, make contacts, and get valuable
exposure to a variety of work settings, and as a vehicle to gain full-time
employment.
Organizations have also begun using flexible staffing to reduce
administrative overhead and to allow management to focus on core business
functions by strategically outsourcing operations such as recruiting, training
and benefits administration. An ancillary benefit of staffing services,
particularly for smaller businesses, is the shifting of certain employment costs
and risks (e.g., workers' compensation and unemployment insurance) to the
personnel provider, which can spread the costs and risks over a larger pool of
employees.
Larger users of staffing services are increasingly demanding centralized
staffing services through national contracts with a few preferred providers. In
part as a result of this trend toward national contracts, the highly fragmented
industry is also currently experiencing a trend toward consolidation. These
trends have increased the need
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for staffing firms to be able to provide highly qualified contingent staffers
offering a broad range of services on a nation-wide or international basis and
also to provide value-added services such as training capabilities, management
services and the ability to effectively utilize technology in the recruiting,
training and hiring of contingent staffers.
Staffing firms that recruit contingent employees fall into two major
categories: (i) specialty staffing and consulting firms, which specialize in one
or a few specialty fields, such as the Company's IT and Telecom sectors and
portions of its Technical services sector, and (ii) traditional staffing firms,
which tend to supply primarily clerical or light industrial personnel.
Specialty Staffing and Consulting
The specialty staffing and consulting sector of the industry has
represented an area of more rapid growth that has tended to generate higher
margins than more traditional staffing services. Taxable revenues attributable
to supplying personnel in the specialty staffing sector have increased from $5.1
billion in 1990 to $7.4 billion in 1993 and $10.0 billion in 1994, an annual
growth rate of 35.1% between 1993 and 1994 and 18.3% over the four-year period,
based on information published by the Census Bureau. The Company believes that
the IT portion of the specialty staffing and consulting sector will grow at a
rate of 20% to 25% annually over the next few years. In addition, the Company
believes that, although the contingent staffing industry as a whole has tended
to be cyclical, the specialty staffing and consulting sector may continue to
grow during economic downturns because technological changes will continue to
necessitate spending for both infrastructure and to retain employees skilled in
new technologies. In recent years, there has been intense competition to attract
the limited number of qualified personnel with the skills and experience
necessary to meet the specialty staffing requirements of clients. The Company
believes that it is increasingly important for a staffing firm to be able to
provide interesting assignments with high-profile customers that offer employees
the opportunity to enhance their skills and marketability, as well as to offer
competitive wages and benefits packages.
Information Technology Sector
The demand for qualified personnel is increasing significantly in
computer-related disciplines such as technical project support, software
development and documentation, systems and database management, and desktop
publishing. As a result, information technology services is one of the most
rapidly growing sectors of the contingent staffing and consulting industry.
Management believes that the demand for IT services will continue to grow,
principally as a result of accelerating technological advances requiring highly
specialized expertise and the need for enterprise-wide integration of computer
systems. The continuing transition, particularly by large corporations, from
legacy systems to computer networks using client/server architecture is a key
factor contributing to the demand for technical staffing services. Rapid
technological change makes it increasingly difficult and expensive for
businesses to employ full-time technicians with the leading edge expertise
needed to maintain and upgrade advanced and complex computer systems. Companies
are increasingly relying on outsourcing, staffing and consulting services to
maintain and upgrade their systems and to train full-time employees in the use
and support of their systems. At the same time, an increasing number of
technical professionals are choosing to operate as consultants, motivated by a
desire for more flexible work schedules and an opportunity to work with emerging
and challenging technologies in a variety of industries and work environments.
Such consultants generally are able to maintain compensation levels comparable
to or higher than those of similarly skilled, full-time employees.
With the approach of the Year 2000, management believes that over the next
several years opportunities in the IT sector will increase as companies utilize
contingent personnel to correct the Year 2000 problem which will result in many
computer applications losing their ability to distinguish dates after December
31, 1999, unless reprogrammed. Industry sources estimate that corporations and
government agencies will spend from $200 to $600 billion to assess and correct
this problem, and the Company believes that expenditures for correcting this
problem will extend for several years after the year 2000 as more critical
applications are corrected first.
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Telecommunications Sector
As businesses globalize and advance technologically, the demand for
telecommunications-related services has increased. Enactment of the
Telecommunications Act of 1996, which deregulates substantial portions of the
telecommunications industry, has been the impetus for the recent and expected
future growth in the industry. The growth of the telecommunications industry is
being fueled also by the rising demand for wireless telecommunications services
which have increased dramatically since their commercial introduction in 1984.
This demand is largely attributable to the widespread availability and
increasing affordability of mobile telephone, paging, personal communications
services ("PCS") and other emerging wireless telecommunications services.
Technological advances and a regulatory environment more favorable to
competition have also served to stimulate market growth. The Company believes
the installation of these networks, which is labor-intensive and requires
specialized technical personnel, will significantly increase the demand for
staffing, consulting and outsourcing services. Currently, wireless penetration
is estimated to be approximately 16% of the telephone market and, according to
Paul Kagan Associates, Inc., is expected to exceed 47% by 2006.
The telecommunications industry uses contingent personnel to provide
services ranging from basic equipment installation to sophisticated engineering
skills, typically in support of telecommunications network expansion or
modernization. Skilled contingent personnel are involved in planning, designing,
engineering, installation and maintenance of wireline and wireless communication
systems development, satellite and earth station deployment, network maintenance
and plant modernization.
Technical Services
The technical services sector has both specialty and traditional elements.
The specialty aspect of the technical services sector of the industry includes
providing highly skilled professionals, such as scientists and researchers and
engineers and other professionals involved in commercial enterprises such as
avionics and aerospace, energy and power, pharmaceutical, marine and
petrochemical, while employees involved in the more traditional aspect of the
technical services sector of the industry perform less skilled services, such as
light industrial work. This sector is more mature than the more rapidly emerging
IT and telecommunications sectors. However, the Company believes that this
sector has experienced significant growth in recent years due principally to the
factors that have contributed to the growth in the contingent staffing and
consulting industry generally, including the increasing prevalence of corporate
restructurings and downsizings, increased government regulations governing
employee relations and the desire by many companies to shift employee costs from
a fixed to a variable expense.
Traditional Staffing Services
Traditional staffing companies derive their revenues primarily from
supplying clerical and light industrial workers. In many cases, customers of
traditional staffing companies seek contingent employees to fill positions
during peak production periods or to temporarily replace absent workers. The
traditional staffing services sector is expected to continue to grow, but at a
slower rate than the staffing industry as a whole. The Company believes that
this sector is also likely to be more affected by an economic downturn than the
specialty staffing sector. This sector also tends to operate at lower margins
than the specialty staffing and consulting sector.
BUSINESS
Overview
The Company is a leading provider of specialty staffing, consulting and
outsourcing solutions primarily to Fortune 500 companies for their information
technology ("IT"), telecommunications, scientific and engineering-related needs.
Through its network of 86 offices (55 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
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services for a broad customer base of over 2,300 companies. The Company's labor
force includes approximately 7,800 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 160,000
highly skilled employees. The Company had pro forma net sales and Adjusted
EBITDA (as defined) of $379.3 million and $22.4 million, respectively, for the
twelve-month period ended September 30, 1997.
The Company's senior management team of Christopher P. Franco, James L.
Paterek and Michael Ferrentino established COMFORCE in 1995 to capitalize on the
consolidation opportunities in the specialty staffing and consulting industry.
Since the initial acquisition of COMFORCE Telecom in October 1995 until prior to
the acquisition of Uniforce in November 1997, this management team has
successfully acquired and integrated seven specialty staffing companies with
1995 annual sales of approximately $175.2 million. These companies had histories
of profitable growth, and COMFORCE has continued this growth during 1996 and
1997 after completing the acquisitions. COMFORCE's net sales and EBITDA (as
defined) increased by 16.7% and 30.9%, respectively, for the nine months ended
September 30, 1997 on a pro forma basis.
On November 26, 1997, COMFORCE completed a tender offer pursuant to which
it acquired, through an indirect wholly-owned subsidiary, approximately 96.5% of
the issued and outstanding common stock of Uniforce. On December 3, 1997, as the
result of a merger, Uniforce became an indirect wholly-owned subsidiary of
COMFORCE. 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 pro forma net sales for the
twelve months ended September 30, 1997 of $171.7 million. Uniforce's net sales
and EBITDA increased by 25.6% and 19.3%, respectively, for the nine months ended
September 30, 1997 on a pro forma basis. The Company's net sales and EBITDA
increased by 20.6% and 24.1%, respectively, for the nine months ended September
30, 1997 on a pro forma combined basis. 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.
The Company operates through four divisions, as described below:
COMFORCE Information Technologies. The Company's IT division provides
highly skilled programmers, help desk personnel, systems consultants and
analysts, software engineers and project managers for a wide range of technical
assignments, including client server, mainframe, Year 2000, desktop services,
internet/intranet and MIS. The IT division also provides payrolling services in
addition to these staffing solutions to certain of its IT customers. 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. 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 which the Company believes will increase 20% to 25% per year. 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. For the
twelve-month period ended September 30, 1997, the IT division had pro forma net
sales of $117.9 million.
COMFORCE Telecom. The Company's Telecom division provides skilled personnel
to plan, design, engineer, install and maintain wireless and wireline
telecommunications systems, including cellular, PCS, microwave, radio, satellite
and other networks. 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
significantly through increased sales to existing Telecom customers as well as
through cross-selling
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opportunities with the telecommunications customers served by the Company's IT
division. For the twelve-month period ended September 30, 1997, the Telecom
division had pro forma net sales of $31.2 million.
COMFORCE Staffing Services. The Company's Staffing Services division
operates in two areas, Technical Services and Professional Services. The Company
provides Technical staffing solutions and, in some cases, payrolling services to
a group of technology-intensive clients working in the areas of aerospace,
avionics, electronics, laser and weapons technology, environmental safety and
alternative energy source development. The Company's Technical Services business
is generally conducted through long-term, high-volume contracts that are not
subject to fixed prices and require low administrative overhead. The Company
offers Professional staffing services through 10 Company-owned and 31 licensed
locations that provide services including medical office staffing solutions,
office automation personnel, customer service/call center personnel and
laboratory professionals. 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. 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. 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. For the twelve-month period ended September 30, 1997, the
Staffing Services division had pro forma net sales of $168.3 million, of which
$47.5 million related to sales by licensees.
COMFORCE Financial Services. The Company's Financial Services division
provides payroll funding services and back office support to approximately 100
independent consulting and staffing companies and provides consulting and
related payrolling services to clients in connection with their use of
independent contractors. The Financial Services division significantly benefits
from Uniforce's sophisticated back office operations, as well as Uniforce's
substantial investment in the PeopleSoft(R) software package, which the Company
believes will become the industry standard. For the twelve- month period ended
September 30, 1997, the Financial Services division had pro forma net sales of
$61.9 million.
Business Strengths
o Emphasis on Specialty Staffing and Consulting Sectors. The Company
provides high-quality, creative staffing and consulting solutions to companies
with dynamic needs in specialty high technology areas. Through its focused
acquisition program, the Company has increased its presence in the high-growth
IT, telecommunications, scientific and engineering-related sectors. The Company
adopted this strategy to capitalize on these areas, which generally produce
higher profit margins and experience lower turnover rates and less cyclicality
than more traditional staffing industry sectors. The Uniforce Acquisition
enhances and expands the Company's presence in these specialty areas, which
represented a majority of the Company's net sales on a pro forma basis for the
twelve- month period ended September 30, 1997.
o High-Quality Customer Base. The Company benefits from established,
long-standing relationships with a broad customer base which includes many
Fortune 500 clients. The Company provides staffing services to over 2,300
companies in diverse industries throughout the United States and internationally
and has an excellent customer retention record. The Company's principal
customers include many dynamic businesses in growing industries that have an
increasing need for contingent employees. The Company's key customers include
Boeing, Microsoft, Sun Microsystems, BellSouth and Los Alamos National
Laboratory. None of the Company's customers accounts for more than 10% of sales
on a pro forma combined basis.
o Critical Mass. Through its history of successful acquisitions, the
Company has broadened and added to its line of services, expanded its geographic
presence and increased pro forma annual net sales to $379.3 million for the
twelve-month period ended September 30, 1997 on a pro forma combined basis. The
Company now provides staffing and consulting services to over 2,300 customers
through its network of 86 offices in 27 states. The Company
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believes it has achieved a critical mass necessary to compete successfully for
national vendor accounts as well as further expand its presence in regional
markets.
o Highly Skilled Labor Force. The Company believes its labor force of
approximately 7,800 highly skilled billable employees provides a competitive
advantage in servicing the specialty staffing and consulting needs of its
customers. The Company believes it experiences low employee turnover and is able
to attract and recruit high-quality staffing personnel by providing attractive
assignments with high-profile customers, highly competitive compensation
packages, tailored benefit plans and value-added training opportunities. The
Company draws personnel for assignments from its extensive proprietary database
of over 160,000 prospective employees.
o Highly Efficient Back Office Operations. The Uniforce Acquisition brings
to the Company Uniforce's back office operation, which the Company believes is
one of the most advanced and efficient in the industry. Based in Woodbury, New
York, the sophisticated operation is the centerpiece of the Company's back
office structure. Currently servicing approximately $680 million of annual
"system-wide" revenues on a pro forma combined basis (including approximately
$300 million generated by other staffing firms and processed by the Company),
the back office system has the capacity to enable the Company to grow
significantly. The Company believes that this back office processing capability
also will enable the Company to continue to effectively integrate acquisitions
and realize significant operating efficiencies.
o Broad Offering of Services. The Company believes its ability to provide a
wide range of high-quality staffing and consulting solutions gives it a
competitive advantage as larger customers consolidate their purchasing of
staffing and consulting services. The Company is able to provide a wide variety
of contingent employees including highly specialized IT and telecommunications
professionals, scientists and researchers, skilled medical office support staff,
legal and accounting personnel and other support staff and light industrial
employees. The Company also provides a variety of value added services,
including (i) training for the Company's billable workforce; (ii) outsourcing
management services such as the Company's RightSourcing(sm), Needs Analysis and
Vendor-on-Premises programs; (iii) consulting services to assist clients in
connection with their use of independent contractors; and (iv) innovative uses
of the Internet and other technology, including the Company's Homework(sm)
program. The Company also provides smaller, independent staffing companies with
funding and back office support services. The Company believes its range of
services also provides significant cross-selling opportunities.
o Reputation as Successful Consolidator. The Company has established a
strong reputation as a successful consolidator in the contingent staffing and
consulting industry through its acquisition of eight specialty staffing and
consulting companies since 1995. The Uniforce Acquisition, the most recent of
these acquisitions, enhances this reputation. The Company's management has
integrated its prior acquisitions with minimal staff turnover and an excellent
customer retention record and expects that the integration of Uniforce's
operations will follow this pattern. The Company is positioned for further
growth through acquisitions with additional borrowing capacity under the New
Credit Facility and the ability to use its publicly traded common stock to fund
all or part of acquisition costs. The Company believes its advanced back office
capabilities will assist it in integrating future acquisitions quickly and
efficiently.
Business Strategy
Management's growth strategy includes the following principal elements:
o Emphasize Internal Growth. The Company intends 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 of
the specialty staffing and consulting industry as a whole have also grown
substantially in recent years. As a result,
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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 Employee Recruiting and Training. 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 and training efforts. 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 and other
technology in its recruiting and training efforts and intends to further develop
its use of such technology-based recruiting and training capabilities.
o 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. The
Company is positioned to build on its solid reputation as a successful
consolidator in the industry with the improved, more permanent capitalization
resulting from the completion in November 1997 of the Notes Offering and the
Units Offering, additional borrowing capacity under the New Credit Facility and
the ability to use the Company's publicly traded common stock to fund all or
part of acquisition costs. Management believes that as the Company grows through
acquisitions, it improves its ability to secure larger contracts.
o 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 will 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
The Company has acquired eight staffing services businesses since October
1995. Following an acquisition, the Company integrates 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. However, the
history of the Company's acquisitions is useful in understanding its acquisition
strategy. Each of the acquired companies, their markets, and the principal
customers they serve, is described briefly in the table below.
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<TABLE>
<CAPTION>
Acquired Year Acquisition Revenue for Offices Market Served Principal
Company Founded Date Fiscal Year ------- ------------- Customers
------- ------- ---- Prior to ---------
Acquisition
(millions)
----------
<S> <C> <C> <C> <C> <C> <C>
COMFORCE 1987 October 1995 $8.2 NY, VA, TX, Telecom Motorola; AT&T; Northern
Telecom GA, NC (5 Telecom
(formerly Yield offices)
TechniGlobal)..
Williams........... 1991 March 1996 $4.2 FL (1 office) Telecom Reltec; Fujitsu
RRA................ 1964 May $52.0 AZ, NY, Technical Services Gulfstream; McDonnell
1996 NM, MO, Douglas; National
SC, WA, CA, Laboratories; Westinghouse
FLA
(10 offices)
Force Five......... 1993 August 1996 $7.1 TX, TN, IT American Airlines; Tyson
WA, CA, Foods
MO (5
offices)
AZATAR............. 1980 November $7.1 NY (2 offices) IT Xerox; Kodak
1996
Continental........ 1965 November $9.9 NY, VA Telecom Nynex; BellSouth
1996 (2 offices)
Rhotech............ 1971 February $85.7 WA, NC, Technical Services and Boeing; Microsoft; First
1997 CA, OR IT Union Corporation
(9 offices)
Uniforce........... 1961 November $142.2 NY, AL, CA, IT, Professional BellSouth; Sun Microsystems;
1997 CO, FL, GA, Services and Financial Texas Instruments; State of
IL, KS, MA, Services Georgia; Pfizer; Owens
MD, MI, NH, Illinois
NJ, NM,
NV, NC, OK,
OR, PA, TN,
TX, VA, WA
(21 company-
owned and 31
licensed
offices)
</TABLE>
Management believes that acquired businesses can be integrated into the
Company at low incremental costs, enabling it to spread fixed costs over an
increasingly larger revenue base. The Company 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 following the Uniforce Acquisition.
The Company currently expects that it will incur a restructuring charge in
the fourth quarter of 1997, in connection with certain potential severance and
other costs related to the integration of COMFORCE and Uniforce. Management
currently believes that such restructuring charge will be approximately $2.0
million; however, no assurance can be given that any such charge, if incurred,
will not exceed such amount.
The Company believes that there exist a substantial number of potentially
attractive acquisition opportunities in the staffing services industry. The
Company from time to time enters into discussions and non-binding letters of
intent which may lead to potential acquisitions but no assurance can be given
that future acquisitions will be consummated.
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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.
Information Technology
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 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 employees of the Company's IT division act as consultants, programmers,
systems analysts, project managers, application development and maintenance data
base administrators, network specialists, software engineers and technical
writers. The IT division accounted for $117.9 million, or 31.1%, of the
Company's pro forma net sales during the twelve-month period ended September 30,
1997, of which $83.8 million consisted of recruited services and $34.1 million
consisted of non-recruited payrolling services. The Company expects that
revenues contributed by the IT division will continue to increase as a
percentage of its total revenues.
Telecom
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 Telecom division
accounted for $31.2 million, or 8.2%, of the Company's pro forma net sales
during the twelve-month period ended September 30, 1997.
Staffing 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 Technical Staffing Services portion of the Staffing Services division
accounted for $108.5 million, or
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28.6%, of the Company's pro forma net sales during the twelve-month period ended
September 30, 1997, of which $78.5 million consisted of recruited services and
$30.0 million consisted of non-recruited payrolling services.
Professional Services. The Company provides highly specialized professional
chemists, biologists, engineers, laboratory instrumentation operators,
technicians and others to companies involved in pharmaceutical, environmental,
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
Professional Services portion of the Staffing Services division accounted for
$59.8 million or 15.8%, of the Company's pro forma net sales during the
twelve-month period ended September 30, 1997, of which $47.5 million was
attributable to Licensees. See "-Licensed Offices."
Financial Services
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 analysis, 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 Uniforce'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.
The Company's Financial Services division accounted for $61.9 million, or
16.3%, of the Company's pro forma net sales during the twelve-month period ended
September 30, 1997.
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
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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 160,000 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 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,
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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.
One customer accounted for 19% of COMFORCE's 1996 historical net sales. In
1995, three customers accounted for 17.3%, 12.6% and 10.1%, respectively, of
COMFORCE's historical net sales. On a pro forma combined basis, no customer
accounted for more than 10% of the Company's net sales during 1996 or 1995.
Sales and Marketing
The Company services its customers through a network of 55 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.
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
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existing customer relationships provide it with significant advantages in
marketing services to these customers in other sectors.
In order to maximize its marketing effectiveness, the Company provides
motivational training to empower its employees and instill a proactive,
solution-based approach to problem solving. In addition, the Company offers
additional compensation, in the form of cash and stock options, to certain of
its employees as incentive to maximize their sales efforts.
Recruiting of Billable Employees
The Company's success is dependent upon its ability to effectively and
efficiently match skilled personnel with specific customer assignments. As a
result of continuous recruiting efforts, the Company has established an
extensive national resume database of over 160,000 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 resume database can be searched 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.
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.
The Company makes various training opportunities available to its
employees. The Company has on staff a software engineer who trains the Company's
billable and staff personnel in various software languages and techniques. 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.
In addition, the Company currently intends to enhance its IT training capacity
by providing online training through the Internet. The Company also maintains a
training facility in Dallas, Texas, where Telecom staffers are trained to
install and test telecommunications equipment. The Company also provides a
telephone hot line to assist its clerical employees with software problems or
questions.
The Company believes it has a competitive advantage in attracting and
retaining specialty staffing and consulting personnel as it provides 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
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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 TAD Technical Services. 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 Adia Services, Inc. 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 450 full-time staff employees
and has approximately 7,800 billable employees on assignment. In addition to
employees on assignment, the Company maintains a proprietary database of over
160,000 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
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,
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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 it
is contemplated that certain existing COMFORCE offices which operate in the same
territory as Uniforce licensees will continue to 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."
Properties
The Company leases its corporate headquarters as well as its 33 branch
offices. Uniforce leases its headquarters office, a regional office and its 21
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 Uniforce's headquarters office, and have remaining lease terms of from less
than one year to four 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 owned by Uniforce.
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.
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
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awarded to them in connection with the management of the jewelry business under
the terms of such management agreements and the Company's Long-Term Stock
Investment Plan. The suits allege that the plaintiffs are entitled to an
unspecified amount of damages. The Company believes that the option to purchase
370,419 shares granted to Mr. Iodice (through Nitsua, Ltd., a corporation
wholly-owned by him) and the option to purchase 185,210 shares granted to Mr.
Giglio, each having an exercise price of $1.125 per share, expired in 1996,
three months after Messrs. Giglio and Iodice ceased to be employed by the
Company. Messrs. Giglio and Iodice maintain that they were agents and not
employees of the Company and that the options continue to be exercisable. In
March 1997, the Company filed motions to dismiss each of these suits on
jurisdictional grounds and the court scheduled hearings on these motions. In
December 1997, the Company elected to withdraw these motions and is currently
preparing its answer to the complaints. The Company intends to vigorously defend
these suits.
In a case filed in U.S. District Court, Central District of California,
against Rhotech and Technical Staff Associates, Inc. ("TSA"), which was acquired
by Rhotech in 1992, TSA's former insurance carrier has alleged that TSA and
Rhotech are obligated to repay to it approximately $1.6 million that it was
required to pay in connection with an injury and death that occurred in November
1992 to a temporary employee of TSA. The action has been referred to 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. The Company maintains general liability insurance,
property insurance, automobile insurance, employee benefit liability insurance,
owner's and contractor's protective insurance and exporter's foreign operations
insurance with coverage of $1 million on a per claim basis and $2 million
aggregate (with $3 million umbrella coverage). The Company insures against
workers' compensation in amounts required under applicable state law and in the
amount of $500,000 in the case of foreign workers. The Company also maintains
fidelity insurance in the amount of $25,000 per claim and directors' and
officers' liability insurance in the amount of $2 million. The Company is
presently soliciting quotations to obtain errors and omissions coverage.
Discontinued Operations
History of 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, under
the names American Photocopy Equipment Company and APECO Corporation, the
Company engaged in various business activities, including the manufacture of
photocopy machines. The Company's current management was not involved in the
operation of any of these discontinued businesses.
Due to continuing losses in the jewelry business and the erosion of the
markets for its products, in September 1995, Lori adopted a plan to discontinue
the jewelry business and determined to seek to enter into another line of
business. In June 1995, Lori contracted with current management to direct its
entry into the technical staffing business. On October 17, 1995, Lori acquired
all of the capital stock of Spectrum Global Services, Inc. (formerly d/b/a YIELD
Global and subsequently renamed COMFORCE Telecom, Inc.). In addition, in
connection with its new business direction, Lori changed its name to COMFORCE
Corporation. At the time of the acquisition, COMFORCE Telecom was one of several
wholly-owned subsidiaries of Spectrum Information Technologies, Inc., a Delaware
corporation ("Spectrum"), which had a Chapter 11 petition pending. The sale of
COMFORCE Telecom, which was not a party to the Chapter 11 proceeding, was
approved by the bankruptcy court in which Spectrum's bankruptcy was pending.
Spectrum had acquired COMFORCE Telecom in 1993.
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In conjunction with the COMFORCE Telecom acquisition, the Company and ARTRA
GROUP Incorporated, then the Company's majority stockholder ("ARTRA"), entered
into an Assumption Agreement as of October 17, 1995 (the "Assumption
Agreement"). Under the Assumption Agreement, ARTRA agreed to pay and discharge
substantially all of the then existing liabilities and obligations of the
Company, including indebtedness, corporate guarantees, accounts payable and
environmental liabilities. ARTRA also agreed to assume responsibility for all
liabilities of the jewelry business from and after October 17, 1995, and applied
the proceeds of the sale thereof to pay creditors. On April 12, 1996, ARTRA sold
the business and certain of the assets of the Company's Lawrence Jewelry Company
subsidiary ("Lawrence") for a selling price of $252,000 plus certain proceeds
subsequently realized from the sale of existing inventory, which proceeds were
applied to pay creditors of Lawrence or deposited in an escrow account to be
applied for such purpose. ARTRA has advised the Company that none of the
proceeds from the sale would remain following the payment of such creditors.
Environmental Matters
Prior to its entry into the jewelry business in 1985, the Company operated
in excess of 20 manufacturing facilities for the production of, inter alia,
photocopy machines, photographic chemicals and paper coating. These operations
were sold or discontinued in the late 1970s and early 1980s. Certain of these
facilities may have used and/or generated hazardous materials and may have
disposed of the hazardous substances, particularly before the enactment of laws
governing the safe disposal of hazardous substances, at an indeterminable number
of sites. Although the controlling stockholders and current management had no
involvement in such prior manufacturing operations, the Company could be held to
be responsible for clean-up costs if any hazardous substances were deposited at
these manufacturing sites, or at off-site waste disposal locations, under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), or under other Federal or state environmental laws now or hereafter
enacted. However, except for the Gary, Indiana site described below, the Company
has not been notified by the Federal Environmental Protection Agency (the "EPA")
that it is a potentially responsible party for, nor is the Company aware of
having disposed of hazardous substances at, any site.
In December 1994, the Company was notified by the EPA that it was a
potentially responsible party under CERCLA for the disposal of hazardous
substances at a site in Gary, Indiana. The alleged disposal occurred in the
mid-1970s at a time when the Company conducted operations as APECO Corporation.
In this connection, in December 1994, the Company was named as one of
approximately 80 defendants in a case brought in the United States District
Court for the Northern District of Indiana by a group of 14 potentially
responsible parties who agreed in a consent order entered into with the EPA to
clean up this site. In October 1997, ARTRA entered into a settlement agreement
with all of the plaintiffs to settle the case for a cash payment of $50,000.
Under the terms of this settlement agreement, the Company was dismissed as a
defendant in the case and released and discharged from any liability in
connection with this matter.
THE TRANSACTIONS
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 Uniforce
Acquisition. 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 (collectively the "Per Share Consideration").
On November 26, 1997, following the close of the Tender Offer at midnight
on November 25, 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 for payment to the holders of the
remaining 106,802 shares of Uniforce Common Stock (who did not tender their
stock) cash and stock equal in amount to the Per Share Consideration. In
addition, as required under the Merger Agreement,
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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, subject to any Uniforce shareholder subsequently exercising
statutory appraisal rights, 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. In addition, the Company estimates that it will incur 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.
A portion of the net proceeds of the Notes Offering were used to pay the
cash portion of the Per Share Consideration. The remaining net proceeds of the
sale of the Old Notes, the net proceeds of the sale of the Old Senior Debentures
and approximately $37.0 million of borrowings under the New Credit Facility were
used in the Refinancing to repay in full the Prior Credit Facility and the
Uniforce Credit Facility.
MANAGEMENT
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.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Executive Officers/Employee Directors
James L. Paterek................................ 35 Chairman of the Board
Christopher P. Franco........................... 38 Chief Executive Officer and Director
Michael Ferrentino.............................. 35 President and Director
Paul J. Grillo.................................. 45 Vice President-Finance and Chief Financial Officer
Andrew Reiben................................... 32 Director of Finance and Chief Accounting Officer
Malcolm High.................................... 45 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 Madden.................................. 48 Vice Chairman
Richard Barber.................................. 38 Director
Keith Goldberg.................................. 34 Director
Dr. Glen Miller................................. 61 Director
Marc Werner..................................... 40 Director
</TABLE>
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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. ("COMFORCE Telecom")) 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).
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 Vice President-Finance and Chief Financial
Officer of COI since its formation in October 1997 and of the Company since July
1996. From July 1991 to July 1996, Mr. Grillo provided business planning and
acquisition advisory services to a number of industries including
telecommunications, contract services, manufacturing, publishing and real estate
management. From April 1980 to June 1991, Mr. Grillo served as Senior Vice
President-Finance, Treasurer and Chief Financial Officer of Butler Service
Group, Inc., an international contract technical staffing services company. Mr.
Grillo is a certified public accountant.
Andrew Reiben has served as Chief Accounting Officer of COI since its
formation in October 1997 and of the Company since February 1996 and as Director
of Finance of the Company since April 1997. 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.
At the time of its acquisition in October 1995, Spectrum Global Services,
Inc. ("Spectrum Global"), now known as COMFORCE Telecom, was one of several
wholly-owned subsidiaries of Spectrum Information Technologies, Inc., a Delaware
corporation ("Spectrum"), which had filed a Chapter 11 petition in January 1995.
Spectrum Global was not a party to the Chapter 11 proceeding. At the time of the
filing of this petition by Spectrum, Mr. Franco served as a Vice President of
Spectrum. In addition, at the time of the filing of this petition, Mr. Paterek
served as the President of Spectrum Global, and he had previously served as a
director of Spectrum (from 1993 to 1994). However, Messrs. Franco and Paterek
were neither involved in the decision to file the petition nor aware that the
petition had been filed until it had been publicly announced. Spectrum had
acquired Spectrum Global (then known as Yield TechniGlobal) from its founders,
Messrs. Paterek and Ferrentino, in 1993. See "Business-Discontinued Operations."
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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
Michael 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 a 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
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<PAGE>
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 (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.
Mr. Madden had served as a director of Spectrum from 1993 to 1994. However,
Mr. Madden was neither a director of Spectrum when it filed its petition under
Chapter 11 nor in any manner involved in its decision to do so. See
"Business-Discontinued Operations."
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.
Director Compensation and Arrangements
Non-employee directors receive fees of $1,000 per quarter. 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, 1996, 1995 and 1994 to each
person who has served as the chief executive officer of the Company at any time
since the beginning of the last completed fiscal year and to the Company's most
highly compensated executive officers who served as executive officers during
the last fiscal year whose income exceeded $100,000 (the "Named Executive
Officers"). No other executive officers of the Company received compensation in
excess of $100,000 in 1996.
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<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards
----------------------------- ----------------------
Name and Position Year Salary ($) Bonus ($) Options/SAR's (#)
- ----------------- ---- ---------- --------- -----------------
<S> <C> <C> <C> <C>
Christopher P. Franco, .......................... 1996 150,000 -- 112,500(2)
Chief Executive Officer 1995 28,846 739,264(1) --
1994 -- -- --
Michael Ferrentino, ............................. 1996 150,000 -- 281,250(2)
President 1995 79,703 739,264(1) --
1994 -- -- --
</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. Management valued the Company based on its discussions with
market makers and other advisors, taking into account (i) that the business
then conducted by the Company, which was discontinued during the third
quarter of 1995, had a negligible value, and (ii) the value of the Company
was principally related to the potential effect that a purchase of COMFORCE
Telecom, if successfully concluded, would have on the market value of the
Company's Common Stock. Management believes this value is a fair and
appropriate value based upon the Company's financial condition as of the
date the Company became obligated to issue these shares.
(2) The options shown are currently exercisable options to purchase the
Company's Common Stock at an exercise price of $6.75 per share. These
options were granted pursuant to a letter agreement dated June 29, 1995 and
subsequently amended as of October 6, 1995.
Option Awards. The following table sets forth information concerning
options to purchase the Company's Common Stock granted to Named Executive
Officers in 1996. No stock appreciation rights were awarded to either of the
Named Executive Officers in 1996.
Option Grants in Fiscal Year 1996
<TABLE>
<CAPTION>
Potential Realizable
--------------------
Value at Assumed
----------------
Annual Rates of
---------------
Stock Price
-----------
Appreciation for
----------------
Individual Grants Option Term(2)
----------------------------------------------------------- -----------------------------
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to or Base
Option/SARs Employees Price Expiration
Name Granted (#)(1) in Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- -------------- -------------- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Christopher P. Franco ............... 112,500 9.0% $6.75 1/10/06 $477,563 $1,210,275
Michael Ferrentino .................. 281,250 22.6% $6.75 1/10/06 $1,193,916 $3,025,620
</TABLE>
- ----------
(1) The options shown are currently exercisable options granted to purchase the
Company's Common Stock at an exercise price of $6.75 per share. These
options were granted pursuant to a letter agreement dated June 29, 1995 and
subsequently amended as of October 6, 1995. These options terminate on
January 10, 2006.
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<PAGE>
(2) The potential realizable value shown is calculated based upon appreciation
of the Common Stock issuable under options, calculated over the full term
of the options assuming 5% and 10% annual appreciation in the value of the
Company's Common Stock from the date of grant, net of the exercise price of
the options.
Option Values. The following table sets forth information concerning the
aggregate number and values of options held by Named Executive Officers as of
December 31, 1996. Neither of the Named Executive Officers hold stock
appreciation rights and neither of the Named Executive Officers exercised any
options in 1996.
Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
Fiscal Year End (#) Fiscal Year End ($)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ---- ------------- -------------
<S> <C> <C>
Christopher P. Franco............................... 112,500/0 $843,750/0
Michael Ferrentino.................................. 281,250/0 $2,109,375/0
</TABLE>
- ----------
(1) This information is presented as of December 31, 1996. See Note 1 to the
"Option Grants in Fiscal Year 1996" table and the notes to the "Summary
Compensation Table" for a description of the terms of the options listed in
this table.
Employment Agreements
COMFORCE Employees
The Company entered into employment agreements with all of its executive
officers and with the Presidents of its Telecom and Technical Services
subsidiaries. In most cases, these agreements are for a term of two years and
are terminable by the Company only for "just cause." "Just cause" includes the
employee's consistent failure to follow written policies or directions, wrongful
conduct which has or is expected to have a material adverse effect on the
Company, material violations of the employment agreement and disruption of a
harmonious work environment, except that, following a change in control of the
Company, the term "just cause" is generally limited in application to criminal
acts. Under these agreements, Christopher P. Franco, the Chief Executive Officer
of the Company, Michael Ferrentino, the President of the Company, and James L.
Paterek, the Chairman of the Company, are entitled to annual compensation of
$150,000, $150,000 and $208,000, respectively, plus such bonuses as are awarded
by the Board, and each is entitled to participate in the Company's normal
benefit programs. If the Company terminates an agreement, the employee shall be
entitled to receive full compensation and to continue to participate in the
Company's benefit programs for the greater of one year or the balance of the
term of the agreement, payable in full at the time of termination. Each
agreement contains customary confidentiality, non-disclosure and employee
non-solicitation provisions. The agreements with Messrs. Franco and Ferrentino
terminate in December 1997, and the parties are presently negotiating renewals
of these agreements.
Uniforce Employees
John Fanning and Rosemary Maniscalco have been principal employees of
Uniforce and have entered into employment agreements, described below, to
continue as employees of Uniforce following consummation of the merger.
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<PAGE>
Under his employment agreement, Mr. Fanning will be employed as President
of the Company's Financial Services Division for an initial term of one year and
on a year-to-year basis thereafter. Mr. Fanning is to be paid a base salary of
$150,000 per year plus supplemental pay of $134,500 per year. The Employment
Agreement may be terminated if Mr. Fanning dies, is permanently disabled and for
certain events constituting "cause." In addition, the Employment Agreement may
be terminated by Uniforce by written notice at any time (subject to the
obligation to make severance payments if termination occurs during the initial
term). Under a separate Noncompetition Agreement, Mr. Fanning has agreed not to
compete with Uniforce for a period of two years after termination of Mr.
Fanning's employment with Uniforce, but in no event shall such term be less than
four years following commencement of the term of the Employment Agreement.
Under her employment agreement, Ms. Maniscalco will be employed as
President of Uniforce and of the Professional Services section of the Staffing
Services division for an initial term of two years and on a year-to-year basis
thereafter. Ms. Maniscalco is to be paid a base salary of $150,000 per year and
supplemental pay of $90,000 per year. The Employment Agreement also provides
that COMFORCE will grant to Ms. Maniscalco an incentive stock option to purchase
50,000 shares of COMFORCE Common Stock, which option is to become exercisable
over a two year period provided Ms. Maniscalco remains employed with Uniforce.
Ms. Maniscalco is also entitled to receive certain incentive compensation. The
Employment Agreement may be terminated if Ms. Maniscalco dies, is permanently
disabled and for certain events constituting "cause." In addition, the
Employment Agreement may be terminated by Uniforce by written notice at any time
(subject to the obligation to make severance payments if termination occurs
during the initial term). Ms. Maniscalco has agreed not to compete with Uniforce
for a period of two years after termination of her employment with Uniforce for
any reason.
In addition, Uniforce entered into arrangements with Ms. Maniscalco under
which she was entitled to receive a cash bonus of $780,761 (subject to reduction
in certain circumstances), payable to the extent of 10% thereof on January 11,
1999, to the extent of 30% thereof on January 11, 2000 and as to the balance
thereof on January 11, 2001, provided that she is then employed by Uniforce. The
cash bonus installments were subject to acceleration in the event of Ms.
Maniscalco's death, the merger of Uniforce, the sale of all or substantially all
of Uniforce's assets or a change of control of Uniforce and, accordingly, were
paid in full upon the consummation of the Merger.
Compensation Committee Interlocks and Insider Participation
During 1996, Michael Ferrentino, Keith Goldberg and Dr. Glen Miller served
as the Company's Compensation Committee. There are no interlocking
relationships, as defined in the regulations of the Securities and Exchange
Commission, involving any of these individuals.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 29, 1995, the Company entered into a letter agreement with
Christopher P. Franco, the Chief Executive Officer and Secretary of the Company,
James L. Paterek, the Chairman of the Company, and Michael Ferrentino, the
President of the Company, subsequently amended as of October 6, 1995 (as
amended, the "Letter Agreement"), pursuant to which Messrs. Franco, Paterek and
Ferrentino agreed to direct the Company's entry into the technical staffing
business. As consideration for agreeing to guide the Company's entry into the
technical staffing business, the Company agreed, inter alia, to (i) issue to
Messrs. Franco, Paterek and Ferrentino, and one other individual who agreed to
serve as a Vice President of COMFORCE Telecom, Kevin W. Kiernan, such number of
shares of Common Stock then equal to 35% of the Company's then issued and
outstanding Common Stock together with additional shares issued and warrants or
options to purchase additional shares granted between October 6, 1995 and
December 1, 1995; (ii) sell or otherwise dispose of all or substantially all of
the Company's interest in the businesses it then operated; (iii) nominate four
individuals selected by these principals to serve on the Company's Board of
Directors; and (iv) reserve for issuance to the principals and other employees
of the Company options or warrants to purchase 10% of the Company's then issued
and outstanding Common Stock together with additional shares issued and warrants
or options to purchase additional shares granted between October 6, 1995 and
December 1, 1995.
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<PAGE>
In the aggregate, 3,888,084 shares of the Company's Common Stock were
issued to the principals in October 1995 and December 1996 in full satisfaction
of the Company's obligations to issue its shares under the terms of the Letter
Agreement, all as follows:
Name No. of Shares
- ---- -------------
Michael Ferrentino....................................... 999,794
Christopher P. Franco.................................... 999,794
James L. Paterek......................................... 1,666,322
Kevin W. Kiernan......................................... 222,174
----------
Total.................................................... 3,888,084
These shares have the same rights and privileges as all other shares of the
Company's Common Stock.
The Company made loans in 1995 and 1996 of $367,000 in the aggregate to
these principals to cover their tax liabilities resulting from these
transactions. The obligations were evidenced by notes and bore interest at the
rate of 6% per annum. As more fully described below, the obligations of Messrs.
Paterek, Franco and Ferrentino were discharged in August 1997.
As a condition to the funding of the Prior Credit Facility, the lenders
required Messrs. Paterek, Franco and Ferrentino to each pledge as additional
collateral to secure the Company's obligations under the Prior 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 Prior 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, which amount was utilized to repay
outstanding loans of such officers due to the Company described above and
related payroll withholding taxes. 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 aggregate amount of this consideration is included as a part of the
fees and expenses incurred in connection with the Prior Credit Facility. The
pledges were released when the Prior Credit Facility was repaid as part of the
Refinancing.
See "Management-Employment Agreements" for a description of the employment
agreements entered into between the Company and each of Messrs. Paterek,
Ferrentino and Franco.
In October 1995, the Company entered into a consulting agreement with Tarek
Corporation ("Tarek"), a corporation wholly-owned by Mr. Paterek. Mr. Paterek
was a founder of COMFORCE Telecom and served as its President from 1985 to
September 1995. Tarek agreed to engage Mr. Paterek to perform the services
required under the agreement, principally to advise the Company as to
fundamental strategies and policies relating to its operations, as to
acquisitions and the integration of acquired businesses and as to growth
strategies generally. Under the terms of the agreement, Tarek agreed to devote
at least 50 hours per month performing services for the Company. The agreement
was originally for a term of three years, but was terminated upon Mr. Paterek's
election as Chairman of the Company in February 1997. Under this agreement, Mr.
Paterek received compensation of $157,000 annually plus reimbursement for
expenses incurred in performing his duties under the agreement. In addition, Mr.
Paterek was entitled to participate in the Company's normal benefit programs.
Yield Industries, Inc., a corporation wholly-owned by Messrs. Paterek and
Ferrentino earned a fee of $750,000 related to its interest in COMFORCE Telecom
in connection with the Company's acquisition of
86
<PAGE>
COMFORCE Telecom, $250,000 of which was paid in 1995 and the balance of which
was paid in January 1996. Yield Industries, Inc. was not affiliated with
COMFORCE Telecom.
The Company paid L.H. Frishkoff & Company, a certified public accounting
firm at which Richard Barber, a Director of the Company, is a partner,
approximately $196,907 in fees during 1997 (through August 31, 1997) and
approximately $104,000 in fees during 1996 for tax-related advisory services.
In connection with the extension by Heller Financial, Inc. ("Heller") of
the New Credit Facility to the Company, 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. Under the terms of his agreement with Heller, $2.5
million of the amount pledged is required to be released when the Company has
unused borrowing availability under the New Credit Facility of at least $15
million for 15 consecutive business days, with the balance to be released when
the Company has $17.5 million of unused borrowing availability for a like
period. As consideration for this agreement, the Company has agreed to pay to
Mr. Fanning a 12% per annum yield on his cash collateral, less the actual return
thereon as invested. See "Description of Other Indebtedness."
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<PAGE>
PRINCIPAL STOCKHOLDERS
Securities Ownership of Certain Beneficial Owners and Management
The following table sets forth the number of shares and percentage of
Common Stock beneficially owned as of December 31, 1997 by (i) each person who
is known by the Company to own beneficially more than 5% of the shares of Common
Stock, (ii) each director and executive officer of the Company, and (iii) all
directors and executive officers of the Company as a group (11 persons). Unless
stated otherwise, each person so named exercises sole voting and investment
power as to the shares of Common Stock so indicated. There were 15,296,350
shares of Common Stock issued and outstanding as of December 31, 1997. None of
the officers or directors own 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 to be issued in connection with the Transactions will be owned
beneficially and of record by the Company. See "Description of Capital Stock."
<TABLE>
<CAPTION>
Name and Address of Number(1) Percentage(1)
Beneficial Owner --------- -------------
- ----------------
<S> <C> <C>
Management:
James L. Paterek(2) ........................... 1,947,572 12.5%
2001 Marcus Avenue
Lake Success, New York 11042
Christopher P. Franco(3) ...................... 1,002,294 6.5%
2001 Marcus Avenue
Lake Success, New York 11042
Michael Ferrentino(4) ......................... 2,393,012 15.4%
2001 Marcus Avenue
Lake Success, New York 11042
Andrew Reiben(5) .............................. 20,000 *
Paul Grillo(6) ................................ 12,500 *
Malcolm High .................................. -- --
Dr. Glen Miller(7) ............................ 20,000 *
Richard Barber(7) ............................. 20,000 *
Keith Goldberg(7) ............................. 20,000 *
Marc Werner(8) ................................ 100,000 *
Michael Madden(9) ............................. 50,000 *
Directors and officers as a group ............. 4,695,584 29.0%
(11 persons)(10)
Other Significant Stockholders:
ARTRA GROUP Incorporated (11)(12) ............. 1,728,000 11.3%
500 Central Avenue
Northfield, Illinois 60093
John Fanning(13) .............................. 914,996 6.0%
Alberta, Canada(14) ........................... 1,400,000 9.2%
Alberta Treasury, Room 530
Terrace Building
9515 107th Street
Edmonton, Alberta T5K 2C3
</TABLE>
- ----------
* Less than 1%
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<PAGE>
(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) 889,794 shares currently held of
record by him and (ii) 112,500 shares issuable to him upon exercise of an
option at an exercise price of $6.75 per share.
(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) 889,794 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 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.
(8) The shares shown to be beneficially owned by Mr. Werner include 100,000
shares issuable upon the exercise of a warrant at an exercise price of
$7.625.
(9) 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.
(10) The shares shown to be beneficially owned by the directors and officers as
a group include (i) 3,555,910 shares held of record by them, (ii) 222,174
shares held of record by Mr. Kiernan (under which Mr. Ferrentino has voting
power), (iii) 20,000 shares issuable upon the exercise of an option at an
exercise price of $7.25 per share, (iv) 705,000 shares issuable upon the
exercise of an option at an exercise price of $6.75 per share, (v) 12,500
shares issuable upon the exercise of an option at an exercise price of
$18.00, (vi) 100,000 shares issuable upon the exercise of a warrant at an
exercise price of $7.625, (vii) 30,000 shares issuable upon the exercise of
an option at $17.00 per share and (viii) 50,000 shares issuable upon the
exercise of an option at an exercise price $7.375.
(11) 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
89
<PAGE>
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.
(12) 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).
(13) 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.
(14) The shares beneficially owned by this stockholder are owned of record.
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<PAGE>
THE NOTES EXCHANGE OFFER
Purpose and Effect of the Notes Exchange Offer
The Old Notes were originally sold by COI on November 26, 1997, to the
Initial Purchaser pursuant to the Note Purchase Agreement. The Initial Purchaser
subsequently resold the Old Notes to qualified institutional buyers pursuant to
Rule 144A under the Securities Act, or institutional "accredited investors" (as
defined in Rule 501(a) (1), (2), (3) or (7) of Regulation D under the Securities
Act). Pursuant to the Note Purchase Agreement, COI entered into the Notes
Registration Rights Agreement, pursuant to which COI has agreed, for the benefit
of the holders of the Unregistered Notes, at COI's cost, (i) to file a
registration statement with the Commission within 30 days after the date of the
original issue (the "Issue Date") of the Unregistered Notes (such date of
filing, the "Filing Date") with respect to the Notes Exchange Offer for the
Exchange Notes, (ii) use its best efforts to cause the Notes Exchange Offer
Registration Statement to be declared effective under the Securities Act within
90 days after the Issue Date, (iii) use its best efforts to cause such Notes
Exchange Offer Registration Statement to remain effective until the closing of
the Notes Exchange Offer and (iv) use its best efforts to consummate the Notes
Exchange Offer no later than 130 days after the Issue Date. Upon the
registration statement being declared effective, COI will offer the Exchange
Notes in exchange for the Unregistered Notes. COI will keep the Notes Exchange
Offer open for no less than 30 business days (or longer if required by
applicable law) after the date on which notice of the Notes Exchange Offer is
mailed to the holders of the Unregistered Notes.
For each Old Note properly tendered and accepted pursuant to the Notes
Exchange Offer, the holder of such Unregistered Note will receive a New Note
having a principal amount equal to that of the Old Note tendered. Interest on
each New Note will accrue or accumulate from the last interest payment date on
which interest was paid on the Unregistered Note tendered in exchange therefor
or, if no interest has been paid on such Unregistered Note, from the Issue Date.
Each holder of the Unregistered Notes who wishes to exchange the
Unregistered Notes for Exchange Notes in the Notes Exchange Offer will be
required to represent in the GREEN Letter of Transmittal that (i) it is not an
affiliate of COI, (ii) the Exchange Notes to be received by it were acquired in
the ordinary course of its business, (iii) at the time of commencement of the
Notes Exchange Offer, it has no arrangement with any person to participate in
the distribution (within the meaning of the Securities Act) of the Exchange
Notes and (iv) it is not acting on behalf of any person who could not truthfully
make the foregoing representations.
In the event that (i) applicable law or interpretations of the staff of the
Commission do not permit COI to effect the Notes Exchange Offer, (ii) in certain
circumstances, the Initial Purchaser so requests, (iii) any holder of the
Unregistered Notes (other than the Initial Purchaser) who is not eligible to
participate in the Notes Exchange Offer so requests, or (iv) for any reason the
Notes Exchange Offer is not consummated within 165 days after the Issue Date,
COI will at its cost, (a) as promptly as reasonably practicable, file a shelf
registration statement covering resales of the Unregistered Notes (a "Notes
Shelf Registration Statement"), (b) use its best efforts to cause such Notes
Shelf Registration Statement to be declared effective under the Securities Act
by the 165th day after the Issue Date (or promptly if such Notes Shelf
Registration Statement was filed pursuant to clause (ii), above) and (c) use its
best efforts to keep effective such Notes Shelf Registration Statement until the
earlier of two years after the Issue Date (or one year from the date the Notes
Shelf Registration Statement is declared effective if such Notes Shelf
Registration Statement is filed upon the request of the Initial Purchaser
pursuant to clause (ii) above) or such shorter period which will terminate when
all of the Notes covered by the Notes Shelf Registration Statement have been
sold pursuant to the Notes Shelf Registration Statement or when all of the
Unregistered Notes become eligible for resale pursuant to Rule 144 under the
Securities Act without volume restriction. See "--Resale of the Exchange Notes".
COI will, in the event of the filing of a Notes Shelf Registration Statement,
provide to each holder of the Registered Notes copies of the prospectus which is
a part of such Notes Shelf Registration Statement. A holder that sells its
Registered Notes pursuant to the Notes Shelf Registration Statement generally
will be required to be named as a selling securityholder in the related
prospectus and to deliver a prospectus to purchasers, will be subject to certain
of the civil liability
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provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Notes Registration Rights Agreement which is
applicable to such holder (including certain indemnification rights and
obligations thereunder).
If COI fails to comply with the above provisions or if such Notes Shelf
Registration Statement fails to become effective, then, as liquidated damages,
additional interest (the "Additional Interest"), as applicable, shall become
payable with respect to the Exchange Notes as follows:
(i) if the registration statement for the Notes Exchange Offer or the Notes
Shelf Registration Statement is not filed within 30 days following the Issue
Date, the Additional Interest shall accrue on the Unregistered Notes over and
above the stated interest at a rate of 0.50% per annum for the first 60 days
commencing on the 31st day after the Issue Date, such Additional Interest
increasing by an additional 0.50% per annum at the beginning of each subsequent
90- day period;
(ii) if the registration statement for the Notes Exchange Offer or the
Notes Shelf Registration Statement is not declared effective within 90 days
following the Issue Date, Additional Interest shall accrue on the Unregistered
Notes over and above the stated interest at a rate of 0.50% per annum for the
first 90 days commencing on the 91st day after the Issue Date, such Additional
Interest increasing by an additional 0.50% per annum at the beginning of each
subsequent 90-day period; or
(iii) if (A) COI has not exchanged all Unregistered Notes validly tendered
in accordance with the terms of the Notes Exchange Offer on or prior to 130 days
after the Issue Date or (B) the registration statement for the Notes Exchange
Offer ceases to be effective at any time prior to the time that the Notes
Exchange Offer is consummated or (C) if applicable, the Notes Shelf Registration
Statement has been declared effective and such Notes Shelf Registration
Statement ceases to be effective at any time prior to the second anniversary of
the Issue Date (unless all the Registered Notes have been sold thereunder or as
otherwise provided herein), then the Additional Interest shall accrue on the
Unregistered Notes over and above the stated interest of 0.50% per annum for the
first 50 days commencing on (x) the 131st day after the Issue Date with respect
to the Notes validly tendered and not exchanged by COI, in the case of (A)
above, or (y) the day the registration statement for the Notes Exchange Offer
ceases to be effective or usable for its intended purpose in the case of (B)
above, or (z) the day the Notes Shelf Registration Statement ceases to be
effective in the case of (C) above, the rate of such Additional Interest
increasing by an additional 0.50% per annum at the beginning of each subsequent
90-day period; provided, however, that the Additional Interest payable on the
Unregistered Notes may not exceed in the aggregate 2.0% per annum; and provided
further, that (1) upon the filing of the registration statement for the Notes
Exchange Offer or the Notes Shelf Registration Statement (in the case of clause
(i) above), (2) upon the effectiveness of such registration statement for the
Notes Exchange Offer or the Notes Shelf Registration Statement (in the case of
(ii) above), or (3) upon the exchange of Exchange Notes for all Unregistered
Notes tendered (in the case of clause (iii) (A) above), or upon the
effectiveness of the registration statement for the Notes Exchange Offer which
had ceased to remain effective in the case of clause (iii) (B) above, or upon
the effectiveness of the Notes Shelf Registration Statement which had ceased to
remain effective (in the case of clause (iii) (C) above), the Additional
Interest accruing on the Unregistered Notes as a result of such clause (or the
relevant subclause thereof), as the case may be, shall cease to accrue.
Any amounts of Additional Interest due pursuant to clauses (i), (ii) or
(iii) above will be payable in cash on the same interest payment dates as
interest on the Unregistered Notes. The Additional Interest will be determined
by multiplying the applicable rate of such Additional Interest by the principal
amount of the Unregistered Notes multiplied by a fraction, the numerator of
which is the number of days such Additional Interest was applicable during such
period (determined on the basis of a 360-day year comprised of twelve 30-day
months), and the denominator of which is 360.
The summary herein of all material provisions of the Notes Registration
Rights Agreement does not purport to be exhaustive and is subject to, and is
qualified in its entirety by, all the provisions of the Notes Registration
Rights Agreement, copies of which will be made available upon request to COI.
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Following the consummation of the Notes Exchange Offer, holders of the
Unregistered Notes who were eligible to participate in the Notes Exchange Offer
but who did not tender their Unregistered Notes will not have any further
exchange or registration rights and such Unregistered Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such Unregistered Notes could be adversely affected.
Terms of the Notes Exchange Offer
Upon the terms and subject to the conditions set forth in this Prospectus
and in the GREEN Letter of Transmittal, COI will accept any and all Unregistered
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time,
on the Expiration Date. COI will issue $1,000 principal amount of New Notes in
exchange for each $1,000 principal amount of outstanding Old Notes accepted in
the Notes Exchange Offer. Holders may tender some or all of their Unregistered
Notes pursuant to the Notes Exchange Offer. However, Old Notes may be tendered
only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Unregistered Notes except (i) the New Notes bear a Series B designation
and a different CUSIP Number from the Old Notes, and (ii) the Exchange Notes
have been registered under the Securities Act and hence will not bear legends
restricting the transfer thereof. The New Notes will evidence the same debt as
the Old Notes and will be entitled to the benefits of the Notes Indenture.
As of the date of this Prospectus $110,000,000 aggregate principal amount
of Old Notes are outstanding. COI has fixed the close of business January 15,
1998 as the record date for the Notes Exchange Offer for purposes of determining
the persons to whom this Prospectus and the GREEN Letter of Transmittal will be
mailed initially.
Holders of the Unregistered Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of Delaware or the Notes Indenture in
connection with the Notes Exchange Offer. COI intends to conduct the Notes
Exchange Offer in accordance with the applicable requirements of the Exchange
Act and the rules and regulations of the Commission thereunder.
COI shall be deemed to have accepted validly tendered Unregistered Notes
when, as and if COI has given oral or written notice thereof to the Notes
Exchange Agent. The Notes Exchange Agent will act as agent for the tendering
holders for the purpose of receiving the Exchange Notes from COI.
If any tendered Unregistered Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Unregistered Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Unregistered Notes in the Notes Exchange Offer will not
be required to pay brokerage commissions or fees or, subject to the instructions
of the GREEN Letter of Transmittal, transfer taxes with respect to the exchange
of Unregistered Notes pursuant to the Notes Exchange Offer. COI will pay all
charges and expenses, other than the transfer taxes in certain circumstances, in
connection with the Notes Exchange Offer. See "--Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
March 27, 1998, unless COI, in its sole discretion, extends the Notes Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Notes Exchange Offer is extended.
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In order to extend the Notes Exchange Offer, COI will notify the Notes
Exchange Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
COI reserves the right, (i) to delay accepting any Unregistered Notes, to
extend the Notes Exchange Offer or to terminate the Notes Exchange Offer if any
of the conditions set forth below under "--Conditions" shall not have been
satisfied, by giving oral or written notice of such delay, extension or
termination to the Notes Exchange Agent or (ii) to amend the terms of the Notes
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered holders.
Procedures for Tendering
The tender of Unregistered Notes pursuant to any of the procedures set
forth in this Prospectus and in the GREEN Letter of Transmittal will constitute
a binding agreement between the Tendering Holder and COI in accordance with the
terms and subject to the conditions set forth herein and in such Letter of
Transmittal. The tender of Unregistered Notes will constitute an agreement to
deliver good and marketable title to all tendered Unregistered Notes prior to
the Expiration Date free and clear of all liens, charges, claims, encumbrances,
interests and restrictions of any kind.
EXCEPT AS PROVIDED IN "--GUARANTEED DELIVERY PROCEDURES," UNLESS THE
UNREGISTERED NOTES BEING TENDERED ARE DEPOSITED BY THE HOLDER WITH THE NOTES
EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE (ACCOMPANIED BY A PROPERLY COMPLETED
AND DULY EXECUTED GREEN LETTER OF TRANSMITTAL), COI MAY, AT ITS OPTION, REJECT
SUCH TENDER. ISSUANCE OF EXCHANGE NOTES WILL BE MADE ONLY AGAINST DEPOSIT OF
TENDERED UNREGISTERED NOTES AND DELIVERY OF ALL OTHER REQUIRED DOCUMENTS.
NOTWITHSTANDING THE FOREGOING, DTC PARTICIPANTS TENDERING THROUGH ATOP WILL BE
DEEMED TO HAVE MADE VALID DELIVERY WHERE THE NOTES EXCHANGE AGENT RECEIVES AN
AGENT'S MESSAGE (DEFINED BELOW) PRIOR TO THE EXPIRATION DATE.
Accordingly, to properly tender Unregistered Notes, the following
procedures must be followed:
Unregistered Notes held through DTC. Each Beneficial Owner holding
Unregistered Notes through a DTC Participant must instruct such DTC Participant
to cause its Unregistered Notes to be tendered in accordance with the procedures
set forth in this Prospectus.
Pursuant to an authorization given by DTC to the DTC Participants, each DTC
Participant holding Unregistered Notes through DTC must (i) electronically
transmit its acceptance through ATOP, and DTC will then edit and verify the
acceptance, execute a book-entry delivery to the Notes Exchange Agent's account
at DTC and send an Agent's Message to the Notes Exchange Agent for its
acceptance, or (ii) comply with the guaranteed delivery procedures set forth
below and in the Notice of Guaranteed Delivery. See "--Guaranteed Delivery
Procedures."
The Notes Exchange Agent will (promptly after the date of this Prospectus)
establish accounts at DTC for purposes of the Notes Exchange Offer with respect
to Unregistered Notes held through DTC, and any financial institution that is a
DTC Participant may make book-entry delivery of interests in Unregistered Notes
into the Notes Exchange Agent's account through ATOP. However, although delivery
of interests in the Unregistered Notes may be effected through book-entry
transfer into the Notes Exchange Agent's account through ATOP, an Agent's
Message in connection with such book-entry transfer, and any other required
documents, must be, in any case, transmitted to and received by the Notes
Exchange Agent at its address set forth under "--Notes Exchange Agent," or the
guaranteed delivery procedures set forth below must be complied with, in each
case, prior to the Expiration Date. Delivery of documents to DTC does not
constitute delivery to the Notes Exchange Agent. The confirmation of a
book-entry
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transfer into the Notes Exchange Agent's account at DTC as described above is
referred to herein as a "Book-Entry Confirmation."
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Notes Exchange Agent and forming a part of the Book-Entry
Confirmation, which states that DTC has received an express acknowledgment from
each DTC Participant tendering through ATOP that such DTC Participants have
received a GREEN Letter of Transmittal and agree to be bound by the terms of
such Letter of Transmittal and that COI may enforce such agreement against such
DTC Participants.
Cede & Co., as the Holder of the global certificates representing the Old
Notes (the "Global Notes"), will tender a portion of each of the Global Notes
equal to the aggregate principal amount due at the stated maturity for which
instructions to tender are given by DTC Participants.
Unregistered Notes held by Holders. Each Holder must (i) complete and sign
and mail or deliver the accompanying GREEN Letter of Transmittal, and any other
documents required by such Letter of Transmittal, together with certificate(s)
representing all tendered Unregistered Notes, to the Notes Exchange Agent at its
address set forth under "--Notes Exchange Agent," or (ii) comply with the
guaranteed delivery procedures set forth below and in the Notice of Guaranteed
Delivery. See "--Guaranteed Delivery Procedures."
All signatures on a Letter of Transmittal must be guaranteed by any member
firm of a registered national securities exchange or of the National Association
of Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor" institution
within the meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible
Institution"); provided, however, that signatures on a Letter of Transmittal
need not be guaranteed if such Unregistered Notes are tendered for the account
of an Eligible Institution including (as such terms are defined in Rule
17Ad-15): (i) a bank; (ii) a broker, dealer, municipal securities dealer,
municipal securities broker, government securities dealer or government
securities broker; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) a savings
institution that is a participant in a Securities Transfer Association
recognized program.
If a Letter of Transmittal or any Unregistered Note is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, agent, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person must so indicate when signing, and proper evidence satisfactory to
COI of the authority of such person so to act must be submitted.
Holders should indicate in the applicable box in the GREEN Letter of
Transmittal the name and address to which substitute certificates evidencing
Unregistered Notes for amounts not tendered are to be issued or sent, if
different from the name and address of the person signing such Letter of
Transmittal. In the case of issuance in a different name, the employer
identification or social security number of the person named must also be
indicated. If no instructions are given, such Unregistered Notes not tendered,
as the case may be, will be returned to the person signing such Letter of
Transmittal.
By tendering, each Holder and each DTC Participant will make to COI the
representations set forth in the third paragraph under the heading "--Purpose
and Effect of the Notes Exchange Offer."
No alternative, conditional, irregular or contingent tenders will be
accepted (unless waived). By executing a GREEN Letter of Transmittal or
transmitting an acceptance through ATOP, as the case may be, each Tendering
Holder waives any right to receive any notice of the acceptance for purchase of
its Unregistered Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Unregistered Notes will be resolved by COI,
whose determination will be final and binding. COI reserves the absolute right
to reject any or all tenders that are not in proper form or the acceptance of
which may, in the opinion of counsel for COI, be unlawful. COI also reserves the
absolute right to waive any condition to the Notes Exchange
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Offer and any irregularities or conditions of tender as to particular
Unregistered Notes. COI's interpretation of the terms and conditions of the
Notes Exchange Offer (including the instructions in the GREEN Letter of
Transmittal) will be final and binding. Unless waived, any irregularities in
connection with tenders must be cured within such time as COI shall determine.
COI and the Notes Exchange Agent shall not be under any duty to give
notification of defects in such tenders and shall not incur liabilities for
failure to give such notification. Tenders of Unregistered Notes will not be
deemed to have been made until such irregularities have been cured or waived.
Any Unregistered Notes received by the Notes Exchange Agent that are not
properly tendered and as to which the irregularities have not been cured or
waived will be returned by the Notes Exchange Agent to the tendering Holder,
unless otherwise provided in the GREEN Letter of Transmittal, as soon as
practicable following the Expiration Date.
LETTERS OF TRANSMITTAL AND UNREGISTERED NOTES MUST BE SENT ONLY TO THE
NOTES EXCHANGE AGENT. DO NOT SEND LETTERS OF TRANSMITTAL OR UNREGISTERED NOTES
TO COI OR DTC.
The method of delivery of Unregistered Notes and Letters of Transmittal,
any required signature guaranties and all other required documents, including
delivery through DTC and any acceptance through ATOP, is at the election and
risk of the persons tendering and delivering acceptances or Letters of
Transmittal and, except as otherwise provided in the applicable Letter of
Transmittal, delivery will be deemed made only when actually received by the
Notes Exchange Agent. If delivery is by mail, it is suggested that the Holder
use properly insured, registered mail with return receipt requested, and that
the mailing be made sufficiently in advance of the Expiration Date to permit
delivery to the Notes Exchange Agent prior to the Expiration Date.
Guaranteed Delivery Procedures
Unregistered Notes held through DTC. DTC Participants holding Unregistered
Notes through DTC who wish to cause their Unregistered Notes to be tendered, but
who cannot transmit their acceptances through ATOP prior to the Expiration Date,
may cause a tender to be effected if:
(a) guaranteed delivery is made by or through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Notes Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by
mail, hand delivery, facsimile transmission or overnight courier)
substantially in the form provided by COI herewith; and
(c) Book-Entry Confirmation and an Agent's Message in connection therewith
(as described above) are received by the Notes Exchange Agent within
three NYSE trading days after the date of the execution of the Notice
of Guaranteed Delivery.
Unregistered Notes Held by Holders. Holders who wish to tender their
Unregistered Notes and (i) whose Unregistered Notes are not immediately
available, (ii) who cannot deliver their Unregistered Notes, the GREEN Letter of
Transmittal or any other required documents to the Notes Exchange Agent or (iii)
who cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Notes Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by
facsimile transmission, mail or hand delivery) setting forth the name
and address of the holder, the certificate number(s) of such
Unregistered Notes and the principal amount of Unregistered Notes
tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days
after the Expiration Date, the GREEN Letter
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of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Unregistered Notes (or a confirmation of book-entry
transfer of such Unregistered Notes into the Notes Exchange Agent's
account at the Book-Entry Transfer Facility), and any other documents
required by such Letter of Transmittal will be deposited by the
Eligible Institution with the Notes Exchange Agent; and
(c) such properly completed and executed GREEN Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all
tendered Unregistered Notes in proper form for transfer (or a
confirmation or book-entry transfer of such Unregistered Notes into
the Notes Exchange Agent's account at the Book-Entry Transfer
Facility), and all other documents required by such Letter of
Transmittal are received by the Notes Exchange Agent upon three New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Notes Exchange Agent, a Notice of Guaranteed Delivery
will be sent to holders who wish to tender their Unregistered Notes according to
the guaranteed delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Unregistered Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
Unregistered Notes held through DTC. DTC Participants holding Unregistered
Notes who have transmitted their acceptances through ATOP may, prior to 5:00
p.m., New York City time, on the Expiration Date, withdraw the instruction given
thereby by delivering to the Notes Exchange Agent, at its address set forth
under "--Notes Exchange Agent," a written, telegraphic or facsimile notice of
withdrawal of such instruction. Such notice of withdrawal must contain the name
and number of the DTC Participant, the principal amount due at the stated
maturity or number of shares of the Unregistered Notes to which such withdrawal
related and the signature of the DTC Participant. Withdrawal of such an
instruction will be effective upon receipt of such written notice of withdrawal
by the Notes Exchange Agent.
Unregistered Notes held by Holders. Holders may withdraw a tender of
Unregistered Notes in the Notes Exchange Offer, by a telegram, telex, letter or
facsimile transmission notice of withdrawal received by the Notes Exchange Agent
at its address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Unregistered Notes to be withdrawn (the
"Depositor"), (ii) identify the Unregistered Notes to be withdrawn (including
the certificate number(s) and principal amount due at the stated maturity of
such Unregistered Notes, or, in the case of Unregistered Notes transferred by
book-entry transfer, the name and number of the account at the Book-Entry
Transfer Facility to be credited), (iii) be signed by the holder in the same
manner as the original signature on the GREEN Letter of Transmittal by which
such Unregistered Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Unregistered Notes register the transfer of such
Unregistered Notes into the name of the person withdrawing the tender and (iv)
specify the name in which any such Unregistered Notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
COI, whose determination shall be final and binding on all parties. Any
Unregistered Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Notes Exchange Offer and no Exchange Notes will be issued
with respect thereto unless the Unregistered Notes so withdrawn are validly
retendered. Any Unregistered Notes which have been tendered but which are not
accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Notes Exchange Offer. Properly withdrawn Unregistered Notes
may be retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
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All signatures on a notice of withdrawal must be guaranteed by an Eligible
Institution; provided, however, that signatures on the notice of withdrawal need
not be guaranteed if the Unregistered Notes being withdrawn are held for the
account of an Eligible Institution.
A withdrawal of an instruction or a withdrawal of a tender must be executed
by a DTC Participant or a Holder, as the case may be, in the same manner as the
person's name appears on its transmission through ATOP or GREEN Letter of
Transmittal, as the case may be, to which such withdrawal relates. If a notice
of withdrawal is signed by a trustee, partner, executor, administrator,
guardian, attorney-in-fact, agent, officer of a corporation or other person
acting in a fiduciary or representative capacity, such person must so indicate
when signing and must submit with the revocation appropriate evidence of
authority to execute the notice of withdrawal. A DTC Participant or a Holder may
withdraw an instruction or a tender, as the case may be, only if such withdrawal
complies with the provisions of this Prospectus.
A withdrawal of a tender of Unregistered Notes by a DTC Participant or a
Holder, as the case may be, may be rescinded only by a new transmission of an
acceptance through ATOP or execution and delivery of a new GREEN Letter of
Transmittal, as the case may be, in accordance with the procedures described
herein.
Conditions
Notwithstanding any other term of the Notes Exchange Offer, COI shall not
be required to accept for exchange, or exchange Notes for, any Unregistered
Notes, and may terminate or amend the Notes Exchange Offer as provided herein
before the acceptance of such Unregistered Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Notes
Exchange Offer which, in the judgment of COI upon written advice of
counsel, could reasonably be expected to materially impair the ability
of COI to proceed with the Notes Exchange Offer or any material
adverse development has occurred in any existing action or proceeding
with respect to COI or any of the subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the judgment
of COI and based on written advice of counsel, could reasonably be
expected to materially impair the ability of COI to proceed with the
Notes Exchange Offer or materially impair the contemplated benefits of
the Notes Exchange Offer to COI; or
(c) any governmental approval has not been obtained, which approval COI
shall, in its discretion and based on written advice of counsel, deem
necessary for the consummation of the Notes Exchange Offer as
contemplated hereby.
If any of the conditions are not satisfied, COI may (i) refuse to accept
any Unregistered Notes and return all tendered Unregistered Notes to the
tendering holders, (ii) extend the Notes Exchange Offer and retain all
Unregistered Notes tendered prior to the expiration of the Notes Exchange Offer,
subject, however, to the rights of holders to withdraw such Unregistered Notes
(see "--Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with
respect to the Notes Exchange Offer and accept all properly tendered
Unregistered Notes which have not been withdrawn.
Notes Exchange Agent
Wilmington Trust Company has been appointed as Notes Exchange Agent for the
Notes Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Notes
Exchange Agent addressed as follows:
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Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, DE 19890
Attention: James P. Lawler
Telephone: (302) 651-8775
Facsimile: (302) 651-1576
Delivery to an address other than as set forth above, or transmission of
instructions via a facsimile number other than the one set forth above, will not
constitute a valid delivery.
Fees and Expenses
The expenses of soliciting tenders will be borne by COI. The principal
solicitation is being made by mail; however, additional solicitation may be made
by telegraph, telecopy, telephone or in person by officers and regular employees
of COI and its affiliates.
COI has not retained any dealer-manager in connection with the Notes
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Notes Exchange Offer. COI however, will pay the
Notes Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Notes Exchange
Offer will be paid by COI. Such expenses include fees and expenses of the Notes
Exchange Agent and Trustee, accounting and legal fees and printing costs, among
others.
Accounting Treatment
The Exchange Notes will be recorded at the same carrying value as the
Unregistered Notes, which is face value, as reflected in COI's accounting
records on the date of exchange. Accordingly, no gain or loss for accounting
purposes will be recognized by COI. The expenses of the Notes Exchange Offer
will be expended over the time of the Exchange Notes.
Consequences of Failure to Exchange
The Unregistered Notes that are not exchanged for Exchange Notes pursuant
to the Notes Exchange Offer will remain restricted securities. Accordingly, such
Unregistered Notes may be resold only (i) to COI (upon redemption thereof or
otherwise), (ii) so long as the Unregistered Notes are eligible for resale
pursuant to Rule 144A, to a person inside the United States whom the seller
reasonably believes is a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act in a transaction meeting the requirements of
Rule 144A, in accordance with Rule 144 under the Securities Act, or pursuant to
another exemption from the registration requirements of the Securities Act (and
based upon an opinion of counsel reasonably acceptable to COI), (iii) outside
the United States to a foreign person in a transaction meeting the requirements
of Rule 904 under the Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States.
Resale of the Exchange Notes
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
COI believes that a holder or other person who receives Exchange Notes in the
ordinary course of business, whether or not such person is the holder (other
than (i) a broker-dealer who purchases such Exchange Notes from COI to resell
pursuant to Rule 144A or any other available exemption under
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the Securities Act or (ii) a person that is an "affiliate" of COI within the
meaning of Rule 405 under the Securities Act) who receives Exchange Notes in
exchange for Unregistered Notes, and who is not participating, does not intend
to participate, and has no arrangement or understanding with such person to
participate, in the distribution of the Exchange Notes, will be allowed to
resell the Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes a
prospectus that satisfies the requirements of Section 10 of the Securities Act.
However, if any holder acquires Exchange Notes in the Notes Exchange Offer for
the purpose of distributing or participating in a distribution of the Exchange
Notes, such holder cannot rely on the position of the staff of the Commission
enunciated in such no-action letters or any similar interpretive letters, and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an exemption
from registration is otherwise available. Further, each Participating
Broker-Dealer that receives Exchange Notes for its own account in exchange for
Unregistered Notes, where such Securities were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes.
As contemplated by these no-action letters and the Notes Registration
Rights Agreement, each holder accepting the Notes Exchange Offer is required to
represent to COI in the GREEN Letter of Transmittal that (i) the Exchange Notes
are to be acquired by the holder or the person receiving such Exchange Notes,
whether or not such person is the holder, in the ordinary course of business,
(ii) the holder or any such other person (other than a broker-dealer referred to
in the next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of COI within the meaning of Rule 405 under the
Securities Act, and (v) the holder or any such other person acknowledges that if
such holder or other person participates in the Exchange Offer for the purpose
of distributing the Exchange Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the Exchange Notes and cannot rely on those no-action letters. As
indicated above, each Participating Broker-Dealer that receives Exchange Notes
for its own account in exchange for Unregistered Notes must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
For a description of the procedures for such resales by Participating
Broker-Dealers, see "Plan of Distribution."
DESCRIPTION OF NOTES
General
The Old Notes were issued, and the New Notes will be issued, under an
indenture, dated as of November 26, 1997 (the "Notes Indenture"), between COI
and Wilmington Trust Company, as trustee (the "Notes Trustee"), a copy of which
is available upon request to COI. The Old Notes and the New Notes will be
treated as a single class of securities under the Notes Indenture. The following
is a summary of certain provisions of the Notes Indenture and the Notes and does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Notes Indenture (including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939, as amended) and the Notes.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of COI in
the Borough of Manhattan, The City of New York (which initially shall be the
corporate trust office of the Notes Trustee in New York, New York), except that,
at the option of COI, payment of interest may be made by check mailed to the
address of the holders of the Notes as such address appears in the Note
Register. Initially, the Notes Trustee will act as Paying Agent and Registrar
for the Notes. The Notes may be presented for registration of transfer and
exchange at the offices of the Registrar, which initially will be the Notes
Trustee's corporate trust office. COI may change any Paying Agent and Registrar
without notice to holders of the Notes.
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The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but COI may
require payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
Terms of Notes
The Notes Indenture permits the issuance of up to $200.0 million aggregate
principal amount of Notes, of which $110.0 million are issued and outstanding;
provided that any Notes issued after the Issue Date shall only be issued in
minimum increments of $10.0 million and in compliance with the covenant
described under "- Certain Covenants- Limitation on Indebtedness and the
restrictions contained in the New Credit Facility. The Notes mature on December
1, 2007. Each Note bears interest at the rate of 12.0% per annum from the date
of issuance, or from the most recent date to which interest has been paid or
provided for, and is payable semiannually on June 1 and December 1 of each year
(each an "Interest Payment Date"), commencing on June 1, 1998, to holders of
record at the close of business on the May 15 or November 15 immediately
preceding the Interest Payment Date. The interest rate on the Notes is subject
to increase under certain circumstances. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months. The Notes will not be
entitled to the benefit of any mandatory sinking fund.
Optional Redemption
Except as set forth below, the Notes will not be redeemable at the option
of COI prior to December 1, 2002. On and after such date, the Notes will be
redeemable, at COI's option, in whole or in part, at any time upon not less than
30 nor more than 60 days' prior notice mailed by first-class mail to each
holder's registered address, at the following redemption prices (expressed in
percentages of principal amount), if redeemed during the 12-month period
commencing on December 1 of the years set forth below, plus accrued and unpaid
interest to the redemption date (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant Interest
Payment Date):
Period Redemption
- ------ Price
-----
2002........................................................... 106.000%
2003........................................................... 104.000%
2004........................................................... 102.000%
2005 and thereafter............................................ 100.000%
Optional Redemption Upon Equity Offering. In addition, at any time prior to
December 1, 2000, COI may, at its option, redeem up to 35% of the aggregate
principal amount of the Notes, with net cash proceeds of one or more Equity
Offerings by COMFORCE Corporation so long as there is a Public Market at the
time of such redemption, at a redemption price equal to 112.000% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the date of redemption; provided, however, that after any such redemption the
aggregate principal amount of the Notes outstanding must equal at least 65% of
the Notes issued as of the date of such redemption under the Notes Indenture. In
order to effect the foregoing redemption with the proceeds of any Equity
Offering, COI shall make such redemption not more than 90 days after the
consummation of any such Equity Offering.
Selection. In the case of any partial redemption, selection of the Notes
for redemption will be made by the Notes Trustee on a pro rata basis, by lot or
by such other method as the Notes Trustee in its sole discretion shall deem to
be fair and appropriate; provided, however, that if a partial redemption is made
with proceeds of an Equity Offering, selection of the Notes or portion thereof
for redemption shall be made by the Notes Trustee only on a pro rata basis,
unless such method is otherwise prohibited. Notes may be redeemed in part in
multiples of $1,000 principal
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amount only. Notice of redemption will be sent, by first class mail, postage
prepaid, at least 45 days (unless a shorter period is acceptable to the Notes
Trustee) prior to the date fixed for redemption to each holder whose Notes are
to be redeemed at the last address for such holder then shown on the registry
books. If any Note is to be redeemed in part only, the notice of redemption that
relates to such Note shall state the portion of the principal amount thereof to
be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original Note. On and after any redemption date, interest will cease to
accrue on the Notes or part thereof called for redemption as long as COI has
deposited with the Paying Agent funds in satisfaction of the redemption price
pursuant to the Notes Indenture.
Fraudulent Conveyance
The use of the proceeds of the debt (including the Notes) incurred in
connection with the Uniforce Acquisition and the Refinancing may subject such
incurrence of debt and the obligations of COI under the Notes to review by a
court under relevant federal bankruptcy and state fraudulent conveyance and
transfer statutes and, if a court makes certain findings, it could take certain
actions detrimental to the holders of the Notes. See "Risk Factors-Fraudulent
Conveyance Considerations."
Ranking
The Notes are senior unsecured obligations of COI. The Notes rank pari
passu in right of payment with all existing and future senior indebtedness of
COI and will rank senior in right of payment to any future subordinated
indebtedness of COI. As of September 30, 1997, on a pro forma basis, after
giving effect to the Transactions, the aggregate principal amount of COI's
outstanding senior indebtedness would be approximately $142.8 million. The Notes
are effectively subordinated to any secured debt of COI, to the extent of the
assets serving as security therefor. The Notes are structurally subordinated to
all liabilities of COI's direct and indirect subsidiaries. As of September 30,
1997, on a pro forma basis after giving effect to the Transactions, the
aggregate principal amount of COI's outstanding secured indebtedness to which
the Notes would have been effectively subordinated, to the extent of the assets
serving as security therefor, would have been approximately $37.8 million and
the aggregate amount of the outstanding liabilities of subsidiaries of COI to
which holders of Notes would be structurally subordinated would have been $59.6
million (including $37.8 million of indebtedness).
Change of Control
Upon the occurrence of any of the following events (each a "Change of
Control"), each holder will have the right to require COI to repurchase all or
any part of such holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of repurchase (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant Interest Payment Date): (i) any
sale, lease, exchange or other transfer (collectively, a "Transfer") (in one
transaction or a series of related transactions) of all or substantially all of
the assets of COI and its Subsidiaries; or (ii) a majority of the Board of
Directors of the Company or of any direct or indirect holding company thereof
shall consist of Persons who are not Continuing Directors of the Company; or
(iii) the acquisition by any Person or Group (other than the Management Group)
of the power, directly or indirectly, to vote or direct the voting of securities
having more than 35% of the ordinary voting power for the election of directors
of the Company or of any direct or indirect holding company thereof; provided
that no Change of Control shall be deemed to occur pursuant to this clause
(iii), so long as the Management Group owns an amount of securities representing
a greater portion of such ordinary voting power than such Person or Group; or
(iv) the acquisition by any Person or Group (including, but not limited to, the
Management Group) of the power, directly or indirectly, to vote or direct the
voting of securities having more than 49.9% of the ordinary voting power for the
election of directors of the Company or any direct or indirect holding company
thereof; or (v) COMFORCE Corporation ceases to own all of the outstanding Voting
Stock of COI.
Within 30 days following any Change of Control, unless COI has mailed a
repurchase notice with respect to all the outstanding Notes in connection with
such Change of Control, COI shall mail a notice to each holder with
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a copy to the Notes Trustee stating: (1) that a Change of Control has occurred
and that such holder has the right to require COI to repurchase such holder's
Notes at a purchase price in cash equal to 101% of the principal amount thereof
plus accrued and unpaid interest thereon, if any, to the date of repurchase
(subject to the right of holders of record on a record date to receive interest
on the relevant Interest Payment Date); (2) the repurchase date (which shall be
no earlier than 30 days nor later than 60 days from the date such notice is
mailed); and (3) the procedures determined by COI, consistent with the Notes
Indenture, that a holder must follow in order to have its Notes repurchased.
COI will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of Notes pursuant to this covenant. To the extent
that the provisions of any securities laws or regulations conflict with
provisions of the Notes Indenture, COI will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Notes Indenture by virtue thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of COI and
its Subsidiaries. With respect to the disposition of property or assets, the
phrase "all or substantially all" as used in the Notes Indenture varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (which is the law which governs
the Notes Indenture) and is subject to judicial interpretation. Accordingly, in
certain circumstances there may be a degree of uncertainty in ascertaining
whether a particular transaction would involve a disposition of "all or
substantially all" of the property or assets of a Person, and therefore it may
be unclear as to whether a Change of Control has occurred and whether COI is
required to make an offer to repurchase the Notes as described above.
The occurrence of certain of the events that would constitute a Change of
Control would also constitute a default under the New Credit Facility. Future
senior indebtedness of COI and its Subsidiaries may also contain prohibitions of
certain events that would constitute a Change of Control or require such senior
indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the holders of their right to require COI to repurchase the Notes could cause
a default under such senior indebtedness, even if the Change of Control itself
does not, due to the financial effect of such repurchase of COI. Finally, COI's
ability to pay cash to the holders upon a repurchase may be limited by COI's
then existing financial resources. There can be no assurance that sufficient
funds will be available when necessary to make any required repurchases. Even if
sufficient funds were otherwise available to allow COI to comply with its
repurchase obligations in the event of a Change of Control, the terms of the New
Credit Facility may prohibit COI's prepayment of Notes prior to their scheduled
maturity. The Notes Indenture provides, so long as COI is primarily obligated
under or has guaranteed the repayment of principal and interest on the New
Credit Facility, that prior to the mailing of a redemption notice in respect of
a Change of Control, but in any event within 30 days following any Change of
Control, COI covenants to, if at such time the terms of the New Credit Facility
require repayment upon a Change of Control, (i) repay in full and terminate all
commitments and Indebtedness under the New Credit Facility or (ii)(A) offer to
repay in full and terminate all commitments and all Indebtedness under the New
Credit Facility and (B) repay the Indebtedness owed to each such lender that has
accepted such offer or (iii) obtain the requisite consents under the New Credit
Facility to waive the provisions of this sentence. Consequently, if COI is not
able to prepay the Indebtedness under the New Credit Facility and any other
senior indebtedness containing similar restrictions or obtain requisite
consents, as described above, COI will be unable to fulfill its repurchase
obligations if holders of Notes exercise their repurchase rights following a
Change of Control, thereby resulting in an Event of Default under the Notes
Indenture.
Certain Covenants
The Notes Indenture contains certain covenants including, among others, the
following:
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Limitation on Indebtedness.
(a) COI shall not, and shall not permit any of its Restricted Subsidiaries
to Incur any Indebtedness; provided, however, that: (i) COI may Incur
Indebtedness which is subordinated to the Notes, if no Default or Event of
Default shall have occurred and be continuing at the time of such Incurrence or
would occur as a consequence of such Incurrence, the Consolidated Coverage Ratio
would be equal to at least 1.50 to 1.00; provided that no such Indebtedness
(other than Indebtedness issued by the Company to a seller of a Permitted
Business) shall have a Stated Maturity which is earlier than the Stated Maturity
of the Notes; and (ii) COI may Incur Indebtedness ranking on a parity with the
Notes if no Default or Event of Default shall have occurred and be continuing at
the time of such Incurrence or would occur as a consequence of such Incurrence
and the Consolidated Coverage Ratio would be at least equal to 2.25 to 1.00.
(b) Notwithstanding the foregoing paragraph (a), COI and its Restricted
Subsidiaries may Incur the following Indebtedness:
(i) Indebtedness Incurred pursuant to the New Credit Facility
(including, without limitation, any renewal, extension, refunding,
restructuring, replacement or refinancing thereof referred to in the
definition thereof) provided, however, that the aggregate principal amount
of all Indebtedness Incurred pursuant to this clause (i) does not exceed
$75.0 million at any time outstanding, less the aggregate principal amount
thereof repaid with the net proceeds of Asset Dispositions;
(ii) Indebtedness represented by Capitalized Lease Obligations,
mortgage financing or purchase money obligations, in each case Incurred for
the purpose of financing all or any part of the purchase price or cost of
construction or improvement of property used in a Permitted Business or
Incurred to refinance any such purchase price or cost of construction or
improvement, in each case Incurred no later than 365 days after the date of
such acquisition or the date of completion of such construction or
improvement; provided, however, that the principal amount of any
Indebtedness Incurred pursuant to this clause (ii) shall not exceed $5.0
million at any time outstanding;
(iii) Indebtedness of COI owing to and held by any Wholly-Owned
Subsidiary or Indebtedness of a Restricted Subsidiary owing to and held by
COI or any Wholly-Owned Subsidiary; provided, however, that any subsequent
issuance or transfer of any Capital Stock or any other event which results
in any such Wholly-Owned Subsidiary ceasing to be a Wholly-Owned Subsidiary
or any subsequent transfer of any such Indebtedness (except to COI or any
Wholly-Owned Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the issuer thereof;
(iv) Indebtedness represented by (a) the Notes and the Exchange Notes,
(b) Existing Indebtedness and (c) any Refinancing Indebtedness Incurred in
respect of any Indebtedness described in this clause (iv) or Incurred
pursuant to paragraph (a) above;
(v) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on the date on which such Restricted Subsidiary was acquired by
COI (other than Indebtedness Incurred in anticipation of, or to provide all
or any portion of the funds or credit support utilized to consummate the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Subsidiary or was otherwise acquired by
COI); provided, however, that at the time such Restricted Subsidiary is
acquired by COI, COI would have been able to Incur $1.00 of additional
Indebtedness pursuant to paragraph (a) above after giving effect to the
Incurrence of such Indebtedness pursuant to this clause (v) and (B)
Refinancing Indebtedness Incurred by a Restricted Subsidiary in respect of
Indebtedness Incurred by such Restricted Subsidiary pursuant to this clause
(v);
(vi) Indebtedness (A) in respect of performance bonds, bankers'
acceptances and surety or appeal bonds provided by COI or any of its
Restricted Subsidiaries to their customers in the ordinary course of their
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business, (B) in respect of performance bonds or similar obligations of COI
or any of its Restricted Subsidiaries for or in connection with pledges,
deposits or payments made or given in the ordinary course of business in
connection with or to secure statutory, regulatory or similar obligations,
including obligations under health, safety or environmental obligations and
(C) arising from Guarantees to suppliers, lessors, licensees, contractors,
franchises or customers of obligations (other than Indebtedness) incurred
in the ordinary course of business;
(vii) Indebtedness under Currency Agreements and Interest Rate
Agreements; provided, however, that in the case of Currency Agreements and
Interest Rate Agreements, such Currency Agreements and Interest Rate
Agreements are entered into for bona fide hedging purposes of COI or its
Restricted Subsidiaries (as determined in good faith by the Board of
Directors of COI) and correspond in terms of notional amount, duration,
currencies and interest rates as applicable, to Indebtedness of COI or its
Restricted Subsidiaries Incurred without violation of the Notes Indenture
or to business transactions of COI or its Restricted Subsidiaries on
customary terms entered into in the ordinary course of business;
(viii) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from Guarantees or letters of credits, surety bonds or performance bonds
securing any obligations of COI or any of its Restricted Subsidiaries
pursuant to such agreements, in each case Incurred in connection with the
disposition of any business assets or Restricted Subsidiary of COI (other
than Guarantees of Indebtedness or other obligations incurred by any Person
acquiring all or any portion of such business assets or Restricted
Subsidiary of COI for the purpose of financing such acquisition) in a
principal amount not to exceed the gross proceeds actually received by COI
or any of its Restricted Subsidiaries in connection with such disposition;
provided, however, that the principal amount of any Indebtedness incurred
pursuant to this clause (viii) when taken together with all Indebtedness
incurred pursuant to this clause (viii) and then outstanding, shall not
exceed $2.0 million;
(ix) Indebtedness consisting of (A) Guarantees by COI (so long as COI
could have incurred such Indebtedness directly without violation of the
Notes Indenture) and (B) Guarantees by a Restricted Subsidiary of
Indebtedness incurred by COI without violation of the Notes Indenture (so
long as such Restricted Subsidiary could have incurred such Indebtedness
directly without violation of the Notes Indenture);
(x) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument issued by COI
or its Subsidiaries drawn against insufficient funds in the ordinary course
of business in an amount not to exceed $250,000 at any time, provided that
such Indebtedness is extinguished within two business days of its
incurrence; and
(xi) Indebtedness (other than Indebtedness described in clauses
(i)-(x)) in a principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this clause
(xi) and then outstanding, will not exceed $10.0 million (it being
understood that any Indebtedness Incurred under this clause (xi) shall
cease to be deemed Incurred or outstanding for purposes of this clause (xi)
(but shall be deemed to be Incurred for purposes of paragraph (a)) from and
after the first date on which COI or its Restricted Subsidiaries could have
Incurred such Indebtedness under the foregoing paragraph (a) without
reliance upon this clause (xi)).
(c) COI will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt.
Limitation on Restricted Payments. (a) COI shall not, and shall not permit
any of its Restricted Subsidiaries, directly or indirectly, to (i) declare or
pay any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
COI or any of its Restricted Subsidiaries) except (A) dividends or distributions
payable in its Capital Stock (other than Disqualified Stock) or in options,
warrants or other rights to purchase such Capital Stock and dividends in
additional shares of Preferred Stock of COI outstanding on the Issue Date, (B)
dividends or distributions payable to COI or a Restricted Subsidiary of COI
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which holds any equity interest in the paying Restricted Subsidiary (and if the
Restricted Subsidiary paying the dividend or making the distribution is not a
Wholly-Owned Subsidiary, to its other holders of Capital Stock on a pro rata
basis), (C) dividends, or other distributions in an amount equal to the "public
company" expenses of COMFORCE, including, but not limited to, legal, regulatory
compliance and accounting expenses, in any event not to exceed $1.25 million in
any fiscal year and (D) dividends payable out of Net Available Cash resulting
from an Asset Disposition to the extent, and only to the extent, that (x) such
amount will be used to comply with the covenant described in "Description of
Senior Debentures-Limitation on Sales of Assets and Subsidiary Stock" and (y)
the Company has previously complied with clauses (A), (B) and (C) of clause
(a)(i) of the covenant described in " -Limitation on Sales of Assets and
Subsidiary Stock", (ii) purchase, redeem, retire or otherwise acquire for value
any Capital Stock of COI held by Persons other than a Wholly-Owned Subsidiary of
COI or any Capital Stock of a Restricted Subsidiary of COI held by any Affiliate
of COI, other than a Wholly-Owned Subsidiary (in either case, other than in
exchange for its Capital Stock (other than Disqualified Stock)), (iii) purchase,
repurchase, redeem, defease or otherwise acquire or retire for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment, any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of purchase, repurchase or acquisition) or (iv)
make any Investment (other than a Permitted Investment) in any Person (any such
dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement or Investment as described in preceding clauses (i)
through (iv) being referred to as a "Restricted Payment"); if at the time COI or
such Restricted Subsidiary makes such Restricted Payment: (1) a Default shall
have occurred and be continuing (or would result therefrom); or (2) COI is not
able to incur an additional $1.00 of Indebtedness pursuant to paragraph (a)
under "-Limitation on Indebtedness"; or (3) the aggregate amount of such
Restricted Payment and all other Restricted Payments declared or made subsequent
to the Issue Date would exceed the sum of (A) 50% of the Consolidated Net Income
accrued during the period (treated as one accounting period) from the first day
of the fiscal quarter beginning on or after the Issue Date to the end of the
most recent fiscal quarter ending prior to the date of such Restricted Payment
as to which financial results are available (but in no event ending more than
135 days prior to the date of such Restricted Payment) (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such deficit); (B) the
aggregate net proceeds received by COI from the issue or sale of its Capital
Stock (other than Disqualified Stock) or other capital contributions subsequent
to the Issue Date (other than net proceeds received from an issuance or sale of
such Capital Stock to (x) a Subsidiary of COI, (y) an employee stock ownership
plan or similar trust or (z) management employees of COI or any Subsidiary of
COI); provided, however, that the value of any non-cash net proceeds shall be as
determined by the Board of Directors in good faith, except that in the event the
value of any non-cash net proceeds shall be $2.0 million or more, the value
shall be as determined in writing by an independent investment banking firm of
nationally recognized standing; (C) the amount by which Indebtedness of COI is
reduced on COI's balance sheet upon the conversion or exchange (other than by a
Restricted Subsidiary of COI) subsequent to the Issue Date of any Indebtedness
of COI convertible or exchangeable for Capital Stock (other than Disqualified
Stock) of COI (less the amount of any cash, or other property, distributed by
COI upon such conversion or exchange); and (D) the amount equal to the net
reduction in Investments (other than Permitted Investments) made after the Issue
Date by COI or any of its Restricted Subsidiaries in any Person resulting from
(i) repurchases or redemptions of such Investments by such Person, proceeds
realized upon the sale of such Investment to an unaffiliated purchaser,
repayments of loans or advances or other transfers of assets by such Person to
COI or any Restricted Subsidiary of COI or (ii) the redesignation of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investment") not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously included in the
calculation of the amount of Restricted Payments; provided, however, that no
amount shall be included under this Clause (D) to the extent it is already
included in Consolidated Net Income.
(b) The provisions of paragraph (a) shall not prohibit: (i) any purchase or
redemption of Capital Stock or Subordinated Obligations of COI made by exchange
for, or out of the proceeds of the substantially concurrent sale of, Capital
Stock of COI (other than Disqualified Stock and other than Capital Stock issued
or sold to a Subsidiary, an employee stock ownership plan or similar trust or
management employees of COI or any Subsidiary of COI); provided, however, that
(A) such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall
be excluded from clause (3) (B) of paragraph
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(a); (ii) any purchase or redemption of Subordinated Obligations of COI made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Subordinated Obligations of COI in compliance with the "Limitation on
Indebtedness" covenant; provided, however, that such purchase or redemption
shall be excluded in the calculation of the amount of Restricted Payments; (iii)
any purchase or redemption of Subordinated Obligations from Net Available Cash
to the extent permitted under "- Limitation on Sales of Assets and Subsidiary
Stock" below; provided, however, that such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments; and (iv)
dividends paid within 60 days after the date of declaration if at such date of
declaration such dividend would have complied with this provision; provided,
however, that such dividend shall be included in the calculation of the amount
of Restricted Payments; provided, however, that in the case of clauses (i), (ii)
and (iii) no Default or Event of Default shall have occurred or be continuing at
the time of such payment or as a result thereof.
(c) For purposes of determining compliance with the foregoing covenant,
Restricted Payments may be made with cash or non-cash assets, provided that any
Restricted Payment made other than in cash shall be valued at the fair market
value (determined, subject to the additional requirements of the immediately
succeeding proviso, in good faith by the Board of Directors) of the assets so
utilized in making such Restricted Payment, provided, further that (i) in the
case of any Restricted Payment made with Capital Stock or Indebtedness, such
Restricted Payment shall be deemed to be made in an amount equal to the greater
of the fair market value thereof and the liquidation preference (if any) or
principal amount of the Capital Stock or Indebtedness, as the case may be, so
utilized, and (ii) in the case of any Restricted Payment in an aggregate amount
in excess of $2.0 million, a written opinion as to the fairness of the valuation
thereof (as determined by COI) for purposes of determining compliance with the
"Limitation on Restricted Payments" covenant in the Notes Indenture shall be
issued by an independent investment banking firm of national standing.
(d) Not later than the date of making any Restricted Payment, COI shall
deliver to the Notes Trustee an Officer's Certificate stating that such
Restricted Payment complies with the Notes Indenture and setting forth in
reasonable detail the basis upon which the required calculations were computed,
which calculations may be based upon COI's latest available quarterly financial
statements and a copy of any required investment banker's opinion.
Limitation on Liens. The Notes Indenture provides that COI will not and
will not permit any Restricted Subsidiary to, directly or indirectly, create or
permit to exist any Liens except for Permitted Liens.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
COI shall not, and shall not permit any of its Restricted Subsidiaries to,
create or permit to exist or become effective any consensual encumbrance or
restriction on the ability of any such Restricted Subsidiary to (i) pay
dividends or make any other distributions on its Capital Stock or pay any
Indebtedness or other obligation owed to COI, (ii) make any loans or advances to
COI or (iii) transfer any of its property or assets to COI, except: (a) any
encumbrance or restriction pursuant to an agreement in effect at or entered into
on the Issue Date, including the New Credit Facility; (b) any encumbrance or
restriction with respect to such a Restricted Subsidiary pursuant to an
agreement relating to any Indebtedness issued by such Restricted Subsidiary on
or prior to the date on which such Restricted Subsidiary was acquired by COI and
outstanding on such date (other than Indebtedness Incurred in anticipation of,
or to provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to which
such Restricted Subsidiary became a Restricted Subsidiary of COI or was acquired
by COI); (c) any encumbrance or restriction with respect to such a Restricted
Subsidiary pursuant to an agreement evidencing Indebtedness Incurred without
violation of the Notes Indenture or effecting a refinancing of Indebtedness
issued pursuant to an agreement referred to in clauses (a) or (b) or this clause
(c) or contained in any amendment to an agreement referred to in clauses (a) or
(b) or this clause (c); provided, however, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained in any of such
agreement, refinancing agreement or amendment, taken as a whole, are no less
favorable to the holders of the Notes in any material respect, as determined in
good faith by the Board of Directors of COI, than encumbrances and restrictions
with respect to such Restricted Subsidiary contained in agreements in effect at,
or entered into on, the Issue Date; (d) in the case of clause (iii), any
encumbrance or restriction (A) that restricts in a customary manner the
subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) by virtue of
any transfer of, agreement to transfer, option or right with
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respect to, or Lien on, any property or assets of COI or any Restricted
Subsidiary not otherwise prohibited by the Notes Indenture, (C) that is included
in a licensing agreement to the extent such restrictions limit the transfer of
the property subject to such licensing agreement or (D) arising or agreed to in
the ordinary course of business and that does not, individually or in the
aggregate, detract from the value of property or assets of COI or any of its
Subsidiaries in any manner material to COI or any such Restricted Subsidiary;
(e) in the case of clause (iii) above, restrictions contained in security
agreements, mortgages or similar documents securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the property
subject to such security agreements; (f) in the case of clause (iii) above, any
instrument governing or evidencing Indebtedness of a Person acquired by COI or
any Restricted Subsidiary of COI at the time of such acquisition, which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person so acquired; provided, however, that
such Indebtedness is not incurred in connection with or in contemplation of such
acquisition; (g) any restriction with respect to such a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; and (h) encumbrances or
restrictions arising or existing by reason of applicable law.
Limitation on Sales of Assets and Subsidiary Stock. (a) COI shall not, and
shall not permit any of its Restricted Subsidiaries to, make any Asset
Disposition unless (i) COI or such Restricted Subsidiary receives consideration
at the time of such Asset Disposition at least equal to the fair market value,
as determined in good faith by COI's Board of Directors (including as to the
value of all non-cash consideration), of the shares and assets subject to such
Asset Disposition, (ii) at least 80% of the consideration thereof received by
COI or such Restricted Subsidiary is in the form of cash or Cash Equivalents and
(iii) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by COI (or such Restricted Subsidiary, as the case may
be) (A) first, to the extent COI or any Restricted Subsidiary elects (or is
required by the terms of any senior secured indebtedness), (x) to prepay, repay
or purchase senior secured indebtedness or (y) to the investment in or
acquisition of Additional Assets within 270 days from the later of the date of
such Asset Disposition or the receipt of such Net Available Cash; (B) second,
within 270 days from the receipt of such Net Available Cash, to the extent of
the balance of such Net Available Cash after application in accordance with
clause (A), to make an offer to purchase Notes at 100% of their principal amount
plus accrued and unpaid interest, if any, thereon; (C) third, within 90 days
after the later of the application of Net Available Cash in accordance with
clauses (A) and (B) and the date that is 270 days from the receipt of such Net
Available Cash, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to prepay, repay or
repurchase Indebtedness (other than Preferred Stock) of a Wholly-Owned
Subsidiary (in each case other than Indebtedness owed to COI); and (D) fourth,
to the extent of the balance of such Net Available Cash after application in
accordance with clauses (A), (B) and (C), to (w) the investment in or
acquisition of Additional Assets, (x) the making of Temporary Cash Investments,
(y) the prepayment, repayment or purchase of Indebtedness of COI (other than
Indebtedness owing to any Subsidiary of COI) or Indebtedness of any Subsidiary
(other than Indebtedness owed to COI or any of its Subsidiaries) or to pay
dividends to COMFORCE Corporation, to the extent, and only to the extent, that
such dividends are used by COMFORCE Corporation to repurchase Senior Debentures
which COMFORCE Corporation is obligated to repurchase pursuant to the covenant
described in "Description of Senior Debentures-Limitation on Sales of Assets and
Subsidiary Stock" or (z) any other purpose otherwise permitted under the Notes
Indenture, in each case within the later of 45 days after the application of Net
Available Cash in accordance with clauses (A), (B) and (C) or the date that is
360 days from the receipt of such Net Available Cash; provided, however, that,
in connection with any prepayment, repayment or purchase of Indebtedness
pursuant to clause (A), (B), (C) or (D) above, COI or such Restricted Subsidiary
shall retire such Indebtedness and shall cause the related loan commitment (if
any) to be permanently reduced in an amount equal to the principal amount so
prepaid, repaid or purchased. Notwithstanding the foregoing provisions, COI and
its Restricted Subsidiaries shall not be required to apply any Net Available
Cash in accordance herewith except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied in accordance
with this covenant at any time exceeds $10.0 million. COI shall not be required
to make an offer for Notes pursuant to this covenant if the Net Available Cash
available therefor (after application of the proceeds as provided in clause (A))
is less than $10.0 million for any particular Asset Disposition (which lesser
amounts shall be carried forward for purposes of determining whether an offer is
required with respect to the Net Available Cash from any subsequent Asset
Disposition).
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For the purposes of this covenant, the following will be deemed to be cash:
(x) the assumption by the transferee of senior indebtedness of COI or senior
indebtedness of any Restricted Subsidiary of COI and the release of COI or such
Restricted Subsidiary from all liability on such senior indebtedness in
connection with such Asset Disposition (in which case COI shall, without further
action, be deemed to have applied such assumed Indebtedness in accordance with
clause (A) of the preceding paragraph) and (y) securities received by COI or any
Restricted Subsidiary of COI from the transferee that are promptly (and in any
event within 60 days) converted by COI or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of
Notes pursuant to clause (a) (iii) (B), COI will be required to purchase Notes
tendered pursuant to an offer by COI for the Notes at a purchase price of 100%
of their principal amount plus accrued and unpaid interest, if any, to the
purchase date in accordance with the procedures (including prorating in the
event of oversubscription) set forth in the Notes Indenture. If the aggregate
purchase price of the Notes tendered pursuant to the offer is less than the Net
Available Cash allotted to the purchase of the Notes, COI will apply the
remaining Net Available Cash in accordance with clauses (a) (iii) (C) or (D)
above.
(c) COI will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to the Notes Indenture. To
the extent that the provisions of any securities laws or regulations conflict
with provisions of this covenant, COI will comply with the applicable securities
laws and regulations and will not be deemed to have breached its obligations
under the Notes Indenture by virtue thereof.
Limitation on Affiliate Transactions. (a) COI will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, enter into or
conduct any transaction or series of related transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with or for the benefit of any Affiliate of COI, other than a
Wholly-Owned Subsidiary (an "Affiliate Transaction") unless: (i) the terms of
such Affiliate Transaction are no less favorable to COI or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time of
such transaction in arm's length dealings with a Person who is not such an
Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $500,000, the terms of such transaction have been approved
by a majority of the members of the Board of Directors of COI and by a majority
of the disinterested members of such Board, if any (and such majority or
majorities, as the case may be, determines that such Affiliate Transaction
satisfies the criteria in (i) above); and (iii) in the event such Affiliate
Transaction involves an aggregate amount in excess of $1.0 million, COI has
received a written opinion from an independent investment banking firm of
nationally recognized standing that such Affiliate Transaction is fair to COI or
such Restricted Subsidiary, as the case may be, from a financial point of view.
(b) The foregoing paragraph (a) shall not apply to (i) any Restricted
Payment permitted to be made pursuant to the covenant described under "-
Limitation on Restricted Payments," (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, or any stock options and stock ownership
plans for the benefit of employees, officers and directors, consultants and
advisors approved by the Board of Directors of COI, (iii) loans or advances to
employees in the ordinary course of business of COI or any of its Restricted
Subsidiaries in aggregate amount outstanding not to exceed $250,000 to any
employee or $1.0 million in the aggregate at any time, (iv) any transaction
between Wholly-Owned Subsidiaries, (v) indemnification agreements with, and the
payment of fees and indemnities to, directors, officers and employees of COI and
its Restricted Subsidiaries, in each case in the ordinary course of business,
(vi) transactions pursuant to agreements in existence on the Issue Date which
are (x) described in the Prospectus or (y) otherwise, in the aggregate,
immaterial to COI and its Restricted Subsidiaries taken as a whole, (vii) any
employment, non-competition or confidentiality agreements entered into by COI or
any of its Restricted Subsidiaries with its employees in the ordinary course of
business, (viii) the issuance of Capital Stock of COI (other than Disqualified
Stock).
Limitation on Issuances of Capital Stock of Restricted Subsidiaries. COI
will not permit any of its Restricted Subsidiaries to issue any Capital Stock to
any Person (other than to COI or a Wholly-Owned Subsidiary of COI) or permit any
Person (other than COI or a Wholly-Owned Subsidiary of COI) to own any Capital
Stock of a Restricted
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Subsidiary of COI, if in either case as a result thereof such Restricted
Subsidiary would no longer be a Restricted Subsidiary of COI; provided, however,
that this provision shall not prohibit (x) COI or any of its Restricted
Subsidiaries from selling, leasing or otherwise disposing of all of the Capital
Stock of any Restricted Subsidiary or (y) the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary in compliance with the Notes Indenture.
Limitation on Sale/Leaseback Transactions. COI will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, enter into,
Guarantee or otherwise become liable with respect to any Sale/Leaseback
Transaction with respect to any property or assets unless (i) COI or such
Restricted Subsidiary, as the case may be, would be entitled, pursuant to the
Notes Indenture, to Incur Indebtedness secured by a Permitted Lien on such
property or assets in an amount equal to the Attributable Indebtedness with
respect to such Sale/Leaseback Transaction, (ii) the Net Cash Proceeds from such
Sale/Leaseback Transaction are at least equal to the fair market value of the
property or assets subject to such Sale/Leaseback Transaction (such fair market
value determined, in the event such property or assets have a fair market value
in excess of $1.0 million, no more than 30 days prior to the effective date of
such Sale/Leaseback Transaction, by the Board of Directors of COI as evidenced
by a resolution of such Board) and (iii) the net cash proceeds of such
Sale/Leaseback Transaction are applied in accordance with the provisions
described under "- Limitation on Sales of Assets and Subsidiary Stock."
SEC Reports. COI will file with the Notes Trustee and provide to the
holders of the Notes, within 15 days after it files them with the Commission,
copies of the annual reports and of the information, documents and other reports
(or copies of such portions of any of the foregoing as the Commission may by
rules and regulations prescribe) which COI files with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act. In the event that COI is not required
to file such reports with the Commission pursuant to the Exchange Act, COI will
nevertheless deliver such Exchange Act information to the holders of the Notes
within 15 days after it would have been required to file it with the Commission.
Limitation on Designations of Unrestricted Subsidiaries. COI may designate
any Subsidiary of COI (other than a Subsidiary of COI which owns Capital Stock
of a Restricted Subsidiary) as an "Unrestricted Subsidiary" under the Notes
Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) COI would be permitted under the Notes Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of
(i) fair market value of the Capital Stock of such Subsidiary owned by COI
and the Restricted Subsidiaries on such date and (ii) the aggregate amount
of other Investments of COI and the Restricted Subsidiaries in such
Subsidiary on such date; and
(c) COI would be permitted to incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the covenant described
under "-Limitation on Indebtedness" at the time of Designation (assuming
the effectiveness of such Designation).
In the event of any such Designation, COI shall be deemed to have made an
Investment constituting a Restricted Payment pursuant to the covenant described
under "-Limitation on Restricted Payments" for all purposes of the Notes
Indenture in the Designation Amount. The Notes Indenture further provides that
COI shall not, and shall not permit any Restricted Subsidiary to, at any time
(x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including of any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary
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(including any right to take enforcement action against such Unrestricted
Subsidiary), except, in the case of clause (x) or (y), to the extent permitted
under the covenant described under "-Limitation on Restricted Payments."
The Notes Indenture further provides that COI may revoke any Designation of
a Subsidiary as an Unrestricted Subsidiary (a "Revocation"), whereupon such
Subsidiary shall then constitute a Restricted Subsidiary, if:
(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the Notes
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
COI delivered to the Notes Trustee certifying compliance with the foregoing
provisions.
Merger and Consolidation. COI shall not consolidate with or merge with or
into, or convey, transfer or lease all or substantially all of its assets to,
any Person, unless: (i) the resulting, surviving or transferee Person (the
"Successor Issuer") shall be a corporation, partnership, trust or limited
liability company organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Issuer
(if not COI) shall expressly assume, by supplemental indenture, executed and
delivered to the Notes Trustee, in form satisfactory to the Notes Trustee, all
the obligations of COI under the Notes and the Notes Indenture; (ii) immediately
after giving effect to such transaction (and treating any Indebtedness that
becomes an obligation of the Successor Issuer or any Subsidiary of the Successor
Issuer as a result of such transaction as having been incurred by the Successor
Issuer or such Restricted Subsidiary at the time of such transaction), no
Default or Event of Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction, the Successor Issuer (A)
shall have a Consolidated Net Worth equal or greater to the Consolidated Net
Worth of COI immediately prior to such transaction and (B) shall be able to
incur at least an additional $1.00 of Indebtedness pursuant to paragraph (a) of
"Limitation on Indebtedness"; and (iv) COI shall have delivered to the Notes
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Notes Indenture; and (v) there has been delivered to the Notes
Trustee an Opinion of Counsel to the effect that holders of Notes will not
recognize income, gain or loss for U.S. federal income tax purposes as a result
of such consolidation, merger, conveyance, transfer or lease and will be subject
to U.S. federal income tax on the same amount and in the same manner and at the
same times as would have been the case if such consolidation, merger,
conveyance, transfer or lease had not occurred.
The Successor Issuer will succeed to, and be substituted for, and may
exercise every right and power of, COI under the Notes Indenture, but, in the
case of a lease of all or substantially all its assets, COI will not be released
from the obligation to pay the principal of and interest on the Notes.
Notwithstanding the foregoing clauses (ii) and (iii), (1) any Restricted
Subsidiary of COI may consolidate with, merge into or transfer all or part of
its properties and assets to COI.
Events of Default
Each of the following constitutes an Event of Default under the Notes
Indenture: (i) a default in any payment of interest on any Note when due,
continued for 30 days, (ii) a default in the payment of principal or premium of
any Note when due at its Stated Maturity, upon optional or mandatory redemption,
upon required repurchase, upon declaration or otherwise, (iii) the failure by
COI to comply with its obligations under the "Merger and Consolidation" covenant
described under "-Certain Covenants" above, (iv) the failure by COI to comply
for 30 days after notice with any of its obligations under the covenants
described under "-Change of Control" above or under covenants described under
"-Certain Covenants" above (in each case, other than a failure to purchase Notes
which shall constitute an Event
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of Default under clause (ii) above), other than "Merger and Consolidation," (v)
the failure by COI to comply for 60 days after notice with its other agreements
contained in the Notes Indenture, (vi) Indebtedness of COI or any Restricted
Subsidiary is not paid within any applicable grace period after final maturity
or is accelerated by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $1.0 million and such
default shall not have been cured or such acceleration rescinded after a 10-day
period, (vii) certain events of bankruptcy, insolvency or reorganization of COI
or a Significant Subsidiary (the "bankruptcy provisions") or (viii) any judgment
or decree for the payment of money in excess of $1.0 million (to the extent not
covered by insurance) is rendered against COI or a Significant Subsidiary and
such judgment or decree shall remain undischarged or unstayed for a period of 60
days after such judgment becomes final and non- appealable (the "judgment
default provision"). However, a default under clause (iv) or (v) will not
constitute an Event of Default until the Notes Trustee or the holders of 25% in
principal amount of all outstanding series of Notes, voting as a single class,
notify COI of the default and COI does not cure such default within the time
specified in clause (iv) or (v) after receipt of such notice.
If an Event of Default occurs and is continuing, the Notes Trustee or the
holders of at least 25% in principal amount of all outstanding series of Notes,
voting as a single class, by notice to COI may declare the principal of and
premium and accrued and unpaid interest, if any, on all the Notes to be due and
payable. Upon such a declaration, such principal and premium and accrued and
unpaid interest shall be due and payable immediately. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of COI
occurs, the principal of and premium and accrued and unpaid interest on all the
Notes will become and be immediately due and payable without any declaration or
other act on the part of the Notes Trustee or any holders. Under certain
circumstances, the holders of a majority in principal amount of all outstanding
series of Notes, voting as a single class, may rescind any such acceleration
with respect to the Notes and its consequences.
Subject to the provisions of the Notes Indenture relating to the duties of
the Notes Trustee, if an Event of Default occurs and is continuing, the Notes
Trustee will be under no obligation to exercise any of the rights or powers
under the Notes Indenture at the request or direction of any of the holders
unless such holders have offered to the Notes Trustee reasonable indemnity or
security against any loss, liability or expense. Except to enforce the right to
receive payment of principal, premium (if any) or interest when due, no holder
may pursue any remedy with respect to the Notes Indenture or the Notes unless
(i) such holder has previously given the Notes Trustee notice that an Event of
Default is continuing, (ii) holders of at least 25% in principal amount of all
outstanding series of Notes, voting as a single class, have requested the Notes
Trustee to pursue the remedy, (iii) such holders have offered the Notes Trustee
reasonable security or indemnity against any loss, liability or expense, (iv)
the Notes Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity and (v) the
holders of a majority in principal amount of all series of outstanding Notes,
acting as a single class, have not given the Notes Trustee a direction that, in
the opinion of the Notes Trustee, is inconsistent with such request within such
60-day period. Subject to certain restrictions, the holders of a majority in
principal amount of all outstanding series of Notes, voting as a single class,
are given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Notes Trustee or of exercising any
trust or power conferred on the Notes Trustee. The Notes Trustee, however, may
refuse to follow any direction that conflicts with law or the Notes Indenture or
that the Notes Trustee determines is unduly prejudicial to the rights of any
other holder or that would involve the Notes Trustee in personal liability.
Prior to taking any action under the Notes Indenture, the Notes Trustee shall be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.
The Notes Indenture provides that if a Default occurs and is continuing and
is known to the Notes Trustee, the Notes Trustee must mail to each holder notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal of, premium (if any) or interest on any Note, the
Notes Trustee may withhold notice if and so long as its board of directors, a
committee of its board of directors or a committee of its Trust officers in good
faith determines that withholding notice is in the interests of the Noteholders.
In addition, COI is required to deliver to the Notes Trustee, within 90 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. COI also is
required to deliver to the
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Notes Trustee, within 30 days after the occurrence thereof, written notice of
any events which would constitute certain Defaults.
Amendments and Waivers
Subject to certain exceptions, the Notes Indenture may be amended with the
consent of the holders of a majority in principal amount of all outstanding
series of Notes, voting as a single class, then outstanding and any past default
or compliance with any provisions may be waived with the consent of the holders
of a majority in principal amount of all outstanding series of Notes, voting as
a single class. However, without the consent of each holder of an outstanding
Note affected, no amendment may, among other things, (i) reduce the amount of
Notes whose holders must consent to an amendment, (ii) reduce the stated rate of
or extend the stated time for payment of interest on any Note, (iii) reduce the
principal of or extend the Stated Maturity of any Note, (iv) reduce the premium
payable upon the redemption or repurchase of any Note or change the time at
which any Note may be redeemed as described under "-Optional Redemption" above,
(v) make any Note payable in money other than that stated in the Note, (vi)
impair the right of any holder to receive payment of principal of and interest
on such holder's Notes on or after the due dates therefor or to institute suit
for the enforcement of any payment on or with respect to such holder's Notes or
(vii) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Without the consent of any holder, COI and the Notes Trustee may amend the
Notes Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation, partnership, trust or
limited liability company of the obligations of COI under the Notes Indenture
(provided that there has been delivered to the Notes Trustee an Opinion of
Counsel to the effect that holders of Notes will not recognize income, gain or
loss for U.S. federal income tax purposes as a result of such assumption and
will be subject to U.S. federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such assumption had
not occurred), to provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner such
that the uncertificated Notes are described in Section 163 (f) (2) (B) of the
Code), to add further Guarantees with respect to the Notes, to secure the Notes,
to add to the covenants of COI for the benefit of the holders or to surrender
any right or power conferred upon COI, to make any change that does not
adversely affect the rights of any holder or to comply with any requirement of
the Commission in connection with the qualification of the Notes Indenture under
the Trust Indenture Act.
The consent of the holders is not necessary under the Notes Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Notes Indenture becomes effective, COI is
required to mail to the holders a notice briefly describing such amendment.
However, the failure to give such notice to all the holders or any defect
therein, will not impair or affect the validity of the amendment.
Defeasance
COI at any time may terminate all its obligations under the Notes and the
Notes Indenture ("legal defeasance"), except for certain obligations, including
those respecting the defeasance trust and obligations to register the transfer
or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes
and to maintain a registrar and paying agent in respect of the Notes. COI at any
time may terminate its obligations under covenants described under "-Certain
Covenants" (other than "Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries and the judgment default provision described under "-Events of
Default" above and the limitations contained in clauses (iii) and (iv) under
"-Certain Covenants -Merger and Consolidation" above ("covenant defeasance").
COI may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If COI exercises its legal
defeasance option, payment of the Notes may not be accelerated because of an
Event
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of Default with respect thereto. If COI exercises its covenant defeasance
option, payment of the Notes may not be accelerated because of an Event of
Default specified in clause (iv), (vi), (vii) (with respect only to Significant
Subsidiaries), (viii) or (ix) under "-Events of Default" above or because of the
failure of COI to comply with clause (iii) or (iv) under "-Certain Covenants -
Merger and Consolidation" above.
In order to exercise either defeasance option, COI must irrevocably deposit
in trust (the "defeasance trust") with the Notes Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Notes Trustee of
an Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to Federal income tax on the same amount and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law.
Satisfaction and Discharge of the Notes Indenture
The Notes Indenture will cease to be of further effect (except as otherwise
expressly provided for in the Notes Indenture) when either (i) all outstanding
Notes have been delivered (other than lost, stolen or destroyed Notes which have
been replaced) to the Notes Trustee for cancellation or (ii) all outstanding
Notes have become due and payable, whether at maturity or as a result of the
mailing of a notice of redemption pursuant to the terms of the Notes Indenture
and COI has irrevocably deposited with the Notes Trustee funds sufficient to pay
at maturity or upon redemption all outstanding Notes, including interest thereon
(other than lost, stolen, mutilated or destroyed Notes which have been
replaced), and, in either case, COI has paid all other sums payable under the
Notes Indenture. The Notes Trustee is required to acknowledge satisfaction and
discharge of the Notes Indenture on demand of COI accompanied by an Officer's
Certificate and an Opinion of Counsel at the cost and expense of COI.
Transfer and Exchange
Upon any transfer of a Note, the registrar may require a holder, among
other things, to furnish appropriate endorsements and transfer documents, and to
pay any taxes and fees required by law or permitted by the Notes Indenture. The
registrar is not required to transfer or exchange any Notes selected for
redemption nor is the registrar required to transfer or exchange any Notes for a
period of 15 days before a selection of Notes to be redeemed. The registered
holder of a Note may be treated as the owner of it for all purposes.
Concerning the Notes Trustee
Wilmington Trust Company is the Notes Trustee under the Notes Indenture and
has been appointed by COI as Registrar and Paying Agent with regard to the
Notes.
The Notes Indenture contains certain limitations on the rights of the Notes
Trustee, should it become a creditor of COI, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim a security or otherwise. The Notes Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest (as
defined) it must eliminate such conflict or resign.
The holders of a majority in aggregate principal amount of the then
outstanding Notes issued under the Notes Indenture will have the right to direct
the time, method and place of conducting any proceeding for exercising any
remedy available to the Notes Trustee. The Notes Indenture provides that in case
an Event of Default shall occur (which shall not be cured) the Notes Trustee
will be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
Notes Trustee will be under no obligation to exercise any of its rights or
powers under the Notes Indenture at the request of any of the holders of the
Notes issued thereunder unless they shall have offered to the Notes Trustee
security and indemnity satisfactory to it.
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Governing Law
The Notes Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
Certain Definitions
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Permitted Business; (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by COI or a Restricted Subsidiary of COI; (iii) Capital
Stock constituting a minority interest in any Person that at such time is a
Restricted Subsidiary of COI; or (iv) Permitted Investments of the type and in
the amounts described in clause (viii) of the definition thereof; provided,
however, that, in the case of clauses (ii) and (iii), such Restricted Subsidiary
is primarily engaged in a Permitted Business.
"Affiliate" of any specified person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of (or
any other equity interests in) a Restricted Subsidiary (other than directors'
qualifying shares) or of any other property or other assets (each referred to
for the purposes of this definition as a "disposition") by COI or any of its
Restricted Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction) other than (i) a disposition by a
Restricted Subsidiary to COI or by COI or a Restricted Subsidiary to a
Wholly-Owned Subsidiary, (ii) a disposition of inventory in the ordinary course
of business, (iii) a disposition of obsolete or worn out equipment or equipment
that is no longer useful in the conduct of the business of COI and its
Restricted Subsidiaries and that is disposed of in each case in the ordinary
course of business, (iv) dispositions of property for net proceeds which, when
taken collectively with the net proceeds of any other such dispositions under
this clause (iv) that were consummated since the beginning of the calendar year
in which such disposition is consummated, do not exceed $1.0 million, and (v)
transactions permitted under "-Certain Covenants-Merger and Consolidation"
above. Notwithstanding anything to the contrary contained above, a Restricted
Payment made in compliance with the "Limitation on Restricted Payments" covenant
shall not constitute an Asset Disposition except for purposes of determinations
of the Consolidated Coverage Ratio.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded annually) of the total obligations
of the lessee for rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the sum of the product of
the numbers of years (rounded upwards to the nearest month) from the date of
determination to the dates of each successive scheduled principal payment of
such Indebtedness or redemption multiplied by the amount of such payment by (ii)
the sum of all such payments.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
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"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date such lease may be terminated without penalty.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit, time
deposits and eurodollar time deposits with maturities of one year or less from
the date of acquisition, bankers' acceptances with maturities not exceeding one
year and overnight bank deposits, in each case with any commercial bank having
capital and surplus in excess of $500 million, (iv) repurchase obligations for
underlying securities of the types described in clauses (ii) and (iii) entered
into with any financial institution meeting the qualifications specified in
clause (iii) above, (v) commercial paper rated A-1 or the equivalent thereof by
Moody's or S&P and in each case maturing within one year after the date of
acquisition, (vi) investment funds investing 95% of their assets in securities
of the types described in clauses (i)-(v) above, (vii) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
from either Moody's or S&P and (viii) Indebtedness or preferred stock issued by
Persons with a rating of "A" or higher from S&P or "A2" or higher from Moody's.
"COI" means COMFORCE Operating, Inc., a Delaware corporation.
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization expense, (v) exchange or
translation losses on foreign currencies and (vi) all other non-cash items
reducing Consolidated Net Income (excluding any non-cash item to the extent it
represents an accrual of or reserve for cash disbursements for any subsequent
period prior to the stated maturity of the Notes) and less, (x) the aggregate
amount of contingent and "earnout" payments in respect of any Permitted Business
acquired by COI or any Restricted Subsidiary that are paid in cash during such
period and (y) to the extent added in calculating Consolidated Net Income, (A)
exchange or translation gains on foreign currencies and (B) non-cash items
(excluding such non-cash items to the extent they represent an accrual for cash
receipts reasonably expected to be received prior to the Stated Maturity of the
Notes), in each case for such period. Notwithstanding the foregoing, the income
tax expense, depreciation expense and amortization expense of a Subsidiary of
COI shall be included in Consolidated Cash Flow only to the extent (and in the
same proportion) that the net income of such Subsidiary was included in
calculating Consolidated Net Income.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent four consecutive fiscal quarters ending prior to the date of
such determination and as to which financial statements are available to (ii)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that (A) if COI or any of its Restricted Subsidiaries has incurred any
Indebtedness since the beginning of such period and through the date of
determination of the Consolidated Coverage Ratio that remains outstanding or if
the transaction giving rise to the need to calculate Consolidated Coverage Ratio
is an incurrence of Indebtedness, or both, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to (1) such Indebtedness as if such Indebtedness had
been incurred on the first day of such period (provided that if such
Indebtedness is incurred under a revolving credit facility (or similar
arrangement or under any predecessor revolving credit or similar arrangement)
only that portion of such Indebtedness that constitutes the one year projected
average balance of such Indebtedness (as determined in good faith by the Board
of Directors of COI) shall be deemed outstanding for purposes of this
calculation), and (2) the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day of such period,
(B) if since the beginning of such period any Indebtedness of COI or any of its
Restricted Subsidiaries has been repaid, repurchased, defeased or otherwise
discharged (other than Indebtedness under a revolving credit or similar
arrangement unless such revolving credit Indebtedness has been permanently
repaid and the underlying commitment terminated and has not been
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replaced), Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Indebtedness had been repaid,
repurchased, defeased or otherwise discharged on the first day of such period,
(C) if since the beginning of such period COI or any of its Restricted
Subsidiaries shall have made any Asset Disposition or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Asset
Disposition, Consolidated Cash Flow for such period shall be reduced by an
amount equal to the Consolidated Cash Flow (if positive) attributable to the
assets which are the subject of such Asset Disposition for such period or
increased by an amount equal to the Consolidated Cash Flow (if negative)
attributable thereto for such period, and Consolidated Interest Expense for such
period shall be (i) reduced by an amount equal to the Consolidated Interest
Expense attributable to any Indebtedness of COI or any of its Restricted
Subsidiaries repaid, repurchased, defeased or otherwise discharged with respect
to COI and its continuing Restricted Subsidiaries in connection with such Asset
Disposition for such period (or, if the Capital Stock of any Restricted
Subsidiary of COI is sold, the Consolidated Interest Expense for such period
directly attributable to the Indebtedness of such Restricted Subsidiary to the
extent COI and its continuing Restricted Subsidiaries are no longer liable for
such Indebtedness after such sale) and (ii) increased by interest income
attributable to the assets which are the subject of such Asset Disposition for
such period, (D) if since the beginning of such period COI or any of its
Restricted Subsidiaries (by merger or otherwise) shall have made an Investment
in any Restricted Subsidiary of COI (or any Person which becomes a Restricted
Subsidiary of COI as a result thereof) or an acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder which
constitutes all or substantially all of an operating unit of a business,
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto (including the incurrence of
any Indebtedness) as if such Investment or acquisition occurred on the first day
of such period and (E) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary of COI or was merged with or into
COI or any Restricted Subsidiary of COI since the beginning of such period)
shall have made any Asset Disposition, Investment or acquisition of assets that
would have required an adjustment pursuant to clause (C) or (D) above if made by
COI or a Restricted Subsidiary of COI during such period, Consolidated Cash Flow
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of such period. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting officer of COI. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months).
"Consolidated Interest Expense" means, for any period, the total
consolidated interest expense of COI and its Restricted Subsidiaries determined
in accordance with GAAP, plus, to the extent not included in such interest
expense (i) interest expense attributable to Capitalized Lease Obligations, (ii)
capitalized interest, (iii) amortization of original issue discount, (iv)
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing, (v) interest actually paid by COI
or any such Restricted Subsidiary under any Guarantee of Indebtedness or other
obligation of any other Person, (vi) net payments (whether positive or negative)
pursuant to Interest Rate Agreements, (vii) the cash contributions to any
employee stock ownership plan or similar trust to the extent such contributions
are used by such plan or trust to pay interest or fees to any Person (other than
COI) in connection with Indebtedness Incurred by such plan or trust and (viii)
cash and Disqualified Stock dividends in respect of all Preferred Stock of
Subsidiaries and Disqualified Stock of COI held by Persons other than COI or a
Wholly-Owned Subsidiary and less (a) to the extent included in such interest
expense, the amortization of capitalized debt issuance costs, (b) interest
income and (c) non-cash interest expense. Notwithstanding the foregoing, the
Consolidated Interest Expense with respect to any Restricted Subsidiary of COI,
that was not a Wholly-Owned Subsidiary, shall be included only to the extent
(and in the same proportion) that the net income of such Restricted Subsidiary
was included in calculating Consolidated Net Income.
"Consolidated Net Income" means, for any period, the consolidated net
income (loss) of COI and its consolidated Subsidiaries determined in accordance
with GAAP; provided, however, that there shall not be included
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in such Consolidated Net Income: (i) any net income (loss) of any person
acquired by COI or any of its Restricted Subsidiaries in a pooling of interests
transaction for any period prior to the date of such acquisition, (ii) any net
income of any Restricted Subsidiary of COI if such Restricted Subsidiary is
subject to restrictions, directly or indirectly, on the payment of dividends or
the making of distributions by such Restricted Subsidiary, directly or
indirectly, to COI (other than restrictions in effect on the Issue Date with
respect to a Restricted Subsidiary of COI and other than restrictions that are
created or exist in compliance with the "Limitation on Restrictions on
Distributions from Restricted Subsidiaries" covenant), (iii) any gain or loss
realized upon the sale or other disposition of any assets of COI or its
consolidated Restricted Subsidiaries (including pursuant to any Sale/Leaseback
Transaction) which are not sold or otherwise disposed of in the ordinary course
of business and any gain or loss realized upon the sale or other disposition of
any Capital Stock of any Person, (iv) any extraordinary gain or loss, (v) the
cumulative effect of a change in accounting principles, (vi) the net income of
any Person, other than a Restricted Subsidiary, except to the extent of the
lesser of (A) cash dividends or distributions actually paid to COI or any of its
Restricted Subsidiaries by such Person and (B) the net income of such Person
(but in no event less than zero), and the net loss of such Person (other than an
Unrestricted Subsidiary) shall be included only to the extent of the aggregate
Investment of COI or any of its Restricted Subsidiaries in such Person and (vii)
any non-cash expenses attributable to grants or exercises of employee stock
options. Notwithstanding the foregoing, for the purpose of the covenant
described under "-Certain Covenants-Limitation on Restricted Payments" only,
there shall be excluded from Consolidated Net Income any dividends, repayments
of loans or advances or other transfers of assets from Unrestricted Subsidiaries
to COI or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a) (3) (D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of COI and its consolidated Restricted Subsidiaries, determined on
a consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of COI ending prior to the taking of any action for the purpose
of which the determination is being made and for which financial statements are
available (but in no event ending more than 135 days prior to the taking of such
action), as (i) the par or stated value of all outstanding Capital Stock of COI
plus (ii) paid in capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned surplus less (A) any accumulated deficit
and (B) any amounts attributable to Disqualified Stock.
"Continuing Director" of any Person means, as of the date of determination,
any Person who (i) was a member of the Board of Directors of such Person on the
date of the Notes Indenture or (ii) was nominated for election or elected to the
Board of Directors of such Person with the affirmative vote of a majority of the
Continuing Directors of such Person who were members of such Board of Directors
at the time of such nomination or election.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than an event which
would constitute a Change of Control), (i) matures (excluding any maturity as
the result of an optional redemption by the issuer thereof) or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
final Stated Maturity of the Notes, or (ii) is convertible into or exchangeable
(unless at the sole option of the issuer thereof) for (a) debt securities or (b)
any Capital Stock referred to in (i) above, in each case at any time prior to
the final Stated Maturity of the Notes.
"Equity Offering" means an offering for cash by COMFORCE Corporation of its
common stock, or options, warrants or rights with respect to its common stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
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"Existing Indebtedness" means Indebtedness of COI or its Restricted
Subsidiaries in existence on the Issue Date, plus interest accrued, thereon,
after application of the net proceeds of the New Credit Facility and the Notes
as described in the Prospectus.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of COI acting reasonably and in
good faith and shall be evidenced by a Board Resolution of the Board of
Directors of COI delivered to the Notes Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Notes Indenture, including those
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Notes Indenture shall be computed in conformity with GAAP.
"Group" shall mean any "group" for purposes of Section 13(d) of the
Exchange Act.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto) (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in clauses (i), (ii) and (v) ) entered into in the
ordinary course of business of such Person to the extent that such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the third business day following receipt by such Person
of a demand for reimbursement following payment on the letter of credit), (iv)
all obligations of such Person to pay the deferred and unpaid purchase price of
property or services (except (x) trade payables and accrued expenses incurred in
the ordinary course of business and (y) contingent or "earnout" payment
obligations in respect of any Permitted Business acquired by COI or any
Restricted Subsidiary), which purchase price is due more than six months after
the date of placing such property in service or taking delivery and title
thereto or the completion of such services, (v) all Capitalized Lease
Obligations and all Attributable Indebtedness of such Person, (vi) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person, (vii) all
Indebtedness of other Persons to the extent Guaranteed by such Person, (viii)
the amount of all obligations of such Person with respect to the redemption,
repayment or other repurchase of any Disqualified Stock or, with respect to any
Restricted Subsidiary of COI, any Preferred Stock of such Restricted Subsidiary
to the extent such obligation
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arises on or before the Stated Maturity of the Notes (but excluding, in each
case, accrued dividends) with the amount of Indebtedness represented by such
Disqualified Stock or Preferred Stock, as the case may be, being equal to the
greater of its voluntary or involuntary liquidation preference and its maximum
fixed repurchase price; provided that, for purposes hereof the "maximum fixed
repurchase price" of any Disqualified Stock or Preferred Stock, as the case may
be, which does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Disqualified Stock or Preferred Stock, as the
case may be, as if such Disqualified Stock or Preferred Stock, as the case may
be, were purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Notes Indenture, and if such price is based on the
fair market value of such Disqualified Stock or Preferred Stock, as the case may
be, such fair market value shall be determined in good faith by the Board of
Directors of COI and (ix) to the extent not otherwise included in this
definition, obligations under Currency Agreements and Interest Rate Agreements.
Unless specifically set forth above, the amount of Indebtedness of any Person at
any date shall be the outstanding principal amount of all unconditional
obligations as described above, as such amount would be reflected on a balance
sheet prepared in accordance with GAAP, and the maximum liability of such
Person, upon the occurrence of the contingency giving rise to the obligation, of
any contingent obligations described above at such date.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts payable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person. For purposes of
the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include
the portion (proportionate to COI's equity interest in a Restricted Subsidiary
to be designated as an Unrestricted Subsidiary) of the fair market value of the
net assets of such Restricted Subsidiary of COI at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary; provided, however, that
upon a redesignation of such Subsidiary as a Restricted Subsidiary, COI shall be
deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary in an amount (if positive) equal to (x) COI's "Investment" in such
Subsidiary at the time of such redesignation less (y) the portion (proportionate
to COI's equity interest in such Subsidiary) of the fair market value of the net
assets of such Subsidiary at the time that such Subsidiary is so redesignated a
Restricted Subsidiary; and (ii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer, in each case as determined in good faith by the Board of
Directors and evidenced by a resolution of such Board of Directors certified in
an Officers' Certificate to the Notes Trustee.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Group" means James L. Paterek, Christopher P. Franco and
Michael Ferrentino.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets subject to such Asset Disposition) therefrom in each
case net of (i) all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state, foreign and local
taxes required to be paid or accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets
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subject to such Asset Disposition, in accordance with the terms of any Lien upon
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition or by applicable law, be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to any Person owning a beneficial interest in assets subject
to sale or minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Disposition, (iv) the deduction of appropriate amounts to
be provided by the seller as a reserve, in accordance with GAAP, against any
liabilities associated with the assets disposed of in such Asset Disposition,
provided however, that upon any reduction in such reserves (other than to the
extent resulting from payments of the respective reserved liabilities), Net
Available Cash shall be increased by the amount of such reduction to reserves,
and retained by COI or any Restricted Subsidiary of COI after such Asset
Disposition and (v) any portion of the purchase price from an Asset Disposition
placed in escrow (whether as a reserve for adjustment of the purchase price, for
satisfaction of indemnities in respect of such Asset Disposition or otherwise in
connection with such Asset Disposition) provided, however, that upon the
termination of such escrow, Net Available Cash shall be increased by any portion
of funds therein released to COI or any Restricted Subsidiary.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"New Credit Facility" means the Loan and Security Agreement, dated as of
November 26, 1997, among COMFORCE and COI and certain subsidiaries thereof, as
guarantors, and various other direct and indirect active subsidiaries thereof,
as borrowers, Heller, and any other financial institutions from time to time
party thereto, together with the related documents thereto (including, without
limitation, any guarantee agreements and security documents), in each case as
such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including by way of adding Subsidiaries of COI as additional
borrowers or guarantors thereunder) all or any portion of the Indebtedness under
such agreement or any successor or replacement agreement and whether by the same
or any other agent, lender or group of lenders.
"Non-Recourse Debt" means Indebtedness (i) as to which neither COI nor any
Restricted Subsidiary (a) provides any guarantee or credit support of any kind
(including any undertaking, guarantee, indemnity, agreement or instrument that
would constitute Indebtedness) or (b) is directly or indirectly liable (as a
guarantor, general partner or otherwise) and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of COI or
any Restricted Subsidiary to declare a default under such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its Stated
Maturity.
"Officer" means the Chairman of the Board, the Vice-Chairman of the Board,
the Chief Executive Officer, the Chief Financial Officer, the President, any
Vice-President, the Treasurer or the Secretary of COI.
"Officer's Certificate" shall mean a certificate signed by two Officers of
COI, at least one of whom shall be the principal executive, financial or
accounting officer of COI.
"Opinion of Counsel" means a written opinion, in form and substance
acceptable to the Notes Trustee, from legal counsel who is acceptable to the
Notes Trustee.
"Permitted Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of COI and its Restricted
Subsidiaries on the date of the Notes Indenture, as reasonably determined by
COI's Board of Directors.
"Permitted Investment" means an Investment by COI or any of its Restricted
Subsidiaries in (i) a Wholly-Owned Subsidiary of COI; provided, however, that
the primary business of such Wholly-Owned Subsidiary
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is a Permitted Business; (ii) another Person if as a result of such Investment
such other Person becomes a Wholly-Owned Subsidiary of COI or is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, COI or a Wholly-Owned Subsidiary of COI; provided, however, that in
each case such Person's primary business is a Permitted Business; (iii)
Temporary Cash Investments; (iv) receivables owing to COI or any of its
Restricted Subsidiaries, created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans and
advances to employees made in the ordinary course of business consistent with
past practices of COI or such Restricted Subsidiary in an aggregate amount
outstanding at any one time not to exceed $250,000 to any one employee or $1.0
million in the aggregate; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to COI
or any of its Restricted Subsidiaries or in satisfaction of judgments or claims;
(viii) a Person engaged in a Permitted Business or a loan or advance by COI the
proceeds of which are used solely to make an investment in a Person engaged in a
Permitted Business or a Guarantee by COI of Indebtedness of any Person in which
such Investment has been made; provided, however, that no Permitted Investments
may be made pursuant to this clause (viii) to the extent the amount thereof
would, when taken together with all other Permitted Investments made pursuant to
this clause (viii), exceed $5.0 million in the aggregate (plus, to the extent
not previously reinvested, any return of capital realized on Permitted
Investments made pursuant to this clause (viii), or any release or other
cancellation of any Guarantee constituting such Permitted Investment); (ix)
Persons to the extent such Investment is received by COI or any Restricted
Subsidiary as consideration for asset dispositions effected in compliance with
the covenant described under "Certain Covenants Limitations on Sales of Assets
and Subsidiary Stock"; (x) prepayments and other credits to suppliers made in
the ordinary course of business consistent with the past practices of COI and
its Restricted Subsidiaries; and (xi) Investments in connection with pledges,
deposits, payments or performance bonds made or given in the ordinary course of
business in connection with or to secure statutory, regulatory or similar
obligations, including obligations under health, safety or environmental
obligations.
"Permitted Liens" means: (i) pledges or deposits by COI or any Restricted
Subsidiary under workmen's compensation laws, unemployment insurance laws, other
types of social security benefits or similar legislation, or good faith deposits
in connection with bids, tenders or contracts (other than for the payment of
Indebtedness) or leases to which COI or any Restricted Subsidiary is a party, or
deposits to secure public or statutory obligations or deposits of cash or United
States government bonds to secure surety or appeal bonds to which COI or any
Restricted Subsidiary is a party, or deposits as security for contested taxes or
import duties or for the payment of rent, in each case incurred by COI or any
Restricted Subsidiary in the ordinary course of business consistent with past
practice; (ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due from COI or any Restricted
Subsidiary or being contested in good faith by appropriate proceedings by COI or
any Restricted Subsidiary, as the case may be, or other Liens arising out of
judgments or awards against COI or any Restricted Subsidiary with respect to
which COI or such Restricted Subsidiary, as the case may be, will then be
prosecuting an appeal or other proceedings for review; (iii) Liens for property
taxes or other taxes, assessments or governmental charges of COI or any
Restricted Subsidiary not yet due or payable or subject to penalties for
nonpayment or which are being contested by COI or such Restricted Subsidiary, as
the case may be, in good faith by appropriate proceedings; (iv) Liens in favor
of issuers of performance bonds and surety bonds issued pursuant to clause
(b)(vi) under "- Certain Covenants - Limitation on Indebtedness"; (v) survey
exceptions, encumbrances, easements or, reservations of, or rights of others
for, licenses, rights-of-way, sewers, electric lines, telegraph and telephone
lines and other similar purposes or zoning or other restrictions as to the use
of real property of COI or any Restricted Subsidiary incidental to the ordinary
course of conduct of the business of COI or such Restricted Subsidiary or as to
the ownership of properties of COI or any Restricted subsidiary, which, in
either case, were not incurred in connection with Indebtedness and which do not
in the aggregate materially adversely affect the value of said properties or
materially impair their use in the operation of the business of COI or any
Restricted subsidiary; (vi) Liens to secure Indebtedness permitted under clauses
(a)(ii) and (b)(i) under "-Certain Covenants - Limitation on Indebtedness";
(vii) Liens outstanding immediately after the Issue Date as set forth on
Schedule II to the Notes Indenture (and not otherwise permitted by clause (vi));
(viii) Liens on property, assets or shares of stock of any Restricted Subsidiary
at the time such Restricted Subsidiary became a Subsidiary of COI; provided,
however, that (A) if any such Lien has been Incurred in anticipation of such
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transaction, such property, assets or shares of stock subject to such Lien will
have a fair market value at the date of the acquisition thereof not in excess of
the lesser of (1) the aggregate purchase price paid or owed by COI in connection
with the acquisition of such Restricted Subsidiary and (2) the fair market value
of all property and assets of such Restricted Subsidiary and (B) any such Lien
will not extend to any other assets owned by COI or any Restricted Subsidiary;
(ix) Liens on property or assets at the time COI or any Restricted Subsidiary
acquired such assets, including any acquisition by means of a merger or
consolidation with or into COI or such Restricted Subsidiary; provided, however,
that (A) if any such Lien is Incurred in anticipation of such transaction, such
property or assets subject to such Lien will have a fair market value at the
date of the acquisition thereof not in excess of the lesser of (1) the aggregate
purchase price paid or owed by COI or such Restricted Subsidiary in connection
with the acquisition thereof and of any other property and assets acquired
simultaneously therewith and (2) the fair market value of all such property and
assets acquired by COI or such Restricted Subsidiary and (B) any such Lien will
not extend to any other property or assets owned by COI or any Restricted
Subsidiary; (x) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to COI or a Wholly Owned Subsidiary; (xi) Liens to secure any
extension, renewal, refinancing, replacement or refunding (or successive
extensions, renewals, refinancings, replacements or refundings), in whole or in
part, of any Indebtedness secured by Liens referred to in any of clauses (vii),
(viii) and (ix); provided, however, that any such Lien will be limited to all or
part of the same property or assets that secured the original Lien (plus
improvements on such property) and the aggregate principal amount of
Indebtedness that is secured by such Lien will not be increased to an amount
greater than the sum of (A) the outstanding principal amount, or, if greater,
the committed amount, of the Indebtedness described under clauses (vii), (viii)
and (ix) at the time the original Lien became a Permitted Lien under the
Indenture and (B) an amount necessary to pay any premiums, fees and other
expenses Incurred by COI in connection with such refinancing, refunding,
extension, renewal or replacement; (xii) Liens on property or assets of COI
securing Interest Rate Agreements and Currency Agreements so long as the related
Indebtedness is, and is permitted under "- Certain Covenants - Limitation on
Indebtedness", secured by a Lien on the same property securing the relevant
Interest Rate Agreement or Currency Agreement; (xiii) Liens securing
Indebtedness incurred under the New Credit Facility or any Guarantee thereof by
any Restricted Subsidiary; and (xiv) Liens on property or assets of COI or any
Restricted Subsidiary securing Indebtedness (1) under purchase money obligation
or Capitalized Lease Obligations permitted under clause (b)(ii) under "- Certain
Covenants - Limitation on Indebtedness" or (2) under Sale/Leaseback Transactions
permitted under "- Certain Covenants - Limitation on Sale/Leaseback
Transactions"; provided, that (A) the amount of Indebtedness Incurred in any
specific case does not, at the time such Indebtedness is Incurred, exceed the
lesser of the cost or fair market value of the property or asset acquired or
constructed in connection with such purchase money obligation or Capitalized
Lease Obligation or subject to such Sale/Leaseback Transaction, as the case may
be, (B) such Lien will attach to such property or asset upon acquisition of such
property or asset and or upon commencement of such Sale/Leaseback Transaction,
as the case may be, and (C) no property or asset of COI or any Restricted
Subsidiary (other than the property or asset acquired or contracted in
connection with such purchase money Obligation or Capitalized Lease Obligation
or subject to such Sale/Leaseback Transaction, as the case may be) are subject
to any Lien securing such Indebtedness.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision hereof or any
other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
A "Public Market" exists at any time with respect to the common stock of
COMFORCE Corporation if (a) the common stock of COMFORCE Corporation is then
registered with the Securities and Exchange Commission pursuant to Section 12(b)
or 12(g) of the Exchange Act and traded either on a national securities exchange
or in the National Association of Securities Dealers Automated Quotation System
and (b) at least 15% of the total issued and
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outstanding common stock of COMFORCE Corporation as applicable, has been
distributed prior to such time by means of an effective registration statement
under the Securities Act of 1933.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness existing on the date of the Notes
Indenture or Incurred in compliance with the Notes Indenture (including
Indebtedness of COI that refinances Indebtedness of any Restricted Subsidiary
and Indebtedness of any Restricted Subsidiary that refinances Indebtedness of
another Restricted Subsidiary) including Indebtedness that refinances
Refinancing Indebtedness; provided, however, that (i) the Refinancing
Indebtedness has a Stated Maturity no earlier than the earlier of (A) the first
anniversary of the Stated Maturity of the Notes and (B) Stated Maturity of the
Indebtedness being refinanced, (ii) the Refinancing Indebtedness has an Average
Life at the time such Refinancing Indebtedness is Incurred that is equal to or
greater than the lesser of (A) the Average Life of the Notes and (B) the Average
Life of the Indebtedness being refinanced and, (iii) the Refinancing
Indebtedness is in an aggregate principal amount (or if issued with original
issue discount, an aggregate issue price) that is equal to (or 101% of, in the
case of a refinancing of the Notes in connection with a Change of Control) or
less than the sum of the aggregate principal amount (or if issued with original
issue discount, the aggregate accreted value) then outstanding of the
Indebtedness being refinanced (plus the amount of any premium required to be
paid in connection therewith and reasonable fees and expenses therewith)
provided, further, that Refinancing Indebtedness shall not include Indebtedness
of a Subsidiary which refinances Indebtedness of COI.
"Restricted Subsidiary" means any Subsidiary of COI other an Unrestricted
Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby COI or a Restricted Subsidiary transfers
such property to a Person and COI or a Subsidiary leases it from such Person.
"Secured Indebtedness" means any Indebtedness of COI secured by a Lien.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of COI within the meaning of Rule 1-02 under Regulation
S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
"Subordinated Obligation" means any Indebtedness of COI (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person. Unless otherwise specified herein, each reference to a Subsidiary shall
refer to a Subsidiary of COI.
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar
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equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act), (iii)
repurchase obligations with a term of not more than 30 days for underlying
securities of the types described in clause (i) above entered into with a bank
meeting the qualifications described in clause (ii) above, (iv) Investments in
commercial paper, maturing not more than 180 days after the date of acquisition,
issued by a corporation (other than an Affiliate of COI) organized and in
existence under the laws of the United States of America or any foreign country
recognized by the United States of America with a rating at the time as of which
any investment therein is made of "P-1" (or higher) according to Moody's
Investors Service, Inc. or "A-1" (or higher) according to Standard and Poor's
Ratings Group, (v) Investments in securities with maturities of six months or
less from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard &
Poor's Ratings Group or "A" by Moody's Investors Service, Inc. and (vi)
Investments in mutual funds whose investment guidelines restrict such funds'
investments to those satisfying the provisions of clauses (i) through (v) above.
"Unrestricted Subsidiary" means (i) any Subsidiary of COI that at the time
of determination shall be designated an Unrestricted Subsidiary by the Board of
Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
COI (including any newly acquired or newly formed Subsidiary of COI) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or owns or holds any Lien on any property
of, COI or any Restricted Subsidiary of COI that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that each Subsidiary to be so
designated and each of its Subsidiaries has not at the time of such designation,
and does not thereafter create, Incur, issue, assume, guarantee or otherwise
becomes liable with respect to any Indebtedness other than Non-Recourse Debt and
either (A) the Subsidiary to be so designated has total consolidated assets of
$10,000 or less or (B) if such Subsidiary has consolidated assets greater than
$10,000, then such designation would be permitted under "-Certain Covenants -
Limitation on Restricted Payments." The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary subject to the limitations
contained in "-Certain Covenants Limitation on Designations of Unrestricted
Subsidiaries."
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of any corporation means all classes of Capital Stock of
such corporation then outstanding and normally entitled to vote in the election
of directors.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of COI, at least
99% of the Capital Stock of which (other than directors' qualifying shares) is
owned by COI or another Wholly-Owned Subsidiary.
THE DEBENTURES EXCHANGE OFFER
Purpose and Effect of the Debentures Exchange Offer
The Units, which were, in part, comprised of the Old Senior Debentures,
were sold by the Company on November 26, 1997, to the Initial Purchaser pursuant
to the Units Purchase Agreement. The Initial Purchaser subsequently resold the
Units, including the Old Senior Debentures, to qualified institutional buyers
pursuant to Rule 144A under the Securities Act, or institutional "accredited
investors" (as defined in Rule 501(a) (1), (2), (3) or (7) of Regulation D under
the Securities Act). Pursuant to the Unit Purchase Agreement, the Company
entered into the Senior Debentures Registration Rights Agreement, pursuant to
which the Company has agreed, for the benefit of the holders of the Unregistered
Senior Debentures, at the Company's cost, to (i) file a registration statement
with the Commission within 30 days after the date of the original issue (the
"Issue Date") of the Unregistered Senior Debentures (such date of filing, the
"Filing Date") with respect to the Debentures Exchange Offer for the Exchange
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Senior Debentures, (ii) use its best efforts to cause the Debentures Exchange
Offer Registration Statement to be declared effective under the Securities Act
within 90 days after the Issue Date, (iii) use its best efforts to cause such
Debentures Exchange Offer Registration Statement to remain effective until the
closing of the Debentures Exchange Offer and (iv) use its best efforts to
consummate the Debentures Exchange Offer no later than 130 days after the Issue
Date. Upon the registration statement being declared effective, the Company will
offer the Exchange Senior Debentures in exchange for the Unregistered Senior
Debentures. The Company will keep the Debentures Exchange Offer open for no less
than 30 business days (or longer if required by applicable law) after the date
on which notice of the Debentures Exchange Offer is mailed to the holders of the
Unregistered Senior Debentures.
For each Old Senior Debenture properly tendered and accepted pursuant to
the Debentures Exchange Offer, the holder of such Unregistered Senior Debenture
will receive a New Senior Debenture having a principal amount equal to that of
the Old Senior Debenture tendered. Interest on each New Senior Debenture will
accrue or accumulate from the last interest payment date on which interest was
paid on the Unregistered Senior Debenture tendered in exchange therefor or, if
no interest has been paid on such Unregistered Senior Debenture, from the Issue
Date.
Each holder of the Unregistered Senior Debentures who wishes to exchange
the Unregistered Senior Debentures for Exchange Senior Debentures in the
Debentures Exchange Offer will be required to represent in the BLUE Letter of
Transmittal that (i) it is not an "affiliate" (as defined in Rule 405 under the
Securities Act) of the Company, (ii) the Exchange Senior Debentures to be
received by it were acquired in the ordinary course of its business, (iii) at
the time of commencement of the Debentures Exchange Offer, it has no arrangement
with any person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Senior Debentures and (iv) it is not acting on
behalf of any person who could not truthfully make the foregoing
representations.
In the event that (i) applicable law or interpretations of the staff of the
Commission do not permit the Company to effect the Debentures Exchange Offer,
(ii) in certain circumstances, the Initial Purchaser so requests, (iii) any
holder of the Unregistered Senior Debentures (other than the Initial Purchaser)
who is not eligible to participate in the Debentures Exchange Offer so requests,
or (iv) for any reason the Debentures Exchange Offer is not consummated within
165 days after the Issue Date, the Company will at its cost, (a) as promptly as
reasonably practicable, file a shelf registration statement covering resales of
the Unregistered Senior Debentures (a "Debentures Shelf Registration
Statement"), (b) use its best efforts to cause such Debentures Shelf
Registration Statement to be declared effective under the Securities Act by the
165th day after the Issue Date (or promptly if such Debentures Shelf
Registration Statement was filed pursuant to clause (ii), above) and (c) use its
best efforts to keep effective such Debentures Shelf Registration Statement
until the earlier of two years after the Issue Date (or one year from the date
the Debentures Shelf Registration Statement is declared effective if such
Debentures Shelf Registration Statement is filed upon the request of the Initial
Purchaser pursuant to clause (ii) above) or such shorter period which will
terminate when all of the Debentures covered by the Debentures Shelf
Registration Statement have been sold pursuant to the Debentures Shelf
Registration Statement or when all of the Unregistered Senior Debentures become
eligible for resale pursuant to Rule 144 under the Securities Act without volume
restriction. See "--Resale of the Exchange Senior Debentures". The Company will,
in the event of the filing of a Debentures Shelf Registration Statement, provide
to each holder of the Registered Debentures copies of the prospectus which is a
part of such Debentures Shelf Registration Statement. A holder that sells its
Registered Debentures pursuant to a Debentures Shelf Registration Statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Debentures
Registration Rights Agreements which are applicable to such holder (including
certain indemnification rights and obligations thereunder).
If the Company fails to comply with the above provisions or if such
Debentures Shelf Registration Statement fails to become effective, then, as
liquidated damages, additional interest (the "Additional Interest") shall become
payable with respect to the Exchange Senior Debentures as follows:
(i) if the registration statement for the Debentures Exchange Offer or the
Debentures Shelf Registration Statement is not filed within 30 days following
the Issue Date, the Additional Interest shall accrue on the Unregistered
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Senior Debentures over and above the stated interest at a rate of 0.50% per
annum for the first 90 days commencing on the 91st day after the Issue Date,
such Additional Interest increasing by an additional 0.50% per annum at the
beginning of each subsequent 90-day period;
(ii) if the registration statement for the Debentures Exchange Offer or the
Debentures Shelf Registration Statement is not declared effective within 90 days
following the Issue Date, Additional Interest shall accrue on the Unregistered
Senior Debentures over and above the stated interest at a rate of 0.50% per
annum for the first 90 days commencing on the 91st day after the Issue Date,
such Additional Interest increasing by an additional 0.50% per annum at the
beginning of each subsequent 90-day period; or
(iii) if (A) the Company has not exchanged all Unregistered Senior
Debentures validly tendered in accordance with the terms of the Debentures
Exchange Offer on or prior to 130 days after the Issue Date or (B) the
registration statement for the Debentures Exchange Offer ceases to be effective
at any time prior to the time that the Debentures Exchange Offer is consummated
or (C) if applicable, the Debentures Shelf Registration Statement has been
declared effective and such Debentures Shelf Registration Statement ceases to be
effective at any time prior to the second anniversary of the Issue Date (unless
all the Registered Debentures have been sold thereunder or as otherwise provided
herein), then the Additional Interest shall accrue on the Unregistered Senior
Debentures over and above the stated interest at a rate of 0.50% per annum for
the first 50 days commencing on (x) the 131st day after the Issue Date with
respect to the Debentures validly tendered and not exchanged by the Company, in
the case of (A) above, or (y) the day the registration statement for the
Debentures Exchange Offer ceases to be effective or usable for its intended
purpose in the case of (B) above, or (z) the day the Debentures Shelf
Registration Statement ceases to be effective in the case of (C) above, the rate
of such Additional Interest increasing by an additional 0.50% per annum at the
beginning of each subsequent 90-day period; provided, however, that the
Additional Interest payable on the Unregistered Senior Debentures may not exceed
in the aggregate 2.0% per annum; and provided further, that (1) upon the filing
of the registration statement for the Debentures Exchange Offer or the
Debentures Shelf Registration Statement (in the case of clause (i) above), (2)
upon the effectiveness of such registration statement for the Debentures
Exchange Offer or the Debentures Shelf Registration Statement (in the case of
(ii) above), or (3) upon the exchange of Exchange Senior Debentures for all
Unregistered Senior Debentures tendered (in the case of clause (iii) (A) above),
or upon the effectiveness of the registration statement which had ceased to
remain effective in the case of clause (iii) (B) above, or upon the
effectiveness of the Debentures Shelf Registration Statement which had ceased to
remain effective (in the case of clause (iii) (C) above), the Additional
Interest accruing on the Unregistered Senior Debentures as a result of such
clause (or the relevant subclause thereof), as the case may be, shall cease to
accrue.
Any amounts of Additional Interest due pursuant to clauses (i), (ii) or
(iii) above will be payable in cash or, at the option of the Company, by the
issuance of additional Debentures, on the same interest payment dates of the
Unregistered Senior Debentures. The aggregate Additional Interest will be
determined by multiplying the applicable rate of such Additional Interest by the
principal amount of the Unregistered Senior Debentures multiplied by a fraction,
the numerator of which is the number of days such Additional Interest was
applicable during such period (determined on the basis of a 360-day year
comprised of twelve 30-day months), and the denominator of which is 360.
The summary herein of all material provisions of the Debentures
Registration Rights Agreement does not purport to be exhaustive and is subject
to, and is qualified in its entirety by, all the provisions of the Debentures
Registration Rights Agreement, copies of which will be made available upon
request to the Company.
Following the consummation of the Debentures Exchange Offer, holders of the
Unregistered Senior Debentures who were eligible to participate in the
Debentures Exchange Offer but who did not tender their Unregistered Senior
Debentures will not have any further exchange or registration rights and such
Unregistered Senior Debentures will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the market for such
Unregistered Senior Debentures could be adversely affected.
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Terms of the Debentures Exchange Offer
Upon the terms and subject to the conditions set forth in this Prospectus
and in the BLUE Letter of Transmittal, the Company will accept any and all
Unregistered Senior Debentures validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. The Company will issue $1,000
principal amount of New Senior Debentures in exchange for each $1,000 principal
amount of outstanding Old Senior Debentures accepted in the Debentures Exchange
Offer. Holders may tender some or all of their Unregistered Senior Debentures
pursuant to the Debentures Exchange Offer. However, Old Senior Debentures may be
tendered only in integral multiples of $1,000.
The form and terms of the Exchange Senior Debentures are the same as the
form and terms of the Unregistered Senior Debentures except (i) the New Senior
Debentures bear a Series B designation and a different CUSIP Number from the Old
Senior Debentures and (ii) the Exchange Senior Debentures have been registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof. The New Senior Debentures will evidence the same debt as the
Old Senior Debentures and will be entitled to the benefits of the Senior
Indenture.
As of the date of this Prospectus $20,000,000 aggregate principal amount of
Old Senior Debentures are outstanding. The Company has fixed the close of
business January 15, 1998 as the record date for the Debentures Exchange Offer
for purposes of determining the persons to whom this Prospectus and the BLUE
Letter of Transmittal will be mailed initially.
Holders of the Unregistered Senior Debentures do not have any appraisal or
dissenters' rights under the General Corporation Law of Delaware or the Senior
Indenture in connection with the Debentures Exchange Offer. The Company intends
to conduct the Debentures Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder.
The Company shall be deemed to have accepted validly tendered Unregistered
Senior Debentures when, as and if the Company has given oral or written notice
thereof to the Debentures Exchange Agent. The Debentures Exchange Agent will act
as agent for the tendering holders for the purpose of receiving the Exchange
Senior Debentures from the Company.
If any tendered Unregistered Senior Debentures are not accepted for
exchange because of an invalid tender, the occurrence of certain other events
set forth herein or otherwise, the certificates for any such unaccepted
Unregistered Senior Debentures will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders who tender Unregistered Senior Debentures in the Debentures
Exchange Offer will not be required to pay brokerage commissions or fees or,
subject to the instructions of the BLUE Letter of Transmittal, transfer taxes
with respect to the exchange of Unregistered Senior Debentures pursuant to the
Debentures Exchange Offer. The Company will pay all charges and expenses, other
than the transfer taxes in certain circumstances, in connection with the
Debentures Exchange Offer. See "--Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
March 27, 1998, unless the Company, in its sole discretion, extends the
Debentures Exchange Offer, in which case the term "Expiration Date" shall mean
the latest date and time to which the Debentures Exchange Offer is extended.
In order to extend the Debentures Exchange Offer, the Company will notify
the Debentures Exchange Agent of any extension by oral or written notice and
will mail to the registered holders an announcement thereof, each prior to 9:00
a.m., New York City time, on the next business day after the previously
scheduled expiration date.
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The Company reserves the right, (i) to delay accepting any Unregistered
Senior Debentures, to extend the Debentures Exchange Offer or to terminate the
Debentures Exchange Offer if any of the conditions set forth below under
"--Conditions" shall not have been satisfied, by giving oral or written notice
of such delay, extension or termination to the Debentures Exchange Agent or (ii)
to amend the terms of the Debentures Exchange Offer in any manner. Any such
delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the registered
holders.
Procedures for Tendering
The tender of Unregistered Senior Debentures pursuant to any of the
procedures set forth in this Prospectus and in the BLUE Letter of Transmittal
will constitute a binding agreement between the Tendering Holder and the Company
in accordance with the terms and subject to the conditions set forth herein and
in such Letter of Transmittal. The tender of Unregistered Senior Debentures will
constitute an agreement to deliver good and marketable title to all tendered
Unregistered Senior Debentures prior to the Expiration Date free and clear of
all liens, charges, claims, encumbrances, interests and restrictions of any
kind.
EXCEPT AS PROVIDED IN "--GUARANTEED DELIVERY PROCEDURES," UNLESS THE
UNREGISTERED SENIOR DEBENTURES BEING TENDERED ARE DEPOSITED BY THE HOLDER WITH
THE DEBENTURES EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE (ACCOMPANIED BY A
PROPERLY COMPLETED AND DULY EXECUTED BLUE LETTER OF TRANSMITTAL), THE COMPANY
MAY, AT ITS OPTION, REJECT SUCH TENDER. ISSUANCE OF EXCHANGE SENIOR DEBENTURES
WILL BE MADE ONLY AGAINST DEPOSIT OF TENDERED UNREGISTERED SENIOR DEBENTURES AND
DELIVERY OF ALL OTHER REQUIRED DOCUMENTS. NOTWITHSTANDING THE FOREGOING, DTC
PARTICIPANTS TENDERING THROUGH ATOP WILL BE DEEMED TO HAVE MADE VALID DELIVERY
WHERE THE DEBENTURES EXCHANGE AGENT RECEIVES AN AGENT'S MESSAGE (DEFINED BELOW)
PRIOR TO THE EXPIRATION DATE.
Accordingly, to properly tender Unregistered Senior Debentures, the
following procedures must be followed:
Unregistered Senior Debentures held through DTC. Each Beneficial Owner
holding Unregistered Senior Debentures through a DTC Participant must instruct
such DTC Participant to cause its Unregistered Senior Debentures to be tendered
in accordance with the procedures set forth in this Prospectus.
Pursuant to an authorization given by DTC to the DTC Participants, each DTC
Participant holding Unregistered Senior Debentures through DTC must (i)
electronically transmit its acceptance through ATOP, and DTC will then edit and
verify the acceptance, execute a book-entry delivery to the Debentures Exchange
Agent's account at DTC and send an Agent's Message to the Debentures Exchange
Agent for its acceptance, or (ii) comply with the guaranteed delivery procedures
set forth below and in the Notice of Guaranteed Delivery. See "--Guaranteed
Delivery Procedures."
The Debentures Exchange Agent will (promptly after the date of this
Prospectus) establish accounts at DTC for purposes of the Debentures Exchange
Offer with respect to Unregistered Senior Debentures held through DTC, and any
financial institution that is a DTC Participant may make book-entry delivery of
interests in Unregistered Senior Debentures into the Debentures Exchange Agent's
account through ATOP. However, although delivery of interests in the
Unregistered Senior Debentures may be effected through book-entry transfer into
the Debentures Exchange Agent's account through ATOP, an Agent's Message in
connection with such book-entry transfer, and any other required documents, must
be, in any case, transmitted to and received by the Debentures Exchange Agent at
its address set forth under "--Debentures Exchange Agent," or the guaranteed
delivery procedures set forth below must be complied with, in each case, prior
to the Expiration Date. Delivery of documents to DTC does not constitute
delivery to the Debentures Exchange Agent. The confirmation of a book-entry
transfer into the Debentures Exchange Agent's account at DTC as described above
is referred to herein as a "Book-Entry Confirmation."
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The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Debentures Exchange Agent and forming a part of the Book-Entry
Confirmation, which states that DTC has received an express acknowledgment from
each DTC Participant tendering through ATOP that such DTC Participants have
received a BLUE Letter of Transmittal and agree to be bound by the terms of such
Letter of Transmittal and that the Company may enforce such agreement against
such DTC Participants.
Cede & Co., as the Holder of the global certificates representing the Old
Senior Debentures (the "Global Debentures"), will tender a portion of each of
the Global Debentures equal to the aggregate principal amount due at the stated
maturity for which instructions to tender are given by DTC Participants.
Unregistered Senior Debentures held by Holders. Each Holder must (i)
complete and sign and mail or deliver the accompanying BLUE Letter of
Transmittal, and any other documents required by such Letter of Transmittal,
together with certificate(s) representing all tendered Unregistered Senior
Debentures, to the Debentures Exchange Agent at its address set forth under
"--Debentures Exchange Agent," or (ii) comply with the guaranteed delivery
procedures set forth below and in the Notice of Guaranteed Delivery. See
"--Guaranteed Delivery Procedures."
All signatures on a Letter of Transmittal must be guaranteed by any member
firm of a registered national securities exchange or of the National Association
of Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor" institution
within the meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible
Institution"); provided, however, that signatures on a Letter of Transmittal
need not be guaranteed if such Unregistered Senior Debentures are tendered for
the account of an Eligible Institution including (as such terms are defined in
Rule 17Ad-15): (i) a bank; (ii) a broker, dealer, municipal securities dealer,
municipal securities broker, government securities dealer or government
securities broker; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) a savings
institution that is a participant in a Securities Transfer Association
recognized program.
If a Letter of Transmittal or any Unregistered Security is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, agent, officer of
a corporation or other person acting in a fiduciary or representative capacity,
such person must so indicate when signing, and proper evidence satisfactory to
the Company of the authority of such person so to act must be submitted.
Holders should indicate in the applicable box in the BLUE Letter of
Transmittal the name and address to which substitute certificates evidencing
Unregistered Senior Debentures for amounts not tendered are to be issued or
sent, if different from the name and address of the person signing such Letter
of Transmittal. In the case of issuance in a different name, the employer
identification or social security number of the person named must also be
indicated. If no instructions are given, such Unregistered Senior Debentures not
tendered, as the case may be, will be returned to the person signing such Letter
of Transmittal.
By tendering, each Holder and each DTC Participant will make to the Company
the representations set forth in the third paragraph under the heading
"--Purpose and Effect of the Debentures Exchange Offer."
No alternative, conditional, irregular or contingent tenders will be
accepted (unless waived). By executing a BLUE Letter of Transmittal or
transmitting an acceptance through ATOP, as the case may be, each Tendering
Holder waives any right to receive any notice of the acceptance for purchase of
its Unregistered Senior Debentures.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Unregistered Senior Debentures will be
resolved by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders that are not in
proper form or the acceptance of which may, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the absolute right to waive any
condition to the Debentures Exchange Offer and any irregularities or conditions
of tender as to particular Unregistered Senior Debentures. The Company's
interpretation of the terms and conditions of the Debentures Exchange Offer
(including the instructions in the BLUE Letter of Transmittal) will be final and
binding. Unless
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waived, any irregularities in connection with tenders must be cured within such
time as the Company shall determine. The Company and the Debentures Exchange
Agent shall not be under any duty to give notification of defects in such
tenders and shall not incur liabilities for failure to give such notification.
Tenders of Unregistered Senior Debentures will not be deemed to have been made
until such irregularities have been cured or waived. Any Unregistered Senior
Debentures received by the Debentures Exchange Agent that are not properly
tendered and as to which the irregularities have not been cured or waived will
be returned by the Debentures Exchange Agent to the tendering Holder, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
LETTERS OF TRANSMITTAL AND UNREGISTERED SENIOR DEBENTURES MUST BE SENT ONLY
TO THE DEBENTURES EXCHANGE AGENT. DO NOT SEND LETTERS OF TRANSMITTAL OR
UNREGISTERED SENIOR DEBENTURES TO THE COMPANY OR DTC.
The method of delivery of Unregistered Senior Debentures and Letters of
Transmittal, any required signature guaranties and all other required documents,
including delivery through DTC and any acceptance through ATOP, is at the
election and risk of the persons tendering and delivering acceptances or Letters
of Transmittal and, except as otherwise provided in the applicable Letter of
Transmittal, delivery will be deemed made only when actually received by the
Debentures Exchange Agent. If delivery is by mail, it is suggested that the
Holder use properly insured, registered mail with return receipt requested, and
that the mailing be made sufficiently in advance of the Expiration Date to
permit delivery to the Debentures Exchange Agent prior to the Expiration Date.
Guaranteed Delivery Procedures
Unregistered Senior Debentures held through DTC. DTC Participants holding
Unregistered Senior Debentures through DTC who wish to cause their Unregistered
Senior Debentures to be tendered, but who cannot transmit their acceptances
through ATOP prior to the Expiration Date, may cause a tender to be effected if:
(a) guaranteed delivery is made by or through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Debentures Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by
mail, hand delivery, facsimile transmission or overnight courier)
substantially in the form provided by the Company herewith; and
(c) Book-Entry Confirmation and an Agent's Message in connection therewith
(as described above) are received by the Debentures Exchange Agent
within three NYSE trading days after the date of the execution of the
Notice of Guaranteed Delivery.
Unregistered Senior Debentures Held by Holders. Holders who wish to tender
their Unregistered Senior Debentures and (i) whose Unregistered Senior
Debentures are not immediately available, (ii) who cannot deliver their
Unregistered Senior Debentures, the BLUE Letter of Transmittal or any other
required documents to the Debentures Exchange Agent or (iii) who cannot complete
the procedures for book-entry transfer, prior to the Expiration Date, may effect
a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Debentures Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by
facsimile transmission, mail or hand delivery) setting forth the name
and address of the holder, the certificate number(s) of such
Unregistered Senior Debentures and the principal amount of
Unregistered Senior Debentures tendered, stating that the tender is
being made thereby and guaranteeing that, within three New York Stock
Exchange trading days after the Expiration
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Date, the BLUE Letter of Transmittal (or facsimile thereof) together
with the certificate(s) representing the Unregistered Senior
Debentures (or a confirmation of book-entry transfer of such
Unregistered Senior Debentures into the Debentures Exchange Agent's
account at the Book-Entry Transfer Facility), and any other documents
required by such Letter of Transmittal will be deposited by the
Eligible Institution with the Debentures Exchange Agent; and
(c) such properly completed and executed BLUE Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all
tendered Unregistered Senior Debentures in proper form for transfer
(or a confirmation or book-entry transfer of such Unregistered Senior
Debentures into the Debentures Exchange Agent's account at the
Book-Entry Transfer Facility), and all other documents required by
such Letter of Transmittal are received by the Debentures Exchange
Agent upon three New York Stock Exchange trading days after the
Expiration Date.
Upon request to the Debentures Exchange Agent, a Notice of Guaranteed
Delivery will be sent to holders who wish to tender their Unregistered Senior
Debentures according to the guaranteed delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Unregistered Senior
Debentures may be withdrawn at any time prior to 5:00 p.m., New York City time,
on the Expiration Date.
Unregistered Senior Debentures held through DTC. DTC Participants holding
Unregistered Senior Debentures who have transmitted their acceptances through
ATOP may, prior to 5:00 p.m., New York City time, on the Expiration Date,
withdraw the instruction given thereby by delivering to the Debentures Exchange
Agent, at its address set forth under "--Debentures Exchange Agent," a written,
telegraphic or facsimile notice of withdrawal of such instruction. Such notice
of withdrawal must contain the name and number of the DTC Participant, the
principal amount due at the stated maturity or number of shares of the
Unregistered Senior Debentures to which such withdrawal related and the
signature of the DTC Participant. Withdrawal of such an instruction will be
effective upon receipt of such written notice of withdrawal by the Debentures
Exchange Agent.
Unregistered Senior Debentures held by Holders. Holders may withdraw a
tender of Unregistered Senior Debentures in the Debentures Exchange Offer, by a
telegram, telex, letter or facsimile transmission notice of withdrawal received
by the Debentures Exchange Agent at its address set forth herein prior to 5:00
p.m., New York City time, on the Expiration Date. Any such notice of withdrawal
must (i) specify the name of the person having deposited the Unregistered Senior
Debentures to be withdrawn (the "Depositor"), (ii) identify the Unregistered
Senior Debentures to be withdrawn (including the certificate number(s) and
principal amount due at the stated maturity of such Unregistered Senior
Debentures, or, in the case of Unregistered Senior Debentures transferred by
book-entry transfer, the name and number of the account at the Book-Entry
Transfer Facility to be credited), (iii) be signed by the holder in the same
manner as the original signature on the BLUE Letter of Transmittal by which such
Unregistered Senior Debentures were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Unregistered Senior Debentures register the transfer
of such Unregistered Senior Debentures into the name of the person withdrawing
the tender and (iv) specify the name in which any such Unregistered Senior
Debentures are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Unregistered Senior Debentures so
withdrawn will be deemed not to have been validly tendered for purposes of the
Debentures Exchange Offer and no Exchange Senior Debentures will be issued with
respect thereto unless the Unregistered Senior Debentures so withdrawn are
validly retendered. Any Unregistered Senior Debentures which have been tendered
but which are not accepted for exchange will be returned to the holder thereof
without cost to such holder as soon as practicable after withdrawal, rejection
of tender or termination of the Debentures Exchange Offer. Properly withdrawn
Unregistered Senior Debentures may
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be retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
All signatures on a notice of withdrawal must be guaranteed by an Eligible
Institution; provided, however, that signatures on the notice of withdrawal need
not be guaranteed if the Unregistered Senior Debentures being withdrawn are held
for the account of an Eligible Institution.
A withdrawal of an instruction or a withdrawal of a tender must be executed
by a DTC Participant or a Holder, as the case may be, in the same manner as the
person's name appears on its transmission through ATOP or BLUE Letter of
Transmittal, as the case may be, to which such withdrawal relates. If a notice
of withdrawal is signed by a trustee, partner, executor, administrator,
guardian, attorney-in-fact, agent, officer of a corporation or other person
acting in a fiduciary or representative capacity, such person must so indicate
when signing and must submit with the revocation appropriate evidence of
authority to execute the notice of withdrawal. A DTC Participant or a Holder may
withdraw an instruction or a tender, as the case may be, only if such withdrawal
complies with the provisions of this Prospectus.
A withdrawal of a tender of Unregistered Senior Debentures by a DTC
Participant or a Holder, as the case may be, may be rescinded only by a new
transmission of an acceptance through ATOP or execution and delivery of a new
BLUE Letter of Transmittal, as the case may be, in accordance with the
procedures described herein.
Conditions
Notwithstanding any other term of the Debentures Exchange Offer, the
Company shall not be required to accept for exchange, or exchange securities
for, any Unregistered Senior Debentures, and may terminate or amend the
Debentures Exchange Offer as provided herein before the acceptance of such
Unregistered Senior Debentures, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Debentures
Exchange Offer which, in the judgment of the Company upon written
advice of counsel, could reasonably be expected to materially impair
the ability of the Company to proceed with the Debentures Exchange
Offer or any material adverse development has occurred in any existing
action or proceeding with respect to the Company or any of the
subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the judgment
of the Company and based on written advice of counsel, could
reasonably be expected to materially impair the ability of the Company
to proceed with the Debentures Exchange Offer or materially impair the
contemplated benefits of the Debentures Exchange Offer to the Company;
or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its discretion and based on written advice of
counsel, deem necessary for the consummation of the Debentures
Exchange Offer as contemplated hereby.
If any of the conditions are not satisfied, the Company may (i) refuse to
accept any Unregistered Senior Debentures and return all tendered Unregistered
Senior Debentures to the tendering holders, (ii) extend the Debentures Exchange
Offer and retain all Unregistered Senior Debentures tendered prior to the
expiration of the Debentures Exchange Offer, subject, however, to the rights of
holders to withdraw such Unregistered Senior Debentures (see "--Withdrawal of
Tenders") or (iii) waive such unsatisfied conditions with respect to the
Debentures Exchange Offer and accept all properly tendered Unregistered Senior
Debentures which have not been withdrawn.
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Debentures Exchange Agent
The Bank of New York has been appointed as Debentures Exchange Agent for
the Debentures Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Debentures
Exchange Agent addressed as follows:
The Bank of New York
101 Barclay Street, 21W
New York, NY 10286
Attention: Mary LaGumina
Telephone: (212) 815-5783
Facsimile: (212) 815-5915
Delivery to an address other than as set forth above, or transmission of
instructions via a facsimile number other than the one set forth above, will not
constitute a valid delivery.
Fees and Expenses
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Debentures Exchange Offer and will not make any payments to brokers, dealers, or
others soliciting acceptances of the Debentures Exchange Offer. The Company
however, will pay the Debentures Exchange Agent reasonable and customary fees
for its services and will reimburse it for its reasonable out-of-pocket expenses
in connection therewith.
The cash expenses to be incurred in connection with the Debentures Exchange
Offer will be paid by the Company. Such expenses include fees and expenses of
the Debentures Exchange Agent and Trustee, accounting and legal fees and
printing costs, among others.
Accounting Treatment
The Exchange Senior Debentures will be recorded at the same carrying value
as the Unregistered Senior Debentures, which is face value, as reflected in the
Company's accounting records on the date of exchange. Accordingly, no gain or
loss for accounting purposes will be recognized by the Company. The expenses of
the Debentures Exchange Offer will be expended over the time of the Exchange
Senior Debentures.
Consequences of Failure to Exchange
The Unregistered Senior Debentures that are not exchanged for Exchange
Senior Debentures pursuant to the Debentures Exchange Offer will remain
restricted securities. Accordingly, such Unregistered Senior Debentures may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so
long as the Unregistered Senior Debentures are eligible for resale pursuant to
Rule 144A, to a person inside the United States whom the seller reasonably
believes is a qualified institutional buyer within the meaning of Rule 144A
under the Securities Act in a transaction meeting the requirements of Rule 144A,
in accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Company), (iii) outside
the United States to a foreign person in a transaction meeting the requirements
of Rule 904 under the Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States.
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Resale of the Exchange Senior Debentures
With respect to resales of Exchange Senior Debentures, based on
interpretations by the staff of the Commission set forth in no-action letters
issued to third parties, the Company believes that a holder or other person who
receives Exchange Senior Debentures in the ordinary course of business, whether
or not such person is the holder (other than (i) a broker-dealer who purchases
such Exchange Senior Debentures from the Company to resell pursuant to Rule 144A
or any other available exemption under the Securities Act or (ii) a person that
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) who receives Exchange Senior Debentures in exchange for
Unregistered Senior Debentures, and who is not participating, does not intend to
participate, and has no arrangement or understanding with person to participate,
in the distribution of the Exchange Notes, will be allowed to resell the
Exchange Senior Debentures to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Senior
Debentures a prospectus that satisfies the requirements of Section 10 of the
Securities Act. However, if any holder acquires Exchange Senior Debentures in
the Debentures Exchange Offer for the purpose of distributing or participating
in a distribution of the Exchange Senior Debentures, such holder cannot rely on
the position of the staff of the Commission enunciated in such no-action letters
or any similar interpretive letters, and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction, unless an exemption from registration is otherwise
available. Further, each Participating Broker-Dealer that receives Exchange
Senior Debentures for its own account in exchange for Unregistered Senior
Debentures, where such Debentures were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Senior Debentures.
As contemplated by these no-action letters and the Debentures Registration
Rights Agreement, each holder accepting the Debentures Exchange Offer is
required to represent to the Company in the BLUE Letter of Transmittal that (i)
the Exchange Senior Debentures are to be acquired by the holder or the person
receiving such Exchange Senior Debentures, whether or not such person is the
holder, in the ordinary course of business, (ii) the holder or any such other
person (other than a broker-dealer referred to in the next sentence) is not
engaging and does not intend to engage, in the distribution of the Exchange
Senior Debentures, (iii) the holder or any such other person has no arrangement
or understanding with any person to participate in the distribution of the
Exchange Senior Debentures, (iv) neither the holder nor any such other person is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, and (v) the holder or any such other person acknowledges that if
such holder or other person participates in the Debentures Exchange Offer for
the purpose of distributing the Exchange Senior Debentures it must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the Exchange Senior Debentures and cannot rely on
those no-action letters. As indicated above, each Participating Broker-Dealer
that receives Exchange Senior Debentures for its own account in exchange for
Unregistered Senior Debentures must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Senior Debentures. For
a description of the procedures for such resales by Participating
Broker-Dealers, see "Plan of Distribution."
DESCRIPTION OF UNITS
The Old Senior Debentures were issued as part of Units pursuant to a Unit
Agreement dated as of November 26, 1997 between COMFORCE and the Initial
Purchaser. Each Unit consists of Senior Debentures having a principal amount of
$1,000 at maturity and 8.45 Warrants, each to purchase one share of Common
Stock. The Senior Debentures and the Warrants will be detachable and will be
separately transferable, subject to compliance with applicable securities laws,
on the earliest to occur of (i) February 24, 1998, (ii) such earlier date as may
be determined by the Initial Purchaser with the consent of the Company, (iii) in
the event of a Change of Control, the date the Company mails notice thereof to
the holders of Units and (iv) the effective date of the Debentures Exchange
Offer Registration Statement. The definitions of certain terms used in the
following summary are set forth below under "Description of Senior
Debentures-Certain Definitions."
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DESCRIPTION OF SENIOR DEBENTURES
General
The Old Senior Debentures were issued, and the New Senior Debentures will
be issued, under an indenture, dated as of November 26, 1997 (the "Senior
Indenture"), between the Company and The Bank of New York, as trustee (the
"Debenture Trustee"), a copy of which is available upon request to the Company.
The Old Senior Debentures and the New Senior Debentures will be treated as a
single class of securities under the Senior Indenture. The following is a
summary of certain provisions of the Senior Indenture and the Senior Debentures
and does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Senior Indenture (including
the definitions of certain terms therein and those terms made a part thereof by
the Trust Indenture Act of 1939, as amended) and the Senior Debentures.
Principal of, premium, if any, and interest on the Senior Debentures will
be payable, and the Senior Debentures may be exchanged or transferred, at the
office or agency of the Company in the Borough of Manhattan, The City of New
York (which initially shall be the corporate trust office of the Debenture
Trustee in New York, New York), except that, at the option of the Company,
payment of interest may be made by check mailed to the address of the holders of
the Senior Debentures as such address appears in the Senior Debenture Register.
Initially, the Debenture Trustee will act as Paying Agent and Registrar for the
Senior Debentures. The Senior Debentures may be presented for registration of
transfer and exchange at the offices of the Registrar, which initially will be
the Debenture Trustee's corporate trust office. The Company may change any
Paying Agent and Registrar without notice to holders of the Senior Debentures.
The Senior Debentures will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000 (except
for Senior Debentures issued in payment of interest on the Senior Debentures).
No service charge will be made for any registration of transfer or exchange of
Senior Debentures, but the Company may require payment of a sum sufficient to
cover any transfer tax or other similar governmental charge payable in
connection therewith.
Terms of Senior Debentures
The Senior Indenture permits the issuance of up to $50.0 million aggregate
principal amount of Senior Debentures, of which $20.0 million are issued and
outstanding; provided that any Senior Debentures issued after the Issue Date
shall only be issued in minimum increments of $5.0 million and in compliance
with the covenant described under "-Certain Covenants-Limitation on
Indebtedness." The Senior Debentures mature on December 1, 2009. Each Senior
Debenture bears interest at the rate of 15% per annum from the date of issuance,
or from the most recent date to which interest has been paid or provided for,
and is payable semiannually on June 1 and December 1 of each year, commencing on
June 1, 1998, to holders of record at the close of business on the May 15 or
November 15 (each an "Interest Payment Date") immediately preceding the Interest
Payment Date. The interest rate on the Senior Debentures is subject to increase
under certain circumstances. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months. The Senior Debentures are not entitled
to the benefit of any mandatory sinking fund. 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. From and after December 1, 2002,
interest is payable only in cash. To the extent that the Company is prohibited
pursuant to the terms of the New Credit Facility or the Notes from paying
interest in cash subsequent to December 1, 2002, the Company will pay interest
equal to the interest rate then applicable to the Senior Debentures plus 2.00%.
Optional Redemption
The Senior Debentures will be redeemable, at the Company's option, in whole
or in part, at any time upon not less than 30 nor more than 60 days' prior
notice mailed by first-class mail to each holder's registered address, at the
following redemption prices (expressed in percentages of principal amount), if
redeemed during the 12-month
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period commencing on December 1 of the years set forth below, plus accrued and
unpaid interest to the redemption date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
Interest Payment Date):
Period Redemption
- ------ Price
-----
1997........................................................ 103.000%
1998 and thereafter......................................... 107.500%
Optional Redemption Upon Equity Offering. In addition, at any time the
Company may, at its option, redeem up to 100% of the Senior Debentures, with net
cash proceeds of one or more Equity Offerings by the Company so long as there is
a Public Market at the time of such redemption, at the redemption prices set
forth above plus accrued and unpaid interest thereon, if any, to the date of
redemption. In order to effect the foregoing redemption with the proceeds of any
Equity Offering, the Company shall make such redemption not more than 90 days
after the consummation of any such Equity Offering.
Selection. In the case of any partial redemption, selection of the Senior
Debentures for redemption will be made by the Debenture Trustee on a pro rata
basis, by lot or by such other method as the Debenture Trustee in its sole
discretion shall deem to be fair and appropriate; provided, however, that if a
partial redemption is made with proceeds of an Equity Offering, selection of the
Senior Debentures or portion thereof for redemption shall be made by the
Debenture Trustee only on a pro rata basis, unless such method is otherwise
prohibited. Senior Debentures may be redeemed in part in multiples of $1,000
principal amount only. Notice of redemption will be sent, by first class mail,
postage prepaid, at least 45 days (unless a shorter period is acceptable to the
Debenture Trustee) prior to the date fixed for redemption to each holder whose
Senior Debentures are to be redeemed at the last address for such holder then
shown on the registry books. If any Senior Debenture is to be redeemed in part
only, the notice of redemption that relates to such Senior Debenture shall state
the portion of the principal amount thereof to be redeemed. A new Senior
Debenture in principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon cancellation of the original
Senior Debenture. On and after any redemption date, interest will cease to
accrue on the Senior Debentures or part thereof called for redemption as long as
the Company has deposited with the Paying Agent funds in satisfaction of the
redemption price pursuant to the Senior Indenture.
Fraudulent Conveyance
The use of the proceeds of the debt (including the Senior Debentures)
incurred in connection with the Uniforce Acquisition and the Refinancing may
subject such incurrence of debt and the obligations of the Company under the
Senior Debentures to review by a court under relevant federal bankruptcy and
state fraudulent conveyance and transfer statutes and, if a court makes certain
findings, it could take certain actions detrimental to the holders of the Senior
Debentures. See "Risk Factors-Fraudulent Conveyance Considerations."
Ranking
The Senior Debentures are direct and unconditional senior obligations of
COMFORCE and are secured by a pledge by COMFORCE of all of the issued and
outstanding capital stock, par value $0.01 per share, of COI, a wholly-owned
subsidiary of COMFORCE. The payment obligations of COMFORCE under the Senior
Debentures will at all times rank at least equal in priority of payment with all
existing and future senior indebtedness of COMFORCE. The Senior Indenture
permits each of COMFORCE and COI to incur additional indebtedness (including
senior indebtedness) subject to certain limitations. As of September 30, 1997,
on a pro forma basis after giving effect to the Transactions, the aggregate
principal amount of COMFORCE's outstanding senior indebtedness would have been
approximately $20.0 million. The Senior Debentures are structurally subordinated
to all liabilities of the Company's direct and indirect subsidiaries and
effectively subordinated to all future secured indebtedness of
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the Company. As of September 30, 1997, on a pro forma basis, after giving effect
to the Transactions, (i) the Company had no outstanding secured indebtedness
other than the Senior Debentures and (ii) the aggregate amount of the
outstanding liabilities of subsidiaries of COMFORCE to which holders of Senior
Debentures would be structurally subordinated would have been $169.6 million
(including $147.8 million of indebtedness).
Negative Pledge
The Company is not permitted to pledge any capital stock of COI, other than
pursuant to the terms of the Senior Debentures. The Company is required to own
100% of the capital stock of COI.
Security
Pursuant to the Senior Indenture, the obligations of the Company are
secured by all of the outstanding capital stock of COI and the Company has
assigned and pledged to the Debenture Trustee for its benefit and the benefit of
the holders of Senior Debentures, a security interest in the capital stock of
COI and certain proceeds from time to time received, receivable or otherwise
distributed in respect thereof (the "Collateral"). The Company will also assign
and pledge to the Debenture Trustee as part of the Collateral all of the shares
of capital stock of COI hereafter acquired by it. The security interest in the
Collateral will be a first priority security interest. However, absent an
acceleration of the Senior Debentures, the Company will be able to vote, as it
sees fit in its sole discretion, the capital stock of the Company.
There can be no assurance that the proceeds of the sale of any Collateral
pursuant to the Senior Indenture following an Event of Default would be
sufficient to satisfy payments due on the Senior Debentures. See "Risk Factors -
Security for the Senior Debentures".
If an Event of Default occurs under the Senior Indenture, the Debenture
Trustee on behalf of the holders of the Senior Debentures, in addition to any
rights or remedies available to it under the Senior Indenture may take such
action as it deems advisable to protect and enforce its rights in the
Collateral, including the institution of foreclosure proceedings. The proceeds
received by the Debenture Trustee from any foreclosure will be applied by the
Debenture Trustee first to pay the expenses of such foreclosure and fees and
other amounts then payable to the Debenture Trustee under the Senior Indenture
and thereafter to pay the principal and interest on the Senior Debentures.
Change of Control
Upon the occurrence of any of the following events (each a "Change of
Control"), each holder will have the right to require the Company to repurchase
all or any part of such holder's Senior Debentures at a purchase price in cash
equal to 101% of the principal amount thereof plus accrued and unpaid interest,
if any, to the date of repurchase (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant Interest
Payment Date): (i) any sale, lease, exchange or other transfer (collectively, a
"Transfer") (in one transaction or a series of related transactions) of all or
substantially all of the assets of the Company and its Subsidiaries; or (ii) a
majority of the Board of Directors of the Company or of any direct or indirect
holding company thereof shall consist of Persons who are not Continuing
Directors of the Company; (iii) the acquisition by any Person or Group (other
than the Management Group) of the power, directly or indirectly, to vote or
direct the voting of securities having more than 35% of the ordinary voting
power for the election of directors of the Company or of any direct or indirect
holding company thereof; provided, that no Change of Control shall be deemed to
occur pursuant to this clause (iii), so long as the Management Group owns an
amount of securities representing a greater percentage of such ordinary voting
power than such Person or Group; or (iv) the acquisition by any Person or Group
(including, but not limited to, the Management Group) of the power, directly or
indirectly, to vote or direct the voting of securities having more than 49.9% of
the ordinary voting power for the election of directors of the Company or any
direct or indirect holding company thereof.
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Within 30 days following any Change of Control, unless the Company has
mailed a redemption notice with respect to all the outstanding Senior Debentures
in connection with such Change of Control, the Company shall mail a notice to
each holder with a copy to the Debenture Trustee stating: (1) that a Change of
Control has occurred and that such holder has the right to require the Company
to repurchase such holder's Senior Debentures at a purchase price in cash equal
to 101% of the principal amount thereof plus accrued and unpaid interest, if
any, to the date of repurchase (subject to the right of holders of record on a
record date to receive interest on the relevant Interest Payment Date), (2) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (3) the procedures determined by the
Company, consistent with the Senior Indenture, that a holder must follow in
order to have its Senior Debentures repurchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Senior Debentures pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the Senior Indenture, the Company will
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations described in the Senior Indenture by
virtue thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of the
Company and its Subsidiaries. With respect to the disposition of property or
assets, the phrase "all or substantially all" as used in the Senior Indenture
varies according to the facts and circumstances of the subject transaction, has
no clearly established meaning under New York law (which is the law which
governs the Senior Indenture) and is subject to judicial interpretation.
Accordingly, in certain circumstances there may be a degree of uncertainty in
ascertaining whether a particular transaction would involve a disposition of
"all or substantially all" of the property or assets of a Person, and therefore
it may be unclear as to whether a Change of Control has occurred and whether the
Company is required to make an offer to repurchase the Senior Debentures as
described above.
The occurrence of certain of the events that would constitute a Change of
Control would also constitute a default under the New Credit Facility and the
Notes Indenture. Future senior indebtedness of the Company and its Subsidiaries
may also contain prohibitions of certain events that would constitute a Change
of Control or require such senior indebtedness to be repurchased upon a Change
of Control. Moreover, the exercise by the holders of their right to require the
Company to repurchase the Senior Debentures could cause a default under such
senior indebtedness even if the Change of Control itself does not, due to the
financial effect of such repurchase on the Company. Finally, the Company's
ability to pay cash to the holders upon a repurchase may be limited by the
Company's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases. Even if sufficient funds were otherwise available to allow the
Company to comply with its repurchase obligations in the event of a Change of
Control, the terms of the New Credit Facility or the Notes Indenture may
prohibit the Company's prepayment of Senior Debentures prior to their scheduled
maturity.
Certain Covenants
The Senior Indenture contains certain covenants including, among others,
the following:
Limitation on Indebtedness.
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; provided, however, that: the Company
may Incur Indebtedness, if no Default or Event of Default shall have occurred
and be continuing at the time of such Incurrence or would occur as a consequence
of such Incurrence and the Consolidated Coverage Ratio would be equal to at
least 1.20 to 1.00.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
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(i) Indebtedness Incurred pursuant to the New Credit Facility
(including, without limitation, any renewal, extension, refunding,
restructuring, replacement or refinancing thereof referred to in the
definition thereof) provided, however, that the aggregate principal amount
of all Indebtedness Incurred pursuant to this clause (i) does not exceed
$75.0 million at any time outstanding, less the aggregate principal amount
thereof repaid with the net proceeds of Asset Dispositions;
(ii) Indebtedness represented by Capitalized Lease Obligations,
mortgage financing or purchase money obligations, in each case Incurred for
the purpose of financing all or any part of the purchase price or cost of
construction or improvement of property used in a Permitted Business or
Incurred to refinance any such purchase price or cost of construction or
improvement, in each case Incurred no later than 365 days after the date of
such acquisition or the date of completion of such construction or
improvement; provided, however, that the principal amount of any
Indebtedness Incurred pursuant to this clause (ii) shall not exceed $5.0
million at any time outstanding;
(iii) Indebtedness of the Company owing to and held by any
Wholly-Owned Subsidiary or Indebtedness of a Restricted Subsidiary owing to
and held by the Company or any Wholly-Owned Subsidiary; provided, however,
that any subsequent issuance or transfer of any Capital Stock or any other
event which results in any such Wholly-Owned Subsidiary ceasing to be a
Wholly-Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or any Wholly-Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the issuer
thereof;
(iv) Indebtedness represented by (a) the Senior Debentures and the
Exchange Debentures, (b) the Notes and the Exchange Notes, (c) Existing
Indebtedness and (d) any Refinancing Indebtedness Incurred in respect of
any Indebtedness described in this clause (iv) or Incurred pursuant to
paragraph (a) above;
(v) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred in anticipation of, or to
provide all or any portion of the funds or credit support utilized to
consummate the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Subsidiary or was otherwise
acquired by the Company); provided, however, that at the time such
Restricted Subsidiary is acquired by the Company, the Company would have
been able to Incur $1.00 of additional Indebtedness pursuant to paragraph
(a) above after giving effect to the Incurrence of such Indebtedness
pursuant to this clause (v) and (B) Refinancing Indebtedness Incurred by a
Restricted Subsidiary in respect of Indebtedness Incurred by such
Restricted Subsidiary pursuant to this clause (v);
(vi) Indebtedness (A) in respect of performance bonds, bankers'
acceptances and surety or appeal bonds provided by the Company or any of
its Restricted Subsidiaries to their customers in the ordinary course of
their business, (B) in respect of performance bonds or similar obligations
of the Company or any of its Restricted Subsidiaries for or in connection
with pledges, deposits or payments made or given in the ordinary course of
business in connection with or to secure statutory, regulatory or similar
obligations, including obligations under health, safety or environmental
obligations and (C) arising from Guarantees to suppliers, lessors,
licensees, contractors, franchises or customers of obligations (other than
Indebtedness) incurred in the ordinary course of business;
(vii) Indebtedness under Currency Agreements and Interest Rate
Agreements; provided, however, that in the case of Currency Agreements and
Interest Rate Agreements, such Currency Agreements and Interest Rate
Agreements are entered into for bona fide hedging purposes of the Company
or its Restricted Subsidiaries (as determined in good faith by the Board of
Directors of the Company) and correspond in terms of notional amount,
duration, currencies and interest rates as applicable, to Indebtedness of
the Company or its Restricted Subsidiaries Incurred without violation of
the Senior Indenture or to
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business transactions of the Company or its Restricted Subsidiaries on
customary terms entered into in the ordinary course of business;
(viii) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from Guarantees or letters of credits, surety bonds or performance bonds
securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness or other
obligations incurred by any Person acquiring all or any portion of such
business assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition) in a principal amount not to exceed the gross
proceeds actually received by the Company or any of its Restricted
Subsidiaries in connection with such disposition; provided, however, that
the principal amount of any Indebtedness incurred pursuant to this clause
(viii) when taken together with all Indebtedness incurred pursuant to this
clause (viii) and then outstanding, shall not exceed $2.0 million;
(ix) Indebtedness consisting of (A) Guarantees by the Company (so long
as the Company could have incurred such Indebtedness directly without
violation of the Senior Indenture) and (B) Guarantees by a Restricted
Subsidiary of senior indebtedness incurred by the Company without violation
of the Senior Indenture (so long as such Restricted Subsidiary could have
incurred such Indebtedness directly without violation of the Senior
Indenture);
(x) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument issued by the
Company or its Subsidiaries drawn against insufficient funds in the
ordinary course of business in an amount not to exceed $250,000 at any
time, provided that such Indebtedness is extinguished within two business
days of its incurrence; and
(xi) Indebtedness (other than Indebtedness described in clauses
(i)-(x)) in a principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this clause
(xi) and then outstanding, will not exceed $10.0 million (it being
understood that any Indebtedness Incurred under this clause (xi) shall
cease to be deemed Incurred or outstanding for purposes of this clause (xi)
(but shall be deemed to be Incurred for purposes of paragraph (a)) from and
after the first date on which the Company or its Restricted Subsidiaries
could have Incurred such Indebtedness under the foregoing paragraph (a)
without reliance upon this clause (xi)).
(c) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any of its Restricted Subsidiaries, directly or indirectly, to (i)
declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving the Company or any of its Restricted Subsidiaries)
except (A) dividends or distributions payable in its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to purchase such
Capital Stock, (B) dividends or distributions payable to the Company or a
Restricted Subsidiary of the Company which holds any equity interest in the
paying Restricted Subsidiary (and if the Restricted Subsidiary paying the
dividend or making the distribution is not a Wholly-Owned Subsidiary, to its
other holders of Capital Stock on a pro rata basis) and (C) cash dividends in
respect of the preferred stock of the Company that is issued and outstanding
prior to the date of the Senior Indenture, (ii) purchase, redeem, retire or
otherwise acquire for value any Capital Stock of the Company held by Persons
other than a Wholly-Owned Subsidiary of the Company or any Capital Stock of a
Restricted Subsidiary of the Company held by any Affiliate of the Company, other
than a Wholly-Owned Subsidiary (in either case, other than in exchange for its
Capital Stock (other than Disqualified Stock)), (iii) purchase, repurchase,
redeem, defease or otherwise acquire or retire for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment, any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of
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satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of purchase, repurchase or
acquisition) or (iv) make any Investment (other than a Permitted Investment) in
any Person (any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Investment as described in
preceding clauses (i) through (iv) being referred to as a "Restricted Payment");
if at the time the Company or such Restricted Subsidiary makes such Restricted
Payment: (1) a Default shall have occurred and be continuing (or would result
therefrom); or (2) the Company is not able to incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) under "-Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other Restricted
Payments declared or made subsequent to the Issue Date would exceed the sum of
(A) 50% of the Consolidated Net Income accrued during the period (treated as one
accounting period) from the first day of the fiscal quarter beginning on or
after the Issue Date to the end of the most recent fiscal quarter ending prior
to the date of such Restricted Payment as to which financial results are
available (but in no event ending more than 135 days prior to the date of such
Restricted Payment) (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit); (B) the aggregate net proceeds received by
the Company from the issue or sale of its Capital Stock (other than Disqualified
Stock) or other capital contributions subsequent to the Issue Date (other than
net proceeds received from an issuance or sale of such Capital Stock to (x) a
Subsidiary of the Company, (y) an employee stock ownership plan or similar
trust) or (z) management employees of the Company or any Subsidiary of the
Company (other than sales of Capital Stock (other than Disqualified Stock) to
management employees of the Company pursuant to bona fide employee stock option
plans of the Company); provided, however, that the value of any non-cash net
proceeds shall be as determined by the Board of Directors in good faith, except
that in the event the value of any non-cash net proceeds shall be $2.0 million
or more, the value shall be as determined in writing by an independent
investment banking firm of nationally recognized standing; (C) the amount by
which Indebtedness of the Company is reduced on the Company's balance sheet upon
the conversion or exchange (other than by a Restricted Subsidiary of the
Company) subsequent to the Issue Date of any Indebtedness of the Company
convertible or exchangeable for Capital Stock (other than Disqualified Stock) of
the Company (less the amount of any cash, or other property, distributed by the
Company upon such conversion or exchange); and (D) the amount equal to the net
reduction in Investments (other than Permitted Investments) made after the Issue
Date by the Company or any of its Restricted Subsidiaries in any Person
resulting from (i) repurchases or redemptions of such Investments by such
Person, proceeds realized upon the sale of such Investment to an unaffiliated
purchaser, repayments of loans or advances or other transfers of assets by such
Person to the Company or any Restricted Subsidiary of the Company or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in
each case as provided in the definition of "Investment") not to exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments previously
included in the calculation of the amount of Restricted Payments; provided,
however, that no amount shall be included under this Clause (D) to the extent it
is already included in Consolidated Net Income.
(b) The provisions of paragraph (a) shall not prohibit: (i) any purchase or
redemption of Capital Stock or Subordinated Obligations of the Company made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Capital Stock of the Company (other than Disqualified Stock and other than
Capital Stock issued or sold to a Subsidiary, an employee stock ownership plan
or similar trust or management employees of the Company or any Subsidiary of the
Company); provided, however, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale shall be excluded from clause (3) (B) of paragraph
(a); (ii) any purchase or redemption of Subordinated Obligations of the Company
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, Subordinated Obligations of the Company in compliance with the
"Limitation on Indebtedness" covenant; provided, however, that such purchase or
redemption shall be excluded in the calculation of the amount of Restricted
Payments; (iii) any purchase or redemption of Subordinated Obligations from Net
Available Cash to the extent permitted under "-Limitation on Sales of Assets and
Subsidiary Stock" below; provided, however, that such purchase or redemption
shall be excluded in the calculation of the amount of Restricted Payments; and
(iv) dividends paid within 60 days after the date of declaration if at such date
of declaration such dividend would have complied with this provision; provided,
however, that such dividend shall be included in the calculation of the amount
of Restricted Payments; provided, however, that in the case of clauses (i), (ii)
and (iii) no Default or Event of Default shall have occurred or be continuing at
the time of such payment or as a result thereof.
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(c) For purposes of determining compliance with the foregoing covenant,
Restricted Payments may be made with cash or non-cash assets, provided that any
Restricted Payment made other than in cash shall be valued at the fair market
value (determined, subject to the additional requirements of the immediately
succeeding proviso, in good faith by the Board of Directors) of the assets so
utilized in making such Restricted Payment, provided, further that (i) in the
case of any Restricted Payment made with capital stock or indebtedness, such
Restricted Payment shall be deemed to be made in an amount equal to the greater
of the fair market value thereof and the liquidation preference (if any) or
principal amount of the capital stock or indebtedness, as the case may be, so
utilized, and (ii) in the case of any Restricted Payment in an aggregate amount
in excess of $2.0 million, a written opinion as to the fairness of the valuation
thereof (as determined by the Company) for purposes of determining compliance
with the "Limitation on Restricted Payments" covenant in the Senior Indenture
shall be issued by an independent investment banking firm of national standing.
(d) Not later than the date of making any Restricted Payment, the Company
shall deliver to the Debenture Trustee an Officer's Certificate stating that
such Restricted Payment complies with the Senior Indenture and setting forth in
reasonable detail the basis upon which the required calculations were computed,
which calculations may be based upon the Company's latest available quarterly
financial statements and a copy of any required investment banker's opinion.
Limitation on Liens. The Senior Indenture provides that the Company will
not and will not permit any Restricted Subsidiary to, directly or indirectly,
create or permit to exist any Liens except for Permitted Liens.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Company shall not, and shall not permit any of its Restricted Subsidiaries
to, create or permit to exist or become effective any consensual encumbrance or
restriction on the ability of any such Restricted Subsidiary to (i) pay
dividends or make any other distributions on its Capital Stock or pay any
Indebtedness or other obligation owed to the Company, (ii) make any loans or
advances to the Company or (iii) transfer any of its property or assets to the
Company, except: (a) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date, including the New Credit Facility
and the Notes Indenture; (b) any encumbrance or restriction with respect to such
a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness
issued by such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company and outstanding on such date
(other than Indebtedness Incurred in anticipation of, or to provide all or any
portion of the funds or credit support utilized to consummate, the transaction
or series of related transactions pursuant to which such Restricted Subsidiary
became a Restricted Subsidiary of the Company or was acquired by the Company);
(c) any encumbrance or restriction with respect to such a Restricted Subsidiary
pursuant to an agreement evidencing Indebtedness Incurred without violation of
the Senior Indenture or effecting a refinancing of Indebtedness issued pursuant
to an agreement referred to in clauses (a) or (b) or this clause (c) or
contained in any amendment to an agreement referred to in clauses (a) or (b) or
this clause (c); provided, however, that the encumbrances and restrictions with
respect to such Restricted Subsidiary contained in any of such agreement,
refinancing agreement or amendment, taken as a whole, are no less favorable to
the holders of the Senior Debentures in any material respect, as determined in
good faith by the Board of Directors of the Company, than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in agreements
in effect at, or entered into on, the Issue Date; (d) in the case of clause
(iii), any encumbrance or restriction (A) that restricts in a customary manner
the subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Senior Indenture, (C) that is included in a
licensing agreement to the extent such restrictions limit the transfer of the
property subject to such licensing agreement or (D) arising or agreed to in the
ordinary course of business and that does not, individually or in the aggregate,
detract from the value of property or assets of the Company or any of its
Subsidiaries in any manner material to the Company or any such Restricted
Subsidiary; (e) in the case of clause (iii) above, restrictions contained in
security agreements, mortgages or similar documents securing Indebtedness of a
Restricted Subsidiary to the extent such restrictions restrict the transfer of
the property subject to such security agreements; (f) in the case of clause
(iii) above, any instrument governing or evidencing Indebtedness of a Person
acquired by the Company or any Restricted Subsidiary of the Company at the
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time of such acquisition, which encumbrance or restriction is not applicable to
any Person, or the properties or assets of any Person, other than the Person so
acquired; provided, however, that such Indebtedness is not incurred in
connection with or in contemplation of such acquisition; (g) any restriction
with respect to such a Restricted Subsidiary imposed pursuant to an agreement
entered into for the sale or disposition of all or substantially all the Capital
Stock or assets of such Restricted Subsidiary pending the closing of such sale
or disposition; and (h) encumbrances or restrictions arising or existing by
reason of applicable law.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any of its Restricted Subsidiaries to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value, as determined in good faith by the Company's Board of Directors
(including as to the value of all non-cash consideration), of the shares and
assets subject to such Asset Disposition, (ii) at least 80% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form of
cash or Cash Equivalents and (iii) an amount equal to 100% of the Net Available
Cash from such Asset Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be) (A) first, to the extent the Company or any
Restricted Subsidiary elects (or is required by the terms of any senior secured
indebtedness or the Notes), (x) to prepay, repay or purchase senior secured
indebtedness or Notes or (y) to the investment in or acquisition of Additional
Assets within 270 days from the later of the date of such Asset Disposition or
the receipt of such Net Available Cash; (B) second, within 270 days from the
receipt of such Net Available Cash, to the extent of the balance of such Net
Available Cash after application in accordance with clause (A), to make an offer
to purchase Senior Debentures at 100% of their principal amount plus accrued and
unpaid interest, if any, thereon; (C) third, within 90 days after the later of
the application of Net Available Cash in accordance with clauses (A) and (B) and
the date that is 270 days from the receipt of such Net Available Cash, to the
extent of the balance of such Net Available Cash after application in accordance
with clauses (A) and (B), to prepay, repay or repurchase Indebtedness (other
than Preferred Stock) of a Wholly-Owned Subsidiary (in each case other than
Indebtedness owned to the Company); and (D) fourth, to the extent of the balance
of such Net Available Cash after application in accordance with clauses (A), (B)
and (C), to (w) the investment in or acquisition of Additional Assets, (x) the
making of Temporary Cash Investments, (y) the prepayment, repayment or purchase
of Indebtedness of the Company (other than Indebtedness owing to any Subsidiary
of the Company) or Indebtedness of any Subsidiary (other than Indebtedness owed
to the Company or any of its Subsidiaries) or (z) any other purpose otherwise
permitted under the Senior Indenture, in each case within the later of 45 days
after the application of Net Available Cash in accordance with clauses (A), (B)
and (C) or the date that is 360 days from the receipt of such Net Available
Cash; provided, however, that, in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (A), (B), (C) or (D) above, the
Company or such Restricted Subsidiary shall retire such Indebtedness and shall
cause the related loan commitment (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions, the Company and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this covenant at any
time exceeds $10.0 million. The Company shall not be required to make an offer
for Senior Debentures pursuant to this covenant if the Net Available Cash
available therefor (after application of the proceeds as provided in clause (A))
is less than $10.0 million for any particular Asset Disposition (which lesser
amounts shall be carried forward for purposes of determining whether an offer is
required with respect to the Net Available Cash from any subsequent Asset
Disposition).
For the purposes of this covenant, the following will be deemed to be cash:
(x) the assumption by the transferee of senior indebtedness of the Company or
senior indebtedness of any Restricted Subsidiary of the Company and the release
of the Company or such Restricted Subsidiary from all liability on such senior
indebtedness in connection with such Asset Disposition (in which case the
Company shall, without further action, be deemed to have applied such assumed
Indebtedness in accordance with clause (A) of the preceding paragraph) and (y)
securities received by the Company or any Restricted Subsidiary of the Company
from the transferee that are promptly (and in any event within 60 days)
converted by the Company or such Restricted Subsidiary into cash.
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(b) In the event of an Asset Disposition that requires the purchase of
Senior Debentures pursuant to clause (a) (iii) (B), the Company will be required
to purchase Senior Debentures tendered pursuant to an offer by the Company for
the Senior Debentures at a purchase price of 100% of their principal amount plus
accrued and unpaid interest, if any, to the purchase date in accordance with the
procedures (including prorating in the event of oversubscription) set forth in
the Senior Indenture. If the aggregate purchase price of the Senior Debentures
tendered pursuant to the offer is less than the Net Available Cash allotted to
the purchase of the Senior Debentures, the Company will apply the remaining Net
Available Cash in accordance with clauses (a) (iii) (C) or (D) above.
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Senior Debentures pursuant
to the Senior Indenture. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant, the Company will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under the Senior Indenture by virtue
thereof.
Limitation on Affiliate Transactions. (a) The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, enter
into or conduct any transaction or series of related transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with or for the benefit of any Affiliate of the Company, other than a
Wholly-Owned Subsidiary (an "Affiliate Transaction") unless: (i) the terms of
such Affiliate Transaction are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that could be obtained at
the time of such transaction in arm's length dealings with a Person who is not
such an Affiliate; (ii) in the event such Affiliate Transaction involves an
aggregate amount in excess of $500,000, the terms of such transaction have been
approved by a majority of the members of the Board of Directors of the Company
and by a majority of the disinterested members of such Board, if any (and such
majority or majorities, as the case may be, determines that such Affiliate
Transaction satisfies the criteria in (i) above); and (iii) in the event such
Affiliate Transaction involves an aggregate amount in excess of $1.0 million,
the Company has received a written opinion from an independent investment
banking firm of nationally recognized standing that such Affiliate Transaction
is fair to the Company or such Restricted Subsidiary, as the case may be, from a
financial point of view.
(b) The foregoing paragraph (a) shall not apply to (i) any Restricted
Payment permitted to be made pursuant to the covenant described under
"-Limitation on Restricted Payments," (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, or any stock options and stock ownership
plans for the benefit of employees, officers and directors, consultants and
advisors approved by the Board of Directors of the Company, (iii) loans or
advances to employees in the ordinary course of business of the Company or any
of its Restricted Subsidiaries in aggregate amount outstanding not to exceed
$250,000 to any employee or $1.0 million in the aggregate at any time, (iv) any
transaction between Wholly-Owned Subsidiaries, (v) indemnification agreements
with, and the payment of fees and indemnities to, directors, officers and
employees of the Company and its Restricted Subsidiaries, in each case in the
ordinary course of business, (vi) transactions pursuant to agreements in
existence on the Issue Date which are (x) described in the Prospectus or (y)
otherwise, in the aggregate, immaterial to the Company and its Restricted
Subsidiaries taken as a whole, (vii) any employment, non-competition or
confidentiality agreements entered into by the Company or any of its Restricted
Subsidiaries with its employees in the ordinary course of business, (viii) the
issuance of Capital Stock of the Company (other than Disqualified Stock).
Limitation on Issuances of Capital Stock of Restricted Subsidiaries. The
Company will not permit any of its Restricted Subsidiaries to issue any Capital
Stock to any Person (other than to the Company or a Wholly-Owned Subsidiary of
the Company) or permit any Person (other than the Company or a Wholly-Owned
Subsidiary of the Company) to own any Capital Stock of a Restricted Subsidiary
of the Company, if in either case as a result thereof such Restricted Subsidiary
would no longer be a Restricted Subsidiary of the Company; provided, however,
that this provision shall not prohibit (x) the Company or any of its Restricted
Subsidiaries from selling, leasing or otherwise disposing of all of the Capital
Stock of any Restricted Subsidiary or (y) the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary in compliance with the Senior
Indenture.
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Limitation on Sale/Leaseback Transactions. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into,
Guarantee or otherwise become liable with respect to any Sale/Leaseback
Transaction with respect to any property or assets unless (i) the Company or
such Restricted Subsidiary, as the case may be, would be entitled, pursuant to
the Senior Indenture, to Incur Indebtedness secured by a Permitted Lien on such
property or assets in an amount equal to the Attributable Indebtedness with
respect to such Sale/Leaseback Transaction, (ii) the Net Cash Proceeds from such
Sale/Leaseback Transaction are at least equal to the fair market value of the
property or assets subject to such Sale/Leaseback Transaction (such fair market
value determined, in the event such property or assets have a fair market value
in excess of $1.0 million, no more than 30 days prior to the effective date of
such Sale/Leaseback Transaction, by the Board of Directors of the Company as
evidenced by a resolution of such Board) and (iii) the net cash proceeds of such
Sale/Leaseback Transaction are applied in accordance with the provisions
described under "-Limitation on Sales of Assets and Subsidiary Stock."
SEC Reports. The Company will file with the Debenture Trustee and provide
to the holders of the Senior Debentures, within 15 days after it files them with
the Commission, copies of the annual reports and of the information, documents
and other reports (or copies of such portions of any of the foregoing as the
Commission may by rules and regulations prescribe) which the Company files with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act. In the event
that the Company is not required to file such reports with the Commission
pursuant to the Exchange Act, the Company will nevertheless deliver such
Exchange Act information to the holders of the Senior Debentures within 15 days
after it would have been required to file it with the Commission.
Limitation on Designations of Unrestricted Subsidiaries. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the Company
which owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted
Subsidiary" under the Senior Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) the Company would be permitted under the Senior Indenture to make
an Investment at the time of Designation (assuming the effectiveness of
such Designation) in an amount (the "Designation Amount") equal to the sum
of (i) fair market value of the Capital Stock of such Subsidiary owned by
the Company and the Restricted Subsidiaries on such date and (ii) the
aggregate amount of other Investments of the Company and the Restricted
Subsidiaries in such Subsidiary on such date; and
(c) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "-Limitation on Indebtedness" at the time of Designation
(assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "-Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Senior Indenture further provides that
the Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including of any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case of
clause (x) or (y), to the extent permitted under the covenant described under
"-Limitation on Restricted Payments."
The Senior Indenture further provides that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"),
whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if:
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(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Debenture Trustee certifying compliance with the
foregoing provisions.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all of its
assets to, any Person, unless: (i) the resulting, surviving or transferee Person
(the "Successor Issuer") shall be a corporation, partnership, trust or limited
liability company organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Issuer
(if not the Company) shall expressly assume, by supplemental indenture, executed
and delivered to the Debenture Trustee, in form satisfactory to the Debenture
Trustee, all the obligations of the Company under the Senior Debentures and the
Senior Indenture; (ii) immediately after giving effect to such transaction (and
treating any Indebtedness that becomes an obligation of the Successor Issuer or
any Subsidiary of the Successor Issuer as a result of such transaction as having
been incurred by the Successor Issuer or such Restricted Subsidiary at the time
of such transaction), no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction, the
Successor Issuer (A) shall have a Consolidated Net Worth equal or greater to the
Consolidated Net Worth of the Company immediately prior to such transaction and
(B) shall be able to incur at least an additional $1.00 of Indebtedness pursuant
to paragraph (a) of "-Limitation on Indebtedness"; and (iv) the Company shall
have delivered to the Debenture Trustee an Officers' Certificate and an Opinion
of Counsel, each stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Senior Indenture; and (v) there
has been delivered to the Debenture Trustee an Opinion of Counsel to the effect
that holders of Senior Debenture will not recognize income, gain or loss for
U.S. federal income tax purposes as a result of such consolidation, merger,
conveyance, transfer or lease and will be subject to U.S. federal income tax on
the same amount and in the same manner and at the same times as would have been
the case if such consolidation, merger, conveyance, transfer or lease had not
occurred.
The Successor Issuer will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Senior Indenture, but,
in the case of a lease of all or substantially all its assets, the Company will
not be released from the obligation to pay the principal of and interest on the
Senior Debentures.
Notwithstanding the foregoing clauses (ii) and (iii), (1) any Restricted
Subsidiary of the Company may consolidate with, merge into or transfer all or
part of its properties and assets to the Company.
Events of Default
Each of the following constitutes an Event of Default under the Senior
Indenture: (i) a default in any payment of interest on any Senior Debenture when
due, continued for 30 days, (ii) a default in the payment of principal of any
Senior Debenture when due at its Stated Maturity, upon optional redemption, upon
required repurchase, upon declaration or otherwise, (iii) the failure by the
Company to comply with its obligations under the "Merger and Consolidation"
covenant described under "-Certain Covenants" above, (iv) the failure by the
Company to comply for 30 days after notice with any of its obligations under the
covenants described under "-Change of Control" above or under covenants
described under "-Certain Covenants" above (in each case, other than a failure
to purchase Senior Debentures which shall constitute an Event of Default under
clause (ii) above), other than "Merger and Consolidation," (v) the failure by
the Company to comply for 60 days after notice with its other agreements
contained in the Senior Indenture, (vi) Indebtedness of the Company or any
Restricted Subsidiary is not paid within any applicable grace period after final
maturity or is accelerated by the holders thereof because of a default and the
total amount of such Indebtedness unpaid or accelerated exceeds $1.0 million and
such default shall not have been cured
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or such acceleration rescinded after a 10-day period, (vii) certain events of
bankruptcy, insolvency or reorganization of the Company or a Significant
Subsidiary (the "bankruptcy provisions") and (viii) any judgment or decree for
the payment of money in excess of $1.0 million (to the extent not covered by
insurance) is rendered against the Company or a Significant Subsidiary and such
judgment or decree shall remain undischarged or unstayed for a period of 60 days
after such judgment becomes final and non-appealable (the "judgment default
provision"). However, a default under clause (iv) or (v) will not constitute an
Event of Default until the Debenture Trustee or the holders of 25% in principal
amount of all outstanding series of Senior Debentures, voting as a single class,
notify the Company of the default and the Company does not cure such default
within the time specified in clause (iv) or (v) after receipt of such notice.
If an Event of Default occurs and is continuing, the Debenture Trustee or
the holders of at least 25% in principal amount of all outstanding series of
Senior Debentures, voting as a single class, by notice to the Company may
declare the principal of and premium and accrued and unpaid interest, if any, on
all the Senior Debentures to be due and payable. Upon such a declaration, such
principal and premium and accrued and unpaid interest shall be due and payable
immediately. If an Event of Default relating to certain events of bankruptcy,
insolvency or reorganization of the Company occurs, the principal of and accrued
and unpaid interest on all the Senior Debentures will become and be immediately
due and payable without any declaration or other act on the part of the
Debenture Trustee or any holders. Under certain circumstances, the holders of a
majority in principal amount of all outstanding series of Senior Debentures,
voting as a single class, may rescind any such acceleration with respect to the
Senior Debentures and its consequences.
Subject to the provisions of the Senior Indenture relating to the duties of
the Debenture Trustee, if an Event of Default occurs and is continuing, the
Debenture Trustee will be under no obligation to exercise any of the rights or
powers under the Senior Indenture at the request or direction of any of the
holders unless such holders have offered to the Debenture Trustee reasonable
indemnity or security against any loss, liability or expense. Except to enforce
the right to receive payment of principal, premium (if any) or interest when
due, no holder may pursue any remedy with respect to the Senior Indenture or the
Senior Debentures unless (i) such holder has previously given the Debenture
Trustee notice that an Event of Default is continuing, (ii) holders of at least
25% in principal amount of all outstanding series of Senior Debentures, voting
as a single class, have requested the Debenture Trustee to pursue the remedy,
(iii) such holders have offered the Debenture Trustee reasonable security or
indemnity against any loss, liability or expense, (iv) the Debenture Trustee has
not complied with such request within 60 days after the receipt of the request
and the offer of security or indemnity and (v) the holders of a majority in
principal amount of all outstanding series of Senior Debentures, voting as a
single class, have not given the Debenture Trustee a direction that, in the
opinion of the Debenture Trustee, is inconsistent with such request within such
60- day period. Subject to certain restrictions, the holders of a majority in
principal amount of the outstanding Senior Debentures are given the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Debenture Trustee or of exercising any trust or power conferred
on the Debenture Trustee. The Debenture Trustee, however, may refuse to follow
any direction that conflicts with law or the Senior Indenture or that the
Debenture Trustee determines is unduly prejudicial to the rights of any other
holder or that would involve the Debenture Trustee in personal liability. Prior
to taking any action under the Senior Indenture, the Debenture Trustee shall be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.
The Senior Indenture provides that if a Default occurs and is continuing
and is known to the Debenture Trustee, the Debenture Trustee must mail to each
holder notice of the Default within 90 days after it occurs. Except in the case
of a Default in the payment of principal of, premium (if any) or interest on any
Senior Debenture, the Debenture Trustee may withhold notice if and so long as
its board of directors, a committee of its board of directors or a committee of
its Trust officers in good faith determines that withholding notice is in the
interests of the Senior Debenture holders. In addition, the Company is required
to deliver to the Debenture Trustee, within 90 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. The Company also is required to deliver
to the Debenture Trustee, within 30 days after the occurrence thereof, written
notice of any events which would constitute certain Defaults.
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Amendments and Waivers
Subject to certain exceptions, the Senior Indenture may be amended with the
consent of the holders of a majority in principal amount of all outstanding
series of Senior Debentures, acting as a single class, then outstanding and any
past default or compliance with any provisions may be waived with the consent of
the holders of a majority in principal amount of all outstanding series of
Senior Debentures, voting as a single class. However, without the consent of
each holder of an outstanding Senior Debenture affected, no amendment may, among
other things, (i) reduce the amount of Senior Debentures whose holders must
consent to an amendment, (ii) reduce the stated rate of or extend the stated
time for payment of interest on any Senior Debenture, (iii) reduce the principal
of or extend the Stated Maturity of any Senior Debenture, (iv) reduce the
premium payable upon the redemption or repurchase of any Senior Debenture or
change the time at which any Senior Debenture may be redeemed as described under
"-Optional Redemption" above, (v) make any Senior Debenture payable in money
other than that stated in the Senior Debenture, (vi) impair the right of any
holder to receive payment of principal of and interest on such holder's Senior
Debentures on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such holder's Senior Debentures
or (vii) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Without the consent of any holder, the Company and the Debenture Trustee
may amend the Senior Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation,
partnership, trust or limited liability company of the obligations of the
Company under the Senior Indenture (provided that there has been delivered to
the Debenture Trustee an Opinion of Counsel to the effect that holders of Senior
Debentures will not recognize income, gain or loss for U.S. federal income tax
purposes as a result of such assumption and will be subject to U.S. federal
income tax on the same amount and in the same manner and at the same times as
would have been the case if such assumption had not occurred), to provide for
uncertificated Senior Debentures in addition to or in place of certificated
Senior Debentures (provided that the uncertificated Senior Debentures are issued
in registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Senior Debentures are described in Section 163 (f)
(2) (B) of the Code), to add further Guarantees with respect to the Senior
Debentures, to secure the Senior Debentures, to add to the covenants of the
Company for the benefit of the holders or to surrender any right or power
conferred upon the Company, to make any change that does not adversely affect
the rights of any holder or to comply with any requirement of the Commission in
connection with the qualification of the Senior Indenture under the Trust
Indenture Act.
The consent of the holders is not necessary under the Senior Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Senior Indenture becomes effective, the
Company is required to mail to the holders a notice briefly describing such
amendment. However, the failure to give such notice to all the holders or any
defect therein, will not impair or affect the validity of the amendment.
Defeasance
The Company at any time may terminate all its obligations under the Senior
Debentures and the Senior Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Senior Debentures, to replace
mutilated, destroyed, lost or stolen Senior Debentures and to maintain a
registrar and paying agent in respect of the Senior Debentures. The Company at
any time may terminate its obligations under covenants described under "-Certain
Covenants" (other than "Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries and the judgment default provision described under "-Events of
Default" above and the limitations contained in clauses (iii) and (iv) under
"-Certain Covenants - Merger and Consolidation" above ("covenant defeasance").
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The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Senior Debentures may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the Senior Debentures may not be
accelerated because of an Event of Default specified in clause (iv), (vi), (vii)
(with respect only to Significant Subsidiaries), (viii) or (ix) under "-Events
of Default" above or because of the failure of the Company to comply with clause
(iii) or (iv) under "-Certain Covenants - Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Debenture Trustee money or
U.S. Government Obligations for the payment of principal, premium (if any) and
interest on the Senior Debentures to redemption or maturity, as the case may be,
and must comply with certain other conditions, including delivery to the
Debenture Trustee of an Opinion of Counsel to the effect that holders of the
Senior Debentures will not recognize income, gain or loss for Federal income tax
purposes as a result of such deposit and defeasance and will be subject to
Federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law.
Satisfaction and Discharge of the Senior Indenture
The Senior Indenture will cease to be of further effect (except as
otherwise expressly provided for in the Senior Indenture) when either (i) all
outstanding Senior Debentures have been delivered (other than lost, stolen or
destroyed Senior Debentures which have been replaced) to the Debenture Trustee
for cancellation or (ii) all outstanding Senior Debentures have become due and
payable, whether at maturity or as a result of the mailing of a notice of
redemption pursuant to the terms of the Senior Indenture and the Company has
irrevocably deposited with the Debenture Trustee funds sufficient to pay at
maturity or upon redemption all outstanding Senior Debentures, including
interest thereon (other than lost, stolen, mutilated or destroyed Senior
Debentures which have been replaced), and, in either case, the Company has paid
all other sums payable under the Senior Indenture. The Debenture Trustee is
required to acknowledge satisfaction and discharge of the Senior Indenture on
demand of the Company accompanied by an Officer's Certificate and an Opinion of
Counsel at the cost and expense of the Company.
Transfer and Exchange
Upon any transfer of a Senior Debenture, the registrar may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents, and to pay any taxes and fees required by law or permitted by the
Indenture. The registrar is not required to transfer or exchange any Senior
Debentures selected for redemption nor is the registrar required to transfer or
exchange any Senior Debentures for a period of 15 days before a selection of
Senior Debentures to be redeemed. The registered holder of a Note may be treated
as the owner of it for all purposes.
Concerning the Debenture Trustee
The Bank of New York is the Debenture Trustee under the Senior Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Senior Debentures.
The Senior Indenture contains certain limitations on the rights of the
Debenture Trustee, should it become a creditor of the Company, to obtain payment
of claims in certain cases, or to realize on certain property received in
respect of any such claim a security or otherwise. The Debenture Trustee will be
permitted to engage in other transactions; however, if it acquires any
conflicting interest (as defined) it must eliminate such conflict or resign.
The holders of a majority in aggregate principal amount of the then
outstanding Senior Debentures issued under the Senior Indenture will have the
right to direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Debenture Trustee. The Senior Indenture
provides that in case an Event of
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Default shall occur (which shall not be cured) the Debenture Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Debenture
Trustee will be under no obligation to exercise any of its rights or powers
under the Senior Indenture at the request of any of the holders of the Senior
Debentures issued thereunder unless they shall have offered to the Debenture
Trustee security and indemnity satisfactory to it.
Governing Law
The Senior Indenture provides that it and the Senior Debentures will be
governed by, and construed in accordance with, the laws of the State of New York
without giving effect to applicable principles of conflicts of law to the extent
that the application of the law of another jurisdiction would be required
thereby.
Certain Definitions
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Permitted Business; (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by the Company or a Restricted Subsidiary of the Company;
(iii) Capital Stock constituting a minority interest in any Person that at such
time is a Restricted Subsidiary of the Company; or (iv) Permitted Investments of
the type and in the amounts described in clause (viii) of the definition
thereof; provided, however, that, in the case of clauses (ii) and (iii), such
Restricted Subsidiary is primarily engaged in a Permitted Business.
"Affiliate" of any specified person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of (or
any other equity interests in) a Restricted Subsidiary (other than directors'
qualifying shares) or of any other property or other assets (each referred to
for the purposes of this definition as a "disposition") by the Company or any of
its Restricted Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction) other than (i) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly-Owned Subsidiary, (ii) a disposition of inventory in the
ordinary course of business, (iii) a disposition of obsolete or worn out
equipment or equipment that is no longer useful in the conduct of the business
of the Company and its Restricted Subsidiaries and that is disposed of in each
case in the ordinary course of business, (iv) dispositions of property for net
proceeds which, when taken collectively with the net proceeds of any other such
dispositions under this clause (iv) that were consummated since the beginning of
the calendar year in which such disposition is consummated, do not exceed $1.0
million, and (v) transactions permitted under "-Certain Covenants - Merger and
Consolidation" above. Notwithstanding anything to the contrary contained above,
a Restricted Payment made in compliance with the "Limitation on Restricted
Payments" covenant shall not constitute an Asset Disposition except for purposes
of determinations of the Consolidated Coverage Ratio.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Senior Debentures, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
indebtedness, the quotient obtained by dividing (i) the sum of the product of
the numbers of years (rounded upwards to the nearest month) from
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the date of determination to the dates of each successive scheduled principal
payment of such Indebtedness or redemption multiplied by the amount of such
payment by (ii) the sum of all such payments.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date such lease may be terminated without penalty.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit, time
deposits and eurodollar time deposits with maturities of one year or less from
the date of acquisition, bankers' acceptances with maturities not exceeding one
year and overnight bank deposits, in each case with any commercial bank having
capital and surplus in excess of $500 million, (iv) repurchase obligation for
underlying securities of the types described in clauses (ii) and (iii) entered
into with any financial institution meeting the qualifications specified in
clause (iii) above, (v) commercial paper rated A-1 or the equivalent thereof by
Moody's or S&P and in each case maturing within one year after the date of
acquisition, (vi) investment funds investing 95% of their assets in securities
of the types described in clauses (i)-(v) above, (vii) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
form either Moody's or S&P and (viii) Indebtedness or preferred stock issued by
Persons with a rating of "A" or higher from S&P or "A2" or higher from Moody's.
"COI" means COMFORCE Operating, Inc., a Delaware corporation.
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization expense, (v) exchange or
translation losses on foreign currencies, and (vi) all other non-cash items
reducing Consolidated Net Income (excluding any non-cash item to the extent it
represents an accrual of or reserve for cash disbursements for any subsequent
period prior to the stated maturity of the Senior Debentures) and less, (x) the
aggregate amount of contingent and "earnout" payments in respect of any
Permitted Business acquired by the Company or any Restricted Subsidiary that are
paid in cash during such period and (y) to the extent added in calculating
Consolidated Net Income, (A) exchange or translation gains on foreign currencies
and (B) non-cash items (excluding such non-cash items to the extent they
represent an accrual for cash receipts reasonably expected to be received prior
to the Stated Maturity of the Senior Debentures), in each case for such period.
Notwithstanding the foregoing, the income tax expense, depreciation expense and
amortization expense of a Subsidiary of the Company shall be included in
Consolidated Cash Flow only to the extent (and in the same proportion) that the
net income of such Subsidiary was included in calculating Consolidated Net
Income.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent four consecutive fiscal quarters ending prior to the date of
such determination and as to which financial statements are available to (ii)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that (A) if the Company or any of its Restricted Subsidiaries has incurred any
Indebtedness since the beginning of such period and through the date of
determination of the Consolidated Coverage Ratio that remains outstanding or if
the transaction giving rise to the need to calculate Consolidated Coverage Ratio
is an incurrence of Indebtedness, or both, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to (1) such Indebtedness as if such Indebtedness had
been incurred on the first day of such period (provided that if such
Indebtedness is incurred under a revolving credit facility
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(or similar arrangement or under any predecessor revolving credit or similar
arrangement) only that portion of such Indebtedness that constitutes the one
year projected average balance of such Indebtedness (as determined in good faith
by the Board of Directors of the Company) shall be deemed outstanding for
purposes of this calculation), and (2) the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of such
period, (B) if since the beginning of such period any Indebtedness of the
Company or any of its Restricted Subsidiaries has been repaid, repurchased,
defeased or otherwise discharged (other than Indebtedness under a revolving
credit or similar arrangement unless such revolving credit Indebtedness has been
permanently repaid and the underlying commitment terminated and has not been
replaced), Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Indebtedness had been repaid,
repurchased, defeased or otherwise discharged on the first day of such period,
(C) if since the beginning of such period the Company or any of its Restricted
Subsidiaries shall have made any Asset Disposition or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Asset
Disposition, Consolidated Cash Flow for such period shall be reduced by an
amount equal to the Consolidated Cash Flow (if positive) attributable to the
assets which are the subject of such Asset Disposition for such period or
increased by an amount equal to the Consolidated Cash Flow (if negative)
attributable thereto for such period, and Consolidated Interest Expense for such
period shall be (i) reduced by an amount equal to the Consolidated Interest
Expense attributable to any Indebtedness of the Company or any of its Restricted
Subsidiaries repaid, repurchased, defeased or otherwise discharged with respect
to the Company and its continuing Restricted Subsidiaries in connection with
such Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary of the Company is sold, the Consolidated Interest Expense
for such period directly attributable to the Indebtedness of such Restricted
Subsidiary to the extent the Company and its continuing Restricted Subsidiaries
are no longer liable for such Indebtedness after such sale) and (ii) increased
by interest income attributable to the assets which are the subject of such
Asset Disposition for such period, (D) if since the beginning of such period the
Company or any of its Restricted Subsidiaries (by merger or otherwise) shall
have made an Investment in any Restricted Subsidiary of the Company (or any
Person which becomes a Restricted Subsidiary of the Company as a result thereof)
or an acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder which constitutes all or substantially all of
an operating unit of a business, Consolidated Cash Flow and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period and (E) if
since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary of the Company or was merged with or into the Company or
any Restricted Subsidiary of the Company since the beginning of such period)
shall have made any Asset Disposition, Investment or acquisition of assets that
would have required an adjustment pursuant to clause (C) or (D) above if made by
the Company or a Restricted Subsidiary of the Company during such period,
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest expense on such Indebtedness shall be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total
consolidated interest expense of the Company and its Restricted Subsidiaries
determined in accordance with GAAP, plus, to the extent not included in such
interest expense (i) interest expense attributable to Capitalized Lease
Obligations, (ii) capitalized interest, (iii) non-cash interest expense and
amortization of original issue discount, (iv) commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing, (v) interest actually paid by the Company or any such Restricted
Subsidiary under any Guarantee of Indebtedness or other obligation of any other
Person, (vi) net payments (whether positive or negative) pursuant to Interest
Rate Agreements, (vii) the cash contributions to any employee stock ownership
plan or similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person (other than the Company) in
connection with Indebtedness Incurred by such plan or trust
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and (viii) cash and Disqualified Stock dividends in respect of all Preferred
Stock of Subsidiaries and Disqualified Stock of the Company held by Persons
other than the Company or a Wholly-Owned Subsidiary and less (a) to the extent
included in such interest expense, the amortization of capitalized debt issuance
costs and (b) interest income. Notwithstanding the foregoing, the Consolidated
Interest Expense with respect to any Restricted Subsidiary of the Company, that
was not a Wholly-Owned Subsidiary, shall be included only to the extent (and in
the same proportion) that the net income of such Restricted Subsidiary was
included in calculating Consolidated Net Income.
"Consolidated Net Income" means, for any period, the consolidated net
income (loss) of the Company and its consolidated Subsidiaries determined in
accordance with GAAP; provided, however, that there shall not be included in
such Consolidated Net Income: (i) any net income (loss) of any person acquired
by the Company or any of its Restricted Subsidiaries in a pooling of interests
transaction for any period prior to the date of such acquisition, (ii) any net
income of any Restricted Subsidiary of the Company if such Restricted Subsidiary
is subject to restrictions, directly or indirectly, on the payment of dividends
or the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company (other than restrictions in effect on the Issue Date
with respect to a Restricted Subsidiary of the Company and other than
restrictions that are created or exist in compliance with the "Limitation on
Restrictions on Distributions from Restricted Subsidiaries" covenant), (iii) any
gain or loss realized upon the sale or other disposition of any assets of the
Company or its consolidated Restricted Subsidiaries (including pursuant to any
Sale/Leaseback Transaction) which are not sold or otherwise disposed of in the
ordinary course of business and any gain or loss realized upon the sale or other
disposition of any Capital Stock of any Person, (iv) any extraordinary gain or
loss, (v) the cumulative effect of a change in accounting principles, (vi) the
net income of any Person, other than a Restricted Subsidiary, except to the
extent of the lesser of (A) cash dividends or distributions actually paid to the
Company or any of its Restricted Subsidiaries by such Person and (B) the net
income of such Person (but in no event less than zero), and the net loss of such
Person (other than an Unrestricted Subsidiary) shall be included only to the
extent of the aggregate Investment of the Company or any of its Restricted
Subsidiaries in such Person and (viii) any non-cash expenses attributable to
grants or exercises of employee stock options. Notwithstanding the foregoing,
for the purpose of the covenant described under "- Certain Covenants -
Limitation on Restricted Payments" only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or advances or other
transfers of assets from Unrestricted Subsidiaries to the Company or a
Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a) (3) (D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Restricted Subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of the
most recent fiscal quarter of the Company ending prior to the taking of any
action for the purpose of which the determination is being made and for which
financial statements are available (but in no event ending more than 135 days
prior to the taking of such action), as (i) the par or stated value of all
outstanding Capital Stock of the Company plus (ii) paid in capital or capital
surplus relating to such Capital Stock plus (iii) any retained earnings or
earned surplus less (A) any accumulated deficit and (B) any amounts attributable
to Disqualified Stock.
"Continuing Director" of any Person means, as of the date of determination,
any Person who (i) was a member of the Board of Directors of such Person on the
date of the Senior Indenture or (ii) was nominated for election or elected to
the Board of Directors of such Person with the affirmative vote of a majority of
the Continuing Directors of such Person who were members of such Board of
Directors at the time of such nomination or election.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than an event which
would constitute a Change of Control), (i) matures (excluding any maturity as
the result of an optional redemption by the
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issuer thereof) or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the final Stated Maturity of the Senior
Debentures, or (ii) is convertible into or exchangeable (unless at the sole
option of the issuer thereof) for (a) debt securities or (b) any Capital Stock
referred to in (i) above, in each case at any time prior to the final Stated
Maturity of the Senior Debentures.
"Equity Offering" means an offering for cash by the Company of its common
stock, or options, warrants or rights with respect to its common stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"Existing Indebtedness" means Indebtedness of the Company or its Restricted
Subsidiaries in existence on the Issue Date, plus interest accrued, thereon,
after application of the net proceeds of the New Credit Facility, the Notes and
the Senior Debentures as described in the Prospectus.
"Fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Debenture Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Senior Indenture, including those
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Senior Indenture shall be computed in conformity with GAAP.
"Group" shall mean any "group" for purposes of Section 13(d) of the
Exchange Act.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto) (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in clauses (i), (ii) and (v)) entered into in the ordinary
course
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of business of such Person to the extent that such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the third business day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services (except (x) trade payables and accrued expenses incurred in
the ordinary course of business and (y) contingent or "earnout" payment
obligations in respect of any Permitted Business acquired by the Company or any
Restricted Subsidiary), which purchase price is due more than six months after
the date of placing such property in service or taking delivery and title
thereto or the completion of such services, (v) all Capitalized Lease
Obligations and all Attributable Indebtedness of such Person, (vi) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person, (vii) all
Indebtedness of other Persons to the extent Guaranteed by such Person, (viii)
the amount of all obligations of such Person with respect to the redemption,
repayment or other repurchase of any Disqualified Stock or, with respect to any
Restricted Subsidiary of the Company, any Preferred Stock of such Restricted
Subsidiary to the extent such obligation arises on or before the Stated Maturity
of the Senior Debentures (but excluding, in each case, accrued dividends) with
the amount of Indebtedness represented by such Disqualified Stock or Preferred
Stock, as the case may be, being equal to the greater of its voluntary or
involuntary liquidation preference and its maximum fixed repurchase price;
provided that, for purposes hereof the "maximum fixed repurchase price" of any
Disqualified Stock or Preferred Stock, as the case may be, which does not have a
fixed repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock or Preferred Stock, as the case may be, as if such
Disqualified Stock or Preferred Stock, as the case may be, were purchased on any
date on which Indebtedness shall be required to be determined pursuant to the
Senior Indenture, and if such price is based on the fair market value of such
Disqualified Stock or Preferred Stock, as the case may be, such fair market
value shall be determined in good faith by the Board of Directors of the Company
and (ix) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements. Unless specifically set
forth above, the amount of Indebtedness of any Person at any date shall be the
outstanding principal amount of all unconditional obligations as described
above, as such amount would be reflected on a balance sheet prepared in
accordance with GAAP, and the maximum liability of such Person, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations described above at such date.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts payable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person. For purposes of
the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in a Restricted
Subsidiary to be designated as an Unrestricted Subsidiary) of the fair market
value of the net assets of such Restricted Subsidiary of the Company at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time that such Subsidiary is so redesignated a Restricted
Subsidiary; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors and
evidenced by a resolution of such Board of Directors certified in an Officers'
Certificate to the Debenture Trustee.
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"Issue Date" means the date on which the Senior Debentures are originally
issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Group" means James L. Paterek, Christopher P. Franco and
Michael Ferrentino.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets subject to such Asset Disposition) therefrom in each
case net of (i) all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state, foreign and local
taxes required to be paid or accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon such assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition or by applicable law, be
repaid out of the proceeds from such Asset Disposition, (iii) all distributions
and other payments required to be made to any Person owning a beneficial
interest in assets subject to sale or minority interest holders in Subsidiaries
or joint ventures as a result of such Asset Disposition, (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition, provided however, that upon any reduction in such
reserves (other than to the extent resulting from payments of the respective
reserved liabilities), Net Available Cash shall be increased by the amount of
such reduction to reserves, and retained by the Company or any Restricted
Subsidiary of the Company after such Asset Disposition and (v) any portion of
the purchase price from an Asset Disposition placed in escrow (whether as a
reserve for adjustment of the purchase price, for satisfaction of indemnities in
respect of such Asset Disposition or otherwise in connection with such Asset
Disposition) provided, however, that upon the termination of such escrow, Net
Available Cash shall be increased by any portion of funds therein released to
the Company or any Restricted Subsidiary.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"New Credit Facility" means the Loan and Security Agreement, dated as of
November 26, 1997, among COMFORCE and COI and certain subsidiaries thereof, as
guarantors, and various other direct and indirect active subsidiaries thereof,
as borrowers, Heller, and any other financial institutions from time to time
party thereto, together with the related documents thereto (including, without
limitation, any guarantee agreements and security documents), in each case as
such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including by way of adding Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any guarantee or credit support of
any kind (including any undertaking, guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor, general partner or otherwise) and (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity.
"Notes" means all of the 12% Senior Notes due 2007, issued and outstanding
under the Notes Indenture.
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"Notes Indenture" means that certain Indenture, dated as of November 26,
1997 between COI and Wilmington Trust Company, as Indenture Trustee.
"Officer" means the Chairman of the Board, the Vice-Chairman of the Board,
the Chief Executive Officer, the Chief Financial Officer, or any Vice-President,
the Treasurer or the Secretary of the Company.
"Officer's Certificate" shall mean a certificate signed by two Officers of
the Company, at least one of whom shall be the principal executive, financial or
accounting officer of the Company.
"Opinion of Counsel" means a written opinion, in form and substance
acceptable to the Debenture Trustee, from legal counsel who is acceptable to the
Debenture Trustee.
"Permitted Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of the Company and its
Restricted Subsidiaries on the date of the Senior Indenture, as reasonably
determined by the Company's Board of Directors.
"Permitted Investment" means an Investment by the Company or any of its
Restricted Subsidiaries in (i) a Wholly-Owned Subsidiary of the Company;
provided, however, that the primary business of such Wholly-Owned Subsidiary is
a Permitted Business; (ii) another Person if as a result of such Investment such
other Person becomes a Wholly-Owned Subsidiary of the Company or is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, the Company or a Wholly-Owned Subsidiary of the Company; provided,
however, that in each case such Person's primary business is a Permitted
Business; (iii) Temporary Cash Investments; (iv) receivables owing to the
Company or any of its Restricted Subsidiaries, created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; (v) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans and advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Restricted
Subsidiary in an aggregate amount outstanding at any one time not to exceed
$250,000 to any one employee or $1.0 million in the aggregate; (vii) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any of its Restricted
Subsidiaries or in satisfaction of judgments or claims; (viii) a Person engaged
in a Permitted Business or a loan or advance by the Company the proceeds of
which are used solely to make an investment in a Person engaged in a Permitted
Business or a Guarantee by the Company of Indebtedness of any Person in which
such Investment has been made; provided, however, that no Permitted Investments
may be made pursuant to this clause (viii) to the extent the amount thereof
would, when taken together with all other Permitted Investments made pursuant to
this clause (viii), exceed $5.0 million in the aggregate (plus, to the extent
not previously reinvested, any return of capital realized on Permitted
Investments made pursuant to this clause (viii), or any release or other
cancellation of any Guarantee constituting such Permitted Investment); (ix)
Persons to the extent such Investment is received by the Company or any
Restricted Subsidiary as consideration for asset dispositions effected in
compliance with the covenant described under "-Certain Covenants - Limitations
on Sales of Assets and Subsidiary Stock"; (x) prepayments and other credits to
suppliers made in the ordinary course of business consistent with the past
practices of the Company and its Restricted Subsidiaries; and (xi) Investments
in connection with pledges, deposits, payments or performance bonds made or
given in the ordinary course of business in connection with or to secure
statutory, regulatory or similar obligations, including obligations under
health, safety or environmental obligations.
"Permitted Liens" means: (i) pledges or deposits by the Company or any
Restricted Subsidiary under workmen's compensation laws, unemployment insurance
laws, other types of social security benefits or similar legislation, or good
faith deposits in connection with bids, tenders or contracts (other than for the
payment of Indebtedness) or leases to which the Company or any Restricted
Subsidiary is a party, or deposits to secure public or statutory obligations or
deposits of cash or United States government bonds to secure surety or appeal
bonds to which the Company or any Restricted Subsidiary is a party, or deposits
as security for contested taxes or import duties or for the payment of rent, in
each case incurred by the Company or any Restricted Subsidiary in the ordinary
course
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of business consistent with past practice; (ii) Liens imposed by law, such as
carriers', warehousemen's and mechanics' Liens, in each case for sums not yet
due from the Company or any Restricted Subsidiary or being contested in good
faith by appropriate proceedings by the Company or any Restricted Subsidiary, as
the case may be, or other Liens arising out of judgments or awards against the
Company or any Restricted Subsidiary with respect to which the Company or such
Restricted Subsidiary, as the case may be, will then be prosecuting an appeal or
other proceedings for review; (iii) Liens for property taxes or other taxes,
assessments or governmental charges of the Company or any Restricted Subsidiary
not yet due or payable or subject to penalties for nonpayment or which are being
contested by the Company or such Restricted Subsidiary, as the case may be, in
good faith by appropriate proceedings; (iv) Liens in favor of issuers of
performance bonds and surety bonds issued pursuant to clause (b)(vii) under
"-Certain Covenants - Limitation on Indebtedness"; (v) survey exceptions,
encumbrances, easements or, reservations of, or rights of others for, licenses,
rights-of-way, sewers, electric lines, telegraph and telephone lines and other
similar purposes or zoning or other restrictions as to the use of real property
of the Company or any Restricted Subsidiary incidental to the ordinary course of
conduct of the business of the Company or such Restricted Subsidiary or as to
the ownership of properties of the Company or any Restricted Subsidiary, which,
in either case, were not incurred in connection with Indebtedness and which do
not in the aggregate materially adversely affect the value of said properties or
materially impair their use in the operation of the business of the Company or
any Restricted Subsidiary; (vi) Liens to secure Indebtedness permitted under
clauses (a) and (b)(i) under "- Certain Covenants - Limitation on Indebtedness";
(vii) Liens outstanding immediately after the Issue Date as set forth on
Schedule II to the Senior Indenture (and not otherwise permitted by clause
(vi)); (viii) Liens on property, assets or shares of stock of any Restricted
Subsidiary at the time such Restricted Subsidiary became a Subsidiary of the
Company; provided, however, that (A) if any such Lien has been Incurred in
anticipation of such transaction, such property, assets or shares of stock
subject to such Lien will have a fair market value at the date of the
acquisition thereof not in excess of the lesser of (1) the aggregate purchase
price paid or owed by the Company in connection with the acquisition of such
Restricted Subsidiary and (2) the fair market value of all property and assets
of such Restricted Subsidiary and (B) any such Lien will not extend to any other
assets owned by the Company or any Restricted Subsidiary; (ix) Liens on property
or assets at the time the Company or any Restricted Subsidiary acquired such
assets, including any acquisition by means of a merger or consolidation with or
into the Company or such Restricted Subsidiary; provided, however, that (A) if
any such Lien is Incurred in anticipation of such transaction, such property or
assets subject to such Lien will have a fair market value at the date of the
acquisition thereof not in excess of the lesser of (1) the aggregate purchase
price paid or owed by the Company or such Restricted Subsidiary in connection
with the acquisition thereof and of any other property and assets acquired
simultaneously therewith and (2) the fair market value of all such property and
assets acquired by the Company or such Restricted Subsidiary and (B) any such
Lien will not extend to any other property or assets owned by the Company or any
Restricted Subsidiary; (x) Liens securing Indebtedness or other obligations of a
Restricted Subsidiary owing to the Company or a Wholly Owned Subsidiary; (xi)
Liens to secure any extension, renewal, refinancing, replacement or refunding
(or successive extensions, renewals, refinancings, replacements or refundings),
in whole or in part, of any Indebtedness secured by Liens referred to in any of
clauses (vii), (viii) and (ix); provided, however, that any such Lien will be
limited to all or part of the same property or assets that secured the original
Lien (plus improvements on such property) and the aggregate principal amount of
Indebtedness that is secured by such Lien will not be increased to an amount
greater than the sum of (A) the outstanding principal amount, or, if greater,
the committed amount, of the Indebtedness described under clauses (vii), (viii)
and (ix) at the time the original Lien became a Permitted Lien under the Senior
Indenture and (B) an amount necessary to pay any premiums, fees and other
expenses Incurred by the Company in connection with such refinancing, refunding,
extension, renewal or replacement; (xii) Liens on property or assets of the
Company securing Interest Rate Agreements and Currency Agreements so long as the
related Indebtedness is, and is permitted under "-Certain Covenants-Limitation
on Indebtedness", secured by a Lien on the same property securing the relevant
Interest Rate Agreement or Currency Agreement; (xiii) Liens securing
Indebtedness incurred under (1) the Senior Indenture and (2) the New Credit
Facility or any Guarantee thereof by any Restricted Subsidiary; (xiv) Liens on
property or assets of the Company or any Restricted Subsidiary securing
Indebtedness (1) under purchase money obligation or Capitalized Lease
Obligations permitted under clause (b)(ii) under "-Certain Covenants -
Limitation on Indebtedness" or (2) under Sale/Leaseback Transactions permitted
under "-Certain Covenants - Limitation on Sale/Leaseback Transactions";
provided, that (A) the amount of Indebtedness Incurred in any specific case does
not, at the time such Indebtedness is Incurred, exceed the lesser of the cost or
fair market value of the property or asset acquired or constructed in connection
with
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such purchase money obligation or Capitalized Lease Obligation or subject to
such Sale/Leaseback Transaction, as the case may be, (B) such Lien will attach
to such property or asset upon acquisition of such property or asset and or upon
commencement of such Sale/Leaseback Transaction, as the case may be, and (C) no
property or asset of the Company or any Restricted Subsidiary (other than the
property or asset acquired or contracted in connection with such purchase money
Obligation or Capital Lease Obligation or subject to such Sale/Leaseback
Transaction, as the case may be) are subject to any Lien securing such
Indebtedness; and (xv) Liens securing the Senior Debentures.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision hereof or any
other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
A "Public Market" exists at any time with respect to the common stock of
the Company if (a) the common stock of the Company is then registered with the
Securities and Exchange Commission pursuant to Section 12(b) or 12(g) of the
Exchange Act and traded either on a national securities exchange or in the
National Association of Securities Dealers Automated Quotation System and (b) at
least 15% of the total issued and outstanding common stock of the Company, as
applicable, has been distributed prior to such time by means of an effective
registration statement under the Securities Act of 1933.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness existing on the date of the Senior
Indenture or Incurred in compliance with the Senior Indenture (including
Indebtedness of the Company that refinances Indebtedness of any Restricted
Subsidiary and Indebtedness of any Restricted Subsidiary that refinances
Indebtedness of another Restricted Subsidiary) including Indebtedness that
refinances Refinancing Indebtedness; provided, however, that (i) the Refinancing
Indebtedness has a Stated Maturity no earlier than the earlier of (A) the first
anniversary of the Stated Maturity of the Senior Debentures and (B) Stated
Maturity of the Indebtedness being refinanced, (ii) the Refinancing Indebtedness
has an Average Life at the time such Refinancing Indebtedness is Incurred that
is equal to or greater than the lesser of (A) the Average Life of the Senior
Debentures and (B) the Average Life of the Indebtedness being refinanced and,
(iii) the Refinancing Indebtedness is in an aggregate principal amount (or if
issued with original issue discount, an aggregate issue price) that is equal to
(or 101% of, in the case of a refinancing of the Senior Debentures in connection
with a Change of Control) or less than the sum of the aggregate principal amount
(or if issued with original issue discount, the aggregate accreted value) then
outstanding of the Indebtedness being refinanced.
"Restricted Subsidiary" means any Subsidiary of the Company other an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Subsidiary leases it
from such Person.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
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"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Senior Debentures pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person. Unless otherwise specified herein, each reference to a Subsidiary shall
refer to a Subsidiary of the Company.
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act), (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) Investments in commercial paper, maturing not more than 180
days after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United States
of America with a rating at the time as of which any investment therein is made
of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard and Poor's Ratings Group, (v) Investments in
securities with maturities of six months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority thereof,
and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's
Investors Service, Inc. and (vi) Investments in mutual funds whose investment
guidelines restrict such funds' investments to those satisfying the provisions
of clauses (i) through (v) above.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any Restricted Subsidiary of the Company
that is not a Subsidiary of the Subsidiary to be so designated; provided,
however, that each Subsidiary to be so designated and each of its Subsidiaries
has not at the time of such designation, and does not thereafter create, Incur,
issue, assume, guarantee or otherwise becomes liable with respect to any
Indebtedness other than Non-Recourse Debt and either (A) the Subsidiary to be so
designated has total consolidated assets of $10,000 or less or (B) if such
Subsidiary has consolidated assets greater than $10,000, then such designation
would be permitted under "-Certain Covenants - Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary subject to the limitations contained in "-Certain
Covenants - Limitation on Designations of Unrestricted Subsidiaries."
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
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"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company, at
least 99% of the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or another Wholly-Owned Subsidiary.
DESCRIPTION OF WARRANTS
General
The Warrants were issued under a Warrant Agreement dated as of November 26,
1997 (the "Warrant Agreement") between the Company and The Bank of New York, as
Warrant Agent (the "Warrant Agent"). The following summary of certain provisions
of the Warrant Agreement does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all of the provisions of the
Warrants and the Warrant Agreement, including the definitions therein of certain
terms. A copy of the Warrant Agreement can be obtained, upon request, from the
Company.
Each Warrant entitles the registered holder thereof, subject to and upon
compliance with the provisions thereof and the Warrant Agreement, at such
holder's option, prior to 5:00 P.M., New York City time, on December 1, 2009
(the "Expiration Date"), to purchase at a price of $7.55 per Warrant (the
"Exercise Price") from the Company one share of Common Stock (or such other
number as may result from adjustments as provided in the Warrant Agreement). The
number of shares of Common Stock for which a Warrant may be exercised is subject
to adjustment as set forth in the Warrant Agreement.
Warrants may be exercised on or after the Exercise Date, and before the
Expiration Date, by surrendering the Warrant Certificate evidencing the Warrants
with the form of election to purchase shares set forth on the reverse side
thereof duly completed and executed by the holder thereof and paying in full the
Exercise Price for such Warrants at the office or agency designated for such
purpose, which will initially be the corporate trust office of the Warrant Agent
in New York, New York. Each Warrant may only be exercised in whole and the
Exercise Price may be paid only in cash or by certified or official bank check.
"Exercise Date" is defined in the Warrant Agreement to mean the business day
after the sale of the Units.
The Warrant Certificates evidencing the Warrants may be surrendered for
exercise or exchange, and the transfer of Warrant Certificates will be
registrable, at the office or agency of the Company maintained for such purpose,
which initially will be the corporate trust office of the Warrant Agent in New
York, New York. No service charge will be made for any exercise, exchange or
registration of transfer of Warrant Certificates, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
Holders of Warrants will not be entitled, by virtue of being holders, to
receive dividends, vote, receive notice of any meetings of stockholders or
otherwise have any right of stockholders of the Company.
Adjustment
The number of shares of Common Stock issuable upon exercise of a Warrant
(the "Exercise Rate") is subject to adjustment from time to time upon the
occurrence of certain events, including (a) dividends or distributions on Common
Stock of the Company payable in the Common Stock of the Company or certain other
Capital Stock of the Company; (b) subdivisions, combinations or certain
reclassifications of the Common Stock of the Company; (c) distributions to all
holders of Common Stock of the Company of rights, warrants or options to
purchase Common Stock of the Company at a price per share less than the Current
Market Value (as defined below) at the Time of Determination (as defined in the
Warrant Agreement); (d) issuances by the Company of Common Stock of the
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Company or of securities convertible into or exchangeable or exercisable for
Common Stock of the Company (other than pursuant to (1) the exercise of the
Warrants, (2) any options, warrants or rights outstanding as of the date of the
Warrant Agreement, (3) without limiting any options, warrants or rights
outstanding pursuant to the immediately preceding clause (2), any directors'
plans and employee stock option or purchase plans to the extent that the
aggregate number of shares of Common Stock of the Company (or securities
convertible into or exchangeable or exercisable for the Common Stock of the
Company) distributed under all such directors' plans and employee stock option
and purchase plans does not exceed 4,000,000 shares of the Company's Common
Stock at any time (of which options to purchase 2,069,030 shares are currently
outstanding), and (4) any security convertible into, or exchangeable or
exercisable for, the Company's Common Stock as to which the issuance thereof has
previously been the subject of any required adjustment pursuant to the Warrant
Agreement and exercisable securities of the Company for which the applicable
adjustment has already been made) at a price per share less than the Current
Market Value at the Time of Determination, and (e) distributions to stockholders
of assets, debt securities or certain rights, warrants or options to purchase
securities of the Company.
"Current Market Value" per share of Common Stock of the Company or any
other security at any date means (1) if the security is not registered under the
Exchange Act, (i) the value of the security determined in good faith by the
Board of Directors of the Company and certified in a board resolution, based on
the most recently completed arm's-length transaction between the Company and a
person other than an affiliate of the Company and the closing of which occurs on
such date or shall have occurred within the six months preceding such date, (ii)
if no such transaction shall have occurred on such date or within such six-month
period, the value of the security most recently determined as of a date within
the six months preceding such date by an independent financial expert or (iii)
if neither clause (i) nor (ii) is applicable, the value of the security
determined as of such date by an independent financial expert, or (2) if the
security is registered under the Exchange Act, the average of the daily closing
bid prices for each business day during the period commencing 15 business days
before such date and ending on the date one day prior to such date or, if the
security has been registered under the Exchange Act for less than 15 consecutive
business days before such date, then the average of the daily closing bid prices
for all of the business days before such date for which daily closing bid prices
are available. If the closing bid price is not determinable for at least 10
business days in such period, the Current Market Value of the security shall be
determined as if the security were not registered under the Exchange Act.
If the Company is a party to a consolidation, merger or binding share
exchange, or certain transfers of all or substantially all of its assets occur,
the right to exercise a warrant for Common Stock of the Company may be changed
by the Company into a right to receive securities, cash or other assets of the
Company or another person.
In the event of a taxable distribution to holders of Common Stock of the
Company which results in an adjustment to the number of shares of Common Stock
or other consideration for which a Warrant may be exercised, the holders of the
Warrants may, in certain circumstances, be deemed to have received a
distribution subject to United States federal income tax as a dividend.
The Warrant Agreement permits, with certain exceptions, the amendment
thereof and the modification of the rights and obligations of the Company and
the rights of the holders of Warrant Certificates under the Warrant Agreement at
any time by the Company and the Warrant Agent with the consent of the holders of
Warrant Certificates representing a majority in number of the then outstanding
Warrants.
Mergers, Consolidations, etc.
Except as provided below, in the event that the Company consolidates with,
mergers with or into, or sells all or substantially all of its property and
assets to another person, each Warrant thereafter shall entitle the holder
thereof to receive upon exercise thereof the number of shares of capital stock
or other securities or property which the holder of a share of Common Stock is
entitled to receive upon completion of such consolidation, merger or sale of
assets. If the Company merges or consolidates with, or sells all or
substantially all of the property and assets of the Company to another person
and, in connection therewith, consideration to the holders of Common Stock in
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exchange for their shares is payable solely in cash, or in the event of the
dissolution, liquidation or winding-up of the Company, then the holders of the
Warrants will be entitled to receive distributions on an equal basis with the
holders of Common Stock or other securities issuable upon exercise of the
Warrants, as if the Warrants had been exercised immediately prior to such event,
less the Exercise Price. Upon receipt of such payment, if any, the Warrants will
expire and the rights of the holders thereof will cease. In case of any such
merger, consolidation or sale of assets, the surviving or acquiring person and,
in the event of any dissolution, liquidation or winding-up of the Company, the
Company must deposit promptly with the Warrant Agent the funds, if any,
necessary to pay to the holders of the Warrants. After such funds and the
surrendered Warrant Certificates are received, the Warrant Agent must make
payment by delivering a check in such amount as is appropriate (or, in the case
of consideration other than cash, such other consideration as is appropriate) to
such person or persons as it may be direct in writing by the holders
surrendering such Warrants.
Delivery and Form
The Warrants are represented by a single permanent global certificate in
fully registered form. See "Book-Entry Delivery and Form". In addition, the
Warrants are subject to significant transfer restrictions and bear a legend
relating to such transfer restrictions. See "Registration Rights."
Registration Rights
The Company and the Initial Purchaser have entered into a Registration
Rights Agreement dated as of November 26, 1997 (the "Warrants Registration
Rights Agreement") with respect to the Warrant Shares. The Warrants Registration
Rights Agreement provides that the Initial Purchaser and persons to whom Warrant
Shares are transferred will have the registration rights and other rights and
obligations with respect to the Warrant Shares described below.
The Company has agreed, pursuant to the Warrant Registration Rights
Agreement, within 130 days of the date of issuance of the Warrants, to file and
use its best efforts to cause to become effective a shelf registration statement
covering resales of the Warrant Shares and to keep such shelf registration
statement effective for a minimum period of two years from issuance.
Furthermore, upon effectiveness of such registration statement, the Company has
agreed to use its reasonable efforts to have the Warrant Shares listed on the
American Stock Exchange or other national securities exchange on which the
Company's Common Stock is then listed, if any.
The Warrants Registration Rights Agreement contains customary provisions
whereby the beneficiaries thereof and the Company indemnify and agree to
contribute to the other with regard to losses caused by the misstatement of any
information required to be provided in a registration statement filed under the
Securities Act. The Warrants Registration Rights Agreement requires the Company
to pay the reasonable expenses associated with any registration, other than
underwriting discounts, commissions and transfer taxes.
The summary herein of certain provisions of the Warrants Registration
Rights Agreement does not purport to be complete and is subject to, and is a
qualified in its entirety by reference to, all of the provisions of the Warrants
Registration Rights Agreement, a copy of which is available upon request to the
Company.
DESCRIPTION OF OTHER INDEBTEDNESS
The New Credit Facility
On November 26, 1997, COMFORCE Corporation and COI and certain subsidiaries
thereof, as guarantors (the "Guarantors"), and various other direct and indirect
active subsidiaries thereof, as borrowers (the "Borrowers") (COMFORCE
Corporation, the Guarantors and the Borrowers collectively referred to as the
"Company"), entered into a Loan and Security Agreement (the "New Credit
Agreement") with Heller Financial, Inc., as lender and agent for other
participating lenders (collectively, "Heller"), to provide to the Company the
New Credit Facility providing
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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 in excess of or less than the Base Rate or LIBOR as set forth below
based upon a specified leverage ratio:
Leverage Ratio Base Rate LIBOR
- -------------- --------- -----
Greater than 6.00 +.75 +2.50
Greater than 5.50 but less than +.50 +2.25
or equal to 6.00
Greater than 4.50 but less than +.25 +2.00
or equal to 5.50
Greater than 4.00 but less than +.00 +1.75
or equal to 4.50
Equal to or less than 4.00 -.25 +1.50
The obligations evidenced by the New Credit Facility are secured by a
pledge of the capital stock of the Borrowers and the Guarantors and security
interests in substantially all of the assets of the Borrowers and the
Guarantors. 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. Under the terms of his agreement with Heller, $2.5 million of the
amount pledged is required to be released when the Company has unused borrowing
availability under the New Credit Facility of at least $15 million for 15
consecutive business days, with the balance to be released when the Company has
$17.5 million of unused borrowing availability for a like period. As
consideration for this agreement, the Company has agreed to pay to Mr. Fanning a
12% per annum yield on his cash collateral, less the actual return thereon as
invested.
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.
The New Credit Agreement specifies various events as Events of Default
which will permit the lenders to cease making loans and to declare all amounts
payable in respect of the New Credit Facility to be immediately due and payable.
These events include customary Events of Default for similar types of credit
facilities.
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock having a par value of $.01 per share and 10,000,000 shares of
Preferred Stock, par value $0.01 per share, which may be issued in one or more
series with such rights and preferences as determined by the Board of Directors.
As of December 31,
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1997, the Company had issued and outstanding capital stock consisting of
15,296,350 shares of Common Stock and 500 shares of Series F Preferred Stock. In
addition, as of the date of this Prospectus, there were options to purchase an
additional 2,069,030 shares of Common Stock, at an average exercise price of
$7.64 per share, issued and outstanding, and warrants to purchase an additional
2,137,794 shares of Common Stock, at an average exercise price of $7.63 per
share, issued and outstanding.
All the shares of capital stock of COI are owned by the Company. In
addition, COI issued to the Company all of the shares in a series of PIK
Preferred Stock having a liquidation value of $20.0 million in the aggregate
(the "PIK Preferred Stock"). As the holder of the PIK Preferred Stock, the
Company is entitled to cumulative dividends, when, as and if declared by COI's
Board of Directors, at a rate equal to the interest rate on the Senior
Debentures. The PIK Preferred Stock is redeemable at COI's option on the same
basis as the Senior Debentures are redeemable by the Company.
The following summary description of the Company's capital stock does not
purport to be complete and is qualified in its entirety by this reference to the
Company's Certificate of Incorporation and Bylaws.
Common Stock
The holders of the Common Stock are entitled to one vote per share of
record on all matters to be voted upon by stockholders. At a meeting of
stockholders at which a quorum is present, a majority of the votes cast decides
all questions, unless the matter is one upon which a different vote is required
by express provision of law or the Company's Certificate of Incorporation or
Bylaws. Cumulative voting is not permitted with respect to the election of
directors.
The holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities. Subject to the rights of
holders of Preferred Stock, if any shares of Preferred Stock are then
outstanding, in the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to participate equally, share for
share, in all assets remaining after payment of liabilities.
The holders of Common Stock are entitled to receive ratably such dividends
as the Board of Directors may declare out of funds legally available therefor,
when and if so declared. The payment by the Company of dividends, if any, rests
within the discretion of its Board of Directors and will depend upon the
Company's results of operations, financial condition and capital expenditure
plans, as well as other factors considered relevant by the Board of Directors.
Preferred Stock
The Company's Certificate of Incorporation authorizes the Board of
Directors to issue shares of Preferred Stock in one or more series and to
establish such relative voting, dividend, redemption, liquidation, conversion
and other powers, preferences, rights, qualifications, limitations and
restrictions as the Board of Directors may determine without further approval of
the Stockholders of the Company.
On 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
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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 are not
entitled to vote. As of December 31, 1997, there were 500 shares of Series F
Preferred Stock outstanding with a liquidation value of $500,000.
Except for the Series F Preferred Stock, there are no other series or
classes of Preferred Stock with currently outstanding shares. All the shares of
all other series or classes of Preferred Stock previously authorized by the
Company's Board have been repurchased by the Company, canceled or converted into
Common Stock and are not subject to reissue.
The issuance of any additional series of Preferred Stock, and the relative
powers, preferences, rights, qualifications, limitations and restrictions of
such series, if and when established, will depend upon, among other things, the
future capital needs of the Company, the then-existing market conditions and
other factors that, in the judgment of the Board of Directors, might warrant the
issuance of Preferred Stock. The issuance of additional series of Preferred
Stock by the Board of Directors could, among other things, adversely affect the
voting power of the holders of Common Stock and, under certain circumstances,
make it more difficult for a person or group to gain control of the Company. At
the date of this Prospectus, there are no plans, agreements or understandings
relative to the issuance of any shares of Preferred Stock.
Delaware Law
Certain provisions of the General Corporation Law of the State of Delaware,
summarized in the following paragraphs, may be considered to have an
anti-takeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt that a stockholder might consider to be in
such stockholder's best interest, including such an attempt as might result in
payment of a premium over the market price for shares held by stockholders.
Section 203 of the General Corporation Law of the State of Delaware
prohibits a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which such person became an interested
stockholder unless (i) prior to such date, the Board of Directors approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder; or (ii) upon becoming an
interested stockholder the stockholder then owned at least 85% of the voting
stock, as defined in Section 203; or (iii) subsequent to such date, the business
combination is approved by both the Board of Directors and by at least 66-2/3 of
the corporation's outstanding voting stock, excluding shares owned by the
interested stockholder. For these purposes, the term "business combination"
includes mergers, asset sales and other similar transactions with an "interested
stockholder." An "interested stockholder" is a person who, together with
affiliates and associates, owns (or, within the prior three years, did own) 15%
or more of the corporation's voting stock. Although Section 203 permits a
corporation to elect not to be governed by its provisions, the Company to date
has not made this election.
Section 203 excludes from the definition of "interested stockholder" any
stockholder of the Company that owned over 15% of the Company's stock on
December 23, 1987, so long as such holder continues to own over 15% of the
Company.
Transfer Agent
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the principal United States federal income
tax consequences of the ownership and disposition of Notes and Units to initial
purchasers who purchase the Notes or Units at the initial issue
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price. This summary is based on the Internal Revenue Code of 1986, as amended to
the date hereof (the "Code"), administrative pronouncements, judicial decisions
and existing and proposed Treasury Regulations, changes to any of which
subsequent to the date of this Prospectus may affect the tax consequences
described herein (possibly retroactively). This summary discusses only Notes and
Units held as capital assets within the meaning of Section 1221 of the Code. It
does not discuss all of the tax consequences that may be relevant to a holder in
light of its particular circumstances or to holders subject to special rules,
such as certain financial institutions, insurance companies, tax-exempt
organizations, dealers or traders in securities or currencies, holders who hold
the Notes, Senior Debentures, Warrants or Units as a position in a "straddle" or
as part of a "hedging," "conversion" or "integrated" transaction, holders whose
functional currency is other than the U.S. dollar or holders that are not U.S.
Holders (as defined below). Persons considering the purchase of Notes or Units
should consult their tax advisors with regard to the application of the United
States federal income tax laws to their particular situations as well as any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction.
As used herein, the term "U.S. Holder" means a holder of a Note or a Unit
that for United States federal income tax purposes is (i) a citizen or resident
of the United States, (ii) a corporation or partnership created or organized in
or under the laws of the United States or of any State thereof (including the
District of Columbia), (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source or (iv) a trust if (A) a
United States court is able to exercise primary supervision over the trust's
administration and (B) one or more United States persons have the authority to
control all of the trust's substantial decisions. Notwithstanding the preceding
sentence, to the extent provided in United States Treasury Regulations, certain
trusts in existence on August 20, 1996, and treated as United States persons
prior to such date, that elect to continue to be treated as United States
persons also will be U.S. Holders.
The Notes
Payments of Interest
Payments of interest on a Note generally will be taxable to a U.S. Holder
as ordinary interest income at the time that such payments are accrued or are
received (in accordance with the U.S. Holder's method of tax accounting).
It is possible that the IRS could assert that the Additional Interest which
the Company would be obligated to pay if the Notes Exchange Offer Registration
Statement is not filed or declared effective within the time periods set forth
herein (or certain other actions are not taken) (as described above under "Notes
Exchange Offer and Registration Rights") are "contingent payments" for United
States federal income tax purposes. If so treated, the Notes would be treated as
contingent payment debt instruments and certain adverse United States federal
income tax consequences could result. However, the United States Treasury
Regulations issued by the IRS regarding debt instruments that provide for one or
more contingent payments provide that, for purposes of determining whether a
debt instrument is a contingent payment debt instrument, remote or incidental
contingencies are ignored. The Company believes that the possibility of the
payment of Additional Interest is remote and, accordingly, does not intend to
treat the Notes as contingent payment debt instruments.
The Company does not intend to treat the possibility of an optional or
provisional redemption or repurchase of the Notes as giving rise to any
additional accrual of OID or recognition of ordinary income upon redemption,
sale or exchange.
Sale, Exchange or Retirement
Subject to the discussion of the Exchange Offer below, upon the sale,
exchange or retirement of a Note, a U.S. Holder would recognize gain or loss, if
any, equal to the difference between the amount realized on the sale, exchange
or retirement and the holder's adjusted tax basis in the Note. Gain or loss
recognized on the sale, exchange or retirement of a Note will generally be
capital gain or loss. In the case of a noncorporate U.S. Holder, the maximum
marginal United States federal income tax rate applicable to such gain will be
lower than the maximum marginal
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United States federal income tax rate applicable to ordinary income if such U.S.
Holder's holding period for such Notes exceeds one year and will be further
reduced if such Notes were held for more than 18 months.
Exchange Offer
The exchange of Notes for Exchange Notes by a U.S. Holder pursuant to the
Exchange Offer should not constitute a taxable exchange for United States
federal income tax purposes. A U.S. Holder should not recognize gain or loss
upon the receipt of an Exchange Note pursuant to the Exchange Offer and should
be required to continue to include interest on the Exchange Notes in gross
income for United States federal income tax purposes in the manner and to the
extent described above. A U.S. Holder's holding period for an Exchange Note
should include the holding period for the original note exchanged pursuant to
the Exchange Offer and such holder's adjusted basis in an Exchange Note should
be the same as such holder's adjusted basis in such original Note.
Backup Withholding and Information Reporting
Certain noncorporate U.S. Holders may be subject to backup withholding at a
rate of 31% on payments made on a Note. Backup withholding will apply only if a
U.S. Holder (i) fails to furnish its Taxpayer Identification Number ("TIN")
which, in the case of an individual, would be his or her Social Security number,
(ii) furnishes an incorrect TIN, (iii) is notified by the IRS that it has failed
to properly report payments of interest and dividends or (iv) under certain
circumstances, fails to certify, under penalty of perjury, that it has furnished
a correct TIN and has not been notified by the IRS that it is subject to backup
withholding. The amounts withheld under the backup withholding rules are not an
additional tax and may be refunded, or credited against the U.S. Holder's United
States federal income tax liability provided that the required information is
furnished to the IRS.
The Units
Allocation of the Issue Price Between a Senior Debenture and Warrant
Each Unit is comprised of a Senior Debenture and a Warrant. The "issue
price" of a Unit for United States federal income tax purposes will be the
initial offering price of a substantial amount of the Units to investors (other
than persons acting in their capacity as underwriters, placement agents or
wholesalers). The issue price will be allocated between the Senior Debenture and
the Warrant based on their respective fair market values at the time of
issuance, and a U.S. Holder's initial tax basis in each will be equal to the
amount so allocated. Based upon its estimate of the fair market value of a
Warrant, the Company intends to treat $19,493,000 of the issue price of a Unit
as allocable to the Senior Debenture (which amount the Company will therefore
treat as its "issue price" for United States federal income tax purposes) and
$507,000 as allocable to the Warrant. The Company intends to file information
returns with the Internal Revenue Service (the "IRS") based on such allocation.
The Company's allocation of the issue price is binding on a U.S. Holder for
United States federal income tax purposes unless the holder discloses the use of
a different allocation in its United States federal income tax return for the
year in which the Unit was acquired. However, the Company's allocation is not
binding on the IRS, and there can be no assurance that the IRS will not
challenge such allocation.
The Senior Debentures
In general, the excess of the "stated redemption price at maturity" of a
Senior Debenture over its "issue price" generally will constitute original issue
discount ("OID") for United States federal income tax purposes. The stated
redemption price at maturity of a Senior Debenture is the sum of all scheduled
amounts payable on the Senior Debenture (including interest). U.S. Holders of
the Senior Debentures will be required to include OID in income for United
States federal income tax purposes as it accrues, in accordance with a constant
yield method based on a compounding of interest, before the receipt of cash
payments attributable to such income. Under this method, U.S.
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Holders generally will be required to include in income increasingly greater
amounts of OID in successive accrual periods.
The Company does not intend to treat the possibility of an optional or
provisional redemption or repurchase of the Senior Debentures as giving rise to
any additional accrual of OID or recognition of ordinary income upon redemption,
sale or exchange.
Subject to the discussion of the Debenture Exchange Offer below, upon the
sale, exchange or retirement of a Senior Debenture, a U.S. Holder will recognize
taxable gain or loss equal to the difference between the amount realized and
such holder's adjusted tax basis. A U.S. Holder's adjusted tax basis generally
will equal the issue price of such Senior Debenture increased by the amount of
any OID previously included in income by such U.S. Holder with respect to such
Senior Debenture and decreased by any payment previously made on such Senior
Debenture. Such gain or loss realized on the sale, exchange or retirement will
be capital gain or loss. In the case of a noncorporate U.S. Holder, the maximum
marginal United States federal income tax rate applicable to such gain will be
lower than the maximum marginal United States federal income tax rate applicable
to ordinary income if such U.S. Holder's holding period for such Senior
Debentures exceeds one year and will be further reduced if such Senior
Debentures were held for more than 18 months.
The exchange of a Subordinated Debenture for an Exchange Debenture by a
U.S. Holder pursuant to the Exchange Offer should not constitute a taxable
exchange for United States federal income tax purposes. A U.S. Holder should not
recognize gain or loss upon the receipt of an Exchange Debenture pursuant to the
Exchange Offer and should be required to continue to include interest on the
Exchange Debenture in gross income for United States federal income tax purposes
in the manner and to the extent described above. A U.S. Holder's holding period
for an Exchange Debenture should include the holding period for the original
Subordinated Debenture exchanged pursuant to the Exchange Offer and such
holder's adjusted basis in an Exchange Subordinated Debenture should be the same
as such holder's adjusted basis in such original Subordinated Debenture.
The Company expects that the Senior Debentures will be applicable high
yield discount obligations as defined in the Code, because their yield to
maturity is expected to exceed the "applicable federal rate" in effect at the
time of their issuance (the "AFR") plus five percentage points. In that event no
portion of the OID on the Senior Debentures would be deductible by the Company
until paid. In addition, a portion of the OID thereon may not be deductible by
the Company at any time; such portion would be an amount that bears the same
ratio to such OID as (i) the excess of the yield to maturity of the Senior
Debentures over the AFR plus six percentage points bears to (ii) the yield to
maturity. To the extent that the non-deductible portion of OID would have been
treated as a dividend if it had been distributed with respect to the Company's
stock, it will be treated as a dividend to corporate holders for purposes of the
rules relating to the dividends received deduction.
It is possible that the IRS could assert that the Additional Interest which
the Company would be obligated to pay if the Debentures Exchange Offer
Registration Statement is not filed or declared effective within the time
periods set forth herein (or certain other actions are not taken) (as described
above under "Debentures Exchange Offer and Registration Rights") are "contingent
payments" for United States federal income tax purposes. If so treated, the
Senior Debentures would be treated as contingent payment debt instruments, and
certain adverse United States federal income tax consequences could result.
However, the United States Treasury Regulations issued by the IRS regarding debt
instruments that provide for one or more contingent payments provide that, for
purposes of determining whether a debt instrument is a contingent debt
instrument, remote or incidental contingencies are ignored. The Company believes
that the possibility of the payment of Additional Interest is remote and,
accordingly, does not intend to treat the Senior Debentures as contingent
payment debt instruments.
The Warrants
A U.S. Holder generally will not recognize any gain or loss upon exercise
of a Warrant (except with respect to any cash received in lieu of a fractional
share of Common Stock). A U.S. Holder will have tax basis in the shares
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of Common Stock received upon exercise equal to the sum of its tax basis in the
Warrants and the aggregate exercise price thereof. A U.S. Holder's holding
period in such shares of Common Stock would begin on the day after such Warrants
were exercised and will not include the period during which the Warrant was
held.
Upon the sale or exchange of a Warrant, a U.S. Holder will generally
recognize gain or loss equal to the difference, if any, between the amount
realized and the U.S. Holder's tax basis. If a Warrant expires unexercised, a
U.S. Holder may be permitted to claim a capital loss, in an amount equal to the
U.S. Holder's tax basis in the Warrant. Any such gain or loss will be capital
gain or loss if the Common Stock to which such Warrant relates would have been a
capital asset in the hands of such holder. In the case of a noncorporate U.S.
Holder, the maximum marginal United States federal income tax rate applicable to
such gain will be lower than the maximum marginal United States federal income
tax rate applicable to ordinary income if such U.S. Holder's holding period for
such Warrants exceeds one year and will be further reduced if such Warrants were
held for more than 18 months.
Under Section 305 of the Code, a U.S. Holder of a Warrant may be deemed to
have received a constructive distribution of ordinary dividend income from the
Company in the event of certain adjustments to the number of shares of Common
Stock to be issued on exercise of a Warrant or the failure to make such an
adjustment.
Backup Withholding and Information Reporting
Certain noncorporate U.S. Holders may be subject to backup withholding at a
rate of 31% on payments made on a Senior Debenture or a Warrant. Backup
withholding will apply only if a U.S. Holder (i) fails to furnish its TIN which,
in the case of an individual, would be his or her Social Security number, (ii)
furnishes an incorrect TIN, (iii) is notified by the IRS that it has failed to
properly report payments of interest and dividends or (iv) under certain
circumstances, fails to certify, under penalty of perjury, that it has furnished
a correct TIN and has not been notified by the IRS that it is subject to backup
withholding. The amounts withheld under the backup withholding rules are not an
additional tax and may be refunded, or credited against the U.S. Holder's United
States federal income tax liability provided that the required information is
furnished to the IRS.
BOOK-ENTRY, DELIVERY AND FORM
The Unregistered Securities were each issued as a single, permanent global
certificate in definitive, fully registered form (the "Unregistered Global
Securities"). Except for Exchange Securities issued to Non-Global Purchasers (as
defined below), the Exchange Securities will each initially be issued in the
form of one or more global certificates (collectively, the "Exchange Global
Certificates"). The Unregistered Global Securities were deposited on the date of
the closing of the Notes Offering and the concurrent offering of the Units, and
the Exchange Global Certificates will be deposited on the date of closing of the
Exchange Offers with, or on behalf of, the Depository and registered in the name
of a nominee of DTC.
Securities (i) originally purchased by or transferred to "foreign
purchasers" or Accredited Investors who are not QIBs or (ii) held by QIBs who
elect to take physical delivery of their certificates instead of holding their
interest through Global Securities (and which are thus ineligible to trade
through DTC) (collectively referred to herein as the "Non-Global Purchasers")
will be issued in registered form ("Certificated Securities"). Upon the transfer
to a QIB of any Certificated Security initially issued to a Non-Global
Purchaser, such Certificated Security will, unless the transferee requests
otherwise or such Global Security has previously been exchanged in whole for
Certificated Securities, be exchanged for an interest in each Global Security.
"Global Securities" means the Unregistered Global Securities or the Exchange
Global Securities, as the case may be.
The Global Securities. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Securities, DTC or its
custodian will credit, on its internal system, the principal amount of Notes, or
the principal amount of Senior Debentures, as the case may be, of the individual
beneficial interest represented by such Global Security to the respective
accounts of persons who have accounts with such depositary and
171
<PAGE>
(ii) ownership of beneficial interests in the Global Securities will be shown
on, and the transfer of such ownership will be effected only through, records
maintained by DTC or its nominee (with respect to interests of persons who have
accounts with DTC ("DTC Participants")) and the records of DTC Participants
(with respect to interests of persons other than DTC Participants). Ownership of
beneficial interests in the Global Securities will be limited to DTC
Participants or persons who hold interests through DTC Participants. QIBs may
hold their interests in the Global Securities directly through DTC, if they are
DTC Participants in such system, or indirectly through organizations which are
DTC Participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of any of
the Global Securities, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the Note or the Senior Debenture, as the
case may be, represented by the applicable Global Security for all purposes
under the Notes Indenture or the Senior Indenture, as the case may be. No
beneficial owner of an interest in the Global Securities will be able to
transfer that interest except in accordance with DTC's procedures, in addition
to those provided for under the Notes Indenture or the Senior Indenture.
Payments on the Global Securities will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the Notes
Trustee or the Debentures Trustee will have any responsibility or liability for
any aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Security or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment in
respect of a Global Security, will credit DTC Participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the applicable Global Security as shown on the records of DTC or its nominee.
The Company also expects that payments by DTC Participants to owners of
beneficial interests in the Global Securities held through such DTC Participants
will be governed by standing instructions and customary practice, as is now the
case with securities held for the accounts of customers registered in the names
of nominees for such customers. Such payments will be the responsibility of such
DTC Participants.
Transfers between DTC Participants in DTC will be effected in the ordinary
way in accordance with DTC rules and will be settled in clearinghouse funds. If
a holder requires physical delivery of a Certificated Security for any reason,
including to sell Notes or Senior Debentures to persons in states which require
physical delivery of Certificated Securities, or to pledge such securities, such
holder must transfer its interest in the applicable Global Security, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Notes Indenture or the Senior Indenture, as the case may be.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Securities (including the presentation of the Securities
for exchange as described below) only at the direction of one or more DTC
Participants to whose account the DTC interests in the Global Securities are
credited and only in respect of such portion of the Securities as to which such
DTC Participant or DTC Participants has or have given such direction. However,
if there is an Event of Default under the Notes Indenture or the Senior
Indenture, DTC will exchange the Global Securities for Certificated Securities,
which it will distribute to its DTC Participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and facilitate the clearance and settlement of
securities transactions between DTC Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. DTC Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly.
172
<PAGE>
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Securities among DTC Participants, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company, the Initial Purchaser or any
other person will have any responsibility for the performance by DTC or its
Participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Securities and a successor depositary is
not appointed by the Company within 90 days, Certificated Securities will be
issued in exchange for the Global Securities.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Securities for its own account
pursuant to either Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Securities received in
exchange for Unregistered Securities, where such Exchange Securities were
acquired as a result of market-making activities or other trading activities.
The Company has agreed that for a period of 180 days after the Expiration Date,
it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. To the extent and for
such period as required by law, all dealers effecting transactions in the
Exchange Securities may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange
Securities by broker-dealers. Exchange Securities received by broker-dealers for
their own account pursuant to either Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Securities, or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commission or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Securities. Any broker-dealer that resells Exchange Securities that
were received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Securities
may be deemed to be an 'underwriter' within the meaning of the Securities Act
and any profit on any such resale of Exchange Securities and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensations under the Securities Act. The Letters of Transmittal state that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an 'underwriter' within the
meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
pursuant to a Letter of Transmittal.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Notes and the Senior
Debentures will be passed upon for COI and the Company, respectively, by
Doepken, Keevican & Weiss Professional Corporation, Pittsburgh, Pennsylvania.
EXPERTS
The consolidated balance sheets of COMFORCE Corporation and Subsidiaries as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows
173
<PAGE>
for each of the three years in the period ended December 31, 1996, included in
this Prospectus, have been audited by Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The balance sheets of RHO Company Incorporated as of December 31, 1995 and
1996, and the related statements of income, changes in shareholders' deficit and
cash flows for the years ended December 31, 1995 and 1996, included in this
Prospectus, have been audited by Arthur Andersen LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The consolidated balance sheets of Uniforce Services, Inc. and Subsidiaries
as of December 31, 1996 and 1995, and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the years in the three
year period ended December 31, 1996, have been included herein in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
174
<PAGE>
COMFORCE CORPORATION
AND UNIFORCE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Pages
-----
<S> <C>
COMFORCE CORPORATION PRO FORMA Unaudited Pro Forma Combined Financial
Statements:
Introduction........................................................................................................ F-2
Unaudited Pro Forma Combined Balance Sheet as of September 30, 1997................................................. F-3
Unaudited Pro Forma Combined Statement of Operations for the nine months ended September 30, 1997................... F-4
Unaudited Pro Forma Combined Statement of Operations for the nine months ended September 30, 1996................... F-5
Unaudited Pro Forma Combined Statement of Operations for the year ended December 31, 1996........................... F-6
Notes to Unaudited Pro Forma Combined Financial Statements.......................................................... F-7
COMFORCE CORPORATION
Audited Financial Statements:
Report of Independent Accountants................................................................................... F-10
Consolidated Balance Sheets as of December 31, 1996 and 1995........................................................ F-11
Consolidated Statements of Operations for years ended December 31, 1996, 1995 and 1994.............................. F-12
Consolidated Statements of Stockholders' Equity for years ended December 31, 1996, 1995 and 1994.................... F-13
Consolidated Statements of Cash Flows for years ended December 31, 1996, 1995 and 1994.............................. F-15
Notes to Consolidated Financial Statements.......................................................................... F-17
Unaudited Interim Financial Statements:
Unaudited Condensed Consolidated Balance Sheet as of September 30, 1997............................................. F-43
Unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 1997 and
1996............................................................................................................. F-45
Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity for the nine months ended
September 30, 1997............................................................................................... F-46
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and
1996............................................................................................................. F-47
Notes to Unaudited Consolidated Financial Statements................................................................ F-48
RHO COMPANY INCORPORATED
Audited Financial Statements:
Report of Independent Public Accountants............................................................................ F-54
Balance Sheets as of December 31, 1996 and 1995..................................................................... F-55
Statements of Income for years ended December 31, 1996, 1995 and 1994............................................... F-56
Statements of Changes in Shareholders' Deficit for years ended December 31, 1996, 1995 and 1995..................... F-57
Statements of Cash Flows for years ended December 31, 1996, 1995 and 1994........................................... F-58
Notes to Financial Statements....................................................................................... F-59
UNIFORCE
Audited Consolidated Financial Statements:
Independent Auditors' Report........................................................................................ F-64
Consolidated Balance Sheets as of December 31, 1996 and 1995........................................................ F-65
Consolidated Statements of Earnings for years ended December 31, 1996, 1995 and 1994................................ F-66
Consolidated Statements of Stockholders' Equity for years ended December 31, 1996, 1995 and 1994.................... F-67
Consolidated Statements of Cash Flows for years ended December 31, 1996, 1995 and 1994.............................. F-68
Notes to Consolidated Financial Statements.......................................................................... F-69
Unaudited Interim Financial Statements:
Unaudited Consolidated Condensed Balance Sheet as of September 30, 1997............................................. F-79
Unaudited Consolidated Condensed Statements of Earnings for the nine months ended September 30, 1997 and
1996............................................................................................................. F-80
Unaudited Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 1997 and
1996............................................................................................................. F-81
Notes to Unaudited Consolidated Condensed Financial Statements...................................................... F-82
</TABLE>
F-1
<PAGE>
COMFORCE Corporation and Subsidiaries
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements reflect (i)
the treatment of the operation of the Company's jewelry business prior to
January 1, 1996 as a discontinued operation; (ii) the acquisition of business
operating in the staffing industry, including COMFORCE Telecom, Inc. ("COMFORCE
Telecom") in 1995, Williams Communications Services, Inc. ("Williams"), RRA,
Inc., Project Staffing Support Team, Inc. and DataTech Technical Services, Inc.
(collectively, "RRA"), Force Five, Inc. ("Force Five"), Continental Field
Services Corp. ("Continental"), and AZATAR Computer Systems, Inc. ("AZATAR"),
completed in 1996, RHO Company Incorporated ("Rhotech"), completed in 1997, and
the proposed acquisition of Uniforce Services, Inc. ("Uniforce") as if such
acquisitions had occurred on January 1, 1996 (other than the unaudited pro forma
balance sheet at September 30, 1997, which has been prepared as if all such
acquisitions were consummated as of such date) (and accounted for by the
purchase method); and (iii) the financing of $167 million of debt resulting from
the Notes Offering, the Units Offering and the initial borrowings under the New
Credit Facility as if such debt were outstanding for all periods presented and
replaced all historical financing arrangements. Prior to its acquisition by the
Company, each of these acquired businesses operated as a separate independent
entity. Since the unaudited pro forma combined financial statements set forth
below show the combined financial condition and operating results of these
recently acquired businesses during periods when they were not under common
control or management, the information presented may not be indicative of the
results which would have actually been obtained had such acquisitions been
completed on the dates indicated, or the Company's future financial or operating
results. These unaudited pro forma combined financial statements should be read
in conjunction with the financial statements of the respective entities included
therein, and the related notes thereto.
F-2
<PAGE>
COMFORCE Corporation
Unaudited Pro Forma Combined Balance Sheet
as of September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
COMFORCE Uniforce Adjustments(1) (the Company)
-------- -------- -------------- -------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $2,670 $6,555 $(7,151) $2,074
Restricted cash and equivalents ................................ 360 -- -- 360
Accounts receivable and Service fees receivable, net ........... 26,547 46,522 -- 73,069
Prepaid expenses ............................................... 1,050 803 -- 1,853
Deferred financing fees ........................................ 1,628 -- (1,628) --
Income tax receivable .......................................... 590 -- -- 590
Deferred income taxes .......................................... 2,028 201 3,000 5,229
Other assets ................................................... 243 -- -- 243
--------- --------- --------- ---------
Total current assets ..................................... 35,116 54,081 (5,779) 83,418
--------- --------- --------- ---------
Deferred financing fees ........................................ -- 324 7,676 8,000
Property and equipment, net of accumulated
depreciation ................................................ 1,449 4,336 -- 5,785
Intangible assets, net of accumulated amortization ............. 38,722 7,051 85,614 131,387
Other assets ................................................... 452 -- -- 452
--------- --------- --------- ---------
Total assets ............................................. $75,739 $65,792 $87,511 $229,042
========= ========= ========= =========
Current liabilities:
Borrowings under revolving line of credit ...................... $16,488 $2,000 $(14,488) $4,000
Current portion of capitalized lease obligations ............... -- 204 -- 204
Accounts payable ............................................... 956 1,274 -- 2,230
Accrued expenses ............................................... 5,232 2,502 -- 7,734
Accrued payroll and payroll taxes .............................. 3,337 7,220 -- 10,557
Income taxes ................................................... -- 485 -- 485
--------- --------- --------- ---------
Total current liabilities ................................ 26,013 13,685 (14,488) 25,210
--------- --------- --------- ---------
Capitalized lease obligations .................................. -- 577 -- 577
Deferred income tax ............................................ 90 -- -- 90
Long-term bank debt ............................................ 20,000 34,098 (21,098) 33,000
Notes and Senior Debentures .................................... -- -- 130,000 130,000
Other .......................................................... 690 -- -- 690
Commitments and contingencies .................................. -- -- -- --
Stockholders' equity:
Series F Senior convertible preferred stock .................... 1 -- -- 1
Common stock ................................................... 137 51 (35) 153
Additional paid-in capital ..................................... 30,485 9,028 3,113 42,626
Retained deficit, since January 1, 1996 ........................ (1,677) -- (1,628) (3,305)
Retained earnings .............................................. -- 30,304 (30,304) --
Treasury stock ................................................. -- (21,951) 21,951 --
--------- --------- --------- ---------
Total stockholders' equity ............................... 28,946 17,432 (6,903) 39,475
--------- --------- --------- ---------
Total liabilities and stockholders' equity ..................... $75,739 $65,792 $87,511 $229,042
========= ========= ========= =========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-3
<PAGE>
COMFORCE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997(2)
(in thousands except per share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
COMFORCE Rhotech Uniforce Adjustments(3 (the Company)
-------- ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues ........................................ $145,986 $15,416 $132,953 -- $294,355
Cost of revenues ................................ 127,227 14,411 107,449 -- 249,087
--------- --------- --------- --------- ---------
Gross profit ................................. 18,759 1,005 25,504 -- 45,268
Operating expenses:
Selling, general and administrative .......... 11,842 1,524 17,325 -- 30,691
Depreciation and amortization ................ 1,241 40 953 1,480 3,714
--------- --------- --------- --------- ---------
Income (loss) from operations ................... 5,676 (559) 7,226 (1,480) 10,863
Other (income) expense:
Bridge financing costs .......................... 5,822 -- -- -- 5,822
Other ........................................... (344) 384 (9) -- 31
Interest expense ................................ 2,151 207 1,829 11,091 15,278
--------- --------- --------- --------- ---------
7,629 591 1,820 11,091 21,131
--------- --------- --------- --------- ---------
Income (loss) before income taxes ............... (1,953) (1,150) 5,406 (12,571) (10,268)
Provision (credit) for income taxes ............. (646) -- 2,126 (4,721) (3,241)
--------- --------- --------- --------- ---------
Net income (loss) ............................... (1,307) $(1,150) $3,280 $(7,850) (7,027)
========= ========= ========= ========= =========
Dividends on preferred stock .................... 732 18
--------- ---------
Loss available for common stockholders .......... $(2,039) $(7,045)
========= =========
Loss per share from operations .................. $(0.15) $(0.45)
========= =========
Weighted average shares outstanding ............. 13,256 15,512(4)
========= =========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
COMFORCE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996(2)
(in thousands except per share data)
<TABLE>
<CAPTION>
FORCE
COMFORCE Williams RRA FIVE AZATAR Continental
-------- -------- --- ---- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues ............................. $ 33,514 $ 657 $ 22,799 $ 4,598 $ 5,781 $ 7,377
Cost of revenues ..................... 28,690 499 20,959 3,454 4,619 6,259
-------- -------- -------- -------- -------- --------
Gross profit ......................... 4,824 158 1,840 1,144 1,162 1,118
Operating expenses:
Selling, general and
administrative .................... 2,891 64 1,375 1,274 555 802
Depreciation and
amortization ...................... 343 1 34 24 25 13
-------- -------- -------- -------- -------- --------
Income (loss) from
operations ........................ 1,590 93 431 (154) 582 303
Other expense (income) ............... (29) -- -- -- (54) (23)
Interest expense
(income) .......................... 102 -- 34 7 29 5
-------- -------- -------- -------- -------- --------
73 -- 34 7 (25) (18)
-------- -------- -------- -------- -------- --------
Income (loss) before
income taxes ...................... 1,517 93 397 (161) 607 321
Provision (credit) for
income taxes ...................... 610 39 -- (49) 254 --
-------- -------- -------- -------- -------- --------
Net income (loss) .................... 907 $ 54 $ 397 $ 112 $ 353 $ 321
======== ======== ======== ======== ========
Less dividends on
preferred stock ................... 193
--------
Add dividends on
common stock
equivalents ....................... 18
--------
Income (loss) available
for common
stockholders ...................... $ 732
========
Income (loss) per share
from operations ................... $ 0.06
========
Weighted average
shares outstanding ................ 12,661
========
<CAPTION>
Pro Forma Pro Forma
Rhotech Uniforce MONTARE Adjustments(3) (the Company)
------- -------- ------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues ............................... $ 63,556 $ 03,393 $ 2,474 -- $ 244,149
Cost of revenues ....................... 56,656 82,047 1,671 -- 204,854
--------- --------- --------- --------- ---------
Gross profit ........................... 6,900 21,346 803 -- 39,295
Operating expenses:
Selling, general and
administrative ...................... 5,321 14,556 546 -- 27,384
Depreciation and
amortization ........................ 226 783 6 2,184 3,639
--------- --------- --------- --------- ---------
Income (loss) from
operations .......................... 1,353 6,007 251 (2,184) 8,272
Other expense (income) ................. 197 (19) (14) -- 58
Interest expense
(income) ............................ 984 1,564 -- 12,553 15,278
--------- --------- --------- --------- ---------
1,181 1,545 (14) 12,553 15,336
--------- --------- --------- --------- ---------
Income (loss) before
income taxes ........................ 172 4,462 265 (14,737) (7,064)
Provision (credit) for
income taxes ........................ -- 1,695 -- (4,509) (1,960)
--------- --------- --------- --------- ---------
Net income (loss) ...................... $ 172 $ 2,767 $ 265 $ (10,228) (5,104)
========= ========= ========= =========
Less dividends on
preferred stock ..................... 18(5)
---------
Add dividends on
common stock
equivalents .........................
---------
Income (loss) available
for common
stockholders ........................ $ (5,122)
=========
Income (loss) per share
from operations ..................... $ (0.40)
=========
Weighted average
shares outstanding .................. 12,980(4)
=========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-5
<PAGE>
COMFORCE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 (2)
(in thousands except per share data)
<TABLE>
<CAPTION>
FORCE
COMFORCE Williams RRA FIVE AZATAR Continental
-------- -------- --- ---- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues ............................ $ 55,867 $ 657 $ 22,799 $ 4,598 $ 6,403 $ 8,368
Cost of revenues .................... 47,574 499 20,959 3,454 5,054 7,017
-------- -------- -------- -------- -------- --------
Gross profit ........................ 8,293 158 1,840 1,144 1,349 1,351
Operating expenses:
Selling, general and
administrative ................... 5,266 64 1,375 1,274 612 898
Depreciation and
amortization ..................... 614 1 34 14 28 13
-------- -------- -------- -------- -------- --------
Income(loss) from
operations ....................... 2,413 93 431 (144) 709 440
Other (income) expense .............. (40) -- (54) (25)
Interest expense
(income) ......................... 201 -- 34 7 29 5
-------- -------- -------- -------- -------- --------
161 -- 34 7 (25) (20)
-------- -------- -------- -------- -------- --------
Income (loss) before
income taxes ..................... 2,252 93 397 (151) 734 460
Provision (credit) for
income taxes ..................... 900 39 -- (49) 301 --
-------- -------- -------- -------- -------- --------
Net income (loss) ................... 1,352 $ 54 $ 397 $ (102) $ 433 $ 460
======== ======== ======== ======== ========
Dividends on preferred
stock ............................ 325
--------
NAccretive dividend on
Series F Preferred
Stock ............................ 665
--------
Income (loss) available
for common
stockholders ..................... $ 362
========
Income (loss) per share
from operations .................. $ 0.03
========
Weighted average shares
outstanding ...................... 12,991
========
<CAPTION>
Pro Form Pro Forma
Rhotech Uniforce MONTARE Adjustments(3) (the Company)
Revenues ................................. $ 85,746 $ 142,151 $ 2,474 -- $ 329,063
Cost of revenues ......................... 76,457 112,663 1,671 -- 275,348
--------- --------- --------- --------- ---------
Gross profit ............................. 9,289 29,488 803 -- 53,715
Operating expenses:
Selling, general and
administrative ........................ 7,215 20,434 546 -- 37,684
Depreciation and
amortization .......................... 297 1,074 6 2,769 4,850
--------- --------- --------- --------- ---------
Income(loss) from
operations ............................ 1,777 7,980 251 (2,769) 11,181
Other (income) expense ................... 260 (45) (14) -- 82
Interest expense
(income) .............................. 1,317 2,170 -- 16,607 20,370
--------- --------- --------- --------- ---------
1,577 2,125 (14) 16,607 20,452
--------- --------- --------- --------- ---------
Income (loss) before
income taxes .......................... 200 5,855 265 (19,376) (9,271)
Provision (credit) for
income taxes .......................... -- 2,185 -- (5,937) (2,561)
--------- --------- --------- --------- ---------
Net income (loss) ........................ $ 200 $ 3,670 $ 265 $ (13,439) $ (6,710)
========= ========= ========= =========
Dividends on preferred
stock ................................. $25 (5)
Accretive dividend on
Series F Preferred
Stock ................................. $ 100
=========
Income (loss) available
for common
stockholders .......................... $ (6,835)
=========
from operations ....................... $ (0.51)
=========
outstanding ........................... 13,527
=========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-6
<PAGE>
COMFORCE Corporation
Notes to Unaudited Pro Forma Combined Financial Statements
(1) Adjustment to record the acquisition of Uniforce and related financing as
follows (based on balance sheet data as of September 30, 1997):
Source of Funds: (in thousands)
--------------
Notes ................................................... $110,000
Units ................................................... 20,000
Borrowings under New Credit Facility .................... 37,000
Existing cash balances .................................. 7,151
--------
Total Sources ................................................. $174,151
========
Use of Funds:
Refinance Existing Credit Facility ...................... $ 36,488
Refinance Uniforce Credit Facility ...................... 36,098
Purchase of Uniforce shares ............................. 93,565
Transaction Costs ....................................... 8,000
--------
Total Uses .................................................... $174,151
========
In addition, the Company will issue approximately 1,585,000 shares of
COMFORCE common stock with a value of $12,157,000, which, together with the
cash portion of the purchase price of $93,565,000, will result in
additional intangibles, principally goodwill, of approximately $85,614,000.
In addition, the Company will write off $1,628,000 of deferred financing
fees associated with COMFORCE's previous financing arrangements, which
amount has not been recorded as an expense in the pro forma statement of
operations.
(2) The unaudited pro forma statements of operations include the statements of
operations for the companies listed for the periods prior to their
acquisition by COMFORCE. The unaudited pro forma statement of operations
for the period ended September 30, 1997 presents the financial statements
of COMFORCE and Uniforce for their respective 1997 nine month periods and
the results of operations for Rhotech (which was acquired on February 28,
1997 for a purchase price of $14.8 million and a contingent payout not to
exceed $3.3 million) from January 1, 1997 to February 28, 1997. The
unaudited pro forma statement of operations for the period ended September
30, 1996 presents the financial statements of COMFORCE, Uniforce (to be
acquired for a purchase price of $105.7 million), Rhotech, Force Five
(which was acquired for a purchase price of $2 million and contingent
payouts not to exceed $2 million), AZATAR (which was acquired for a
purchase price of $5.15 million and a contingent payout not to exceed $1.2
million) and Continental (which was acquired for a purchase price of $5
million and contingent payout not to exceed $1.02 million) for their
respective 1996 nine month periods and the results of operations for
companies acquired during the nine month period ended September 30, 1996 as
follows: Williams (which was acquired for a purchase price of $2 million
and a contingent payout not to exceed $2 million) (January 1 through March
3, 1996), RRA (which was acquired for a purchase price of $5.1 million and
a contingent payout not to exceed $650,000) (January 1 through May 10,
1996) and Montare International ("Montare") January 1, 1996 through May 17,
1996. Montare was acquired by Uniforce on May 17, 1996. The acquisition of
Montare did not have a material impact on Uniforce results of operations.
The unaudited pro forma statement of operations for the year ended December
31, 1996 includes the annual 1996 results of operations for COMFORCE,
Uniforce, and Rhotech and the results of operations for companies acquired
during the period as follows: Williams (January 1 through March 3, 1996),
RRA (January 1 through May 10, 1996), Force Five (January 1 through July
31, 1996), AZATAR (January 1 through November 3, 1996), Continental
(January 1 through
F-7
<PAGE>
COMFORCE Corporation
Notes to Unaudited Pro Forma Combined Financial Statements (Continued)
November 17, 1996) and Montare (January 1, 1996 through May 17, 1996). The
pro forma results of operations are presented as if these companies were
acquired on January 1, 1996 (and accounted for by the purchase method) and
do not purport to be an indication of the results of operations had these
acquisitions been made as of that date or of results which may occur in the
future.
(3) Pro forma adjustments include the following:
Nine Months Ended Year Ended
September 30, December 31,
1997 1996 1996
---- ---- ----
(in thousands)
Additional amortization of intangibles (a) ... $ (1,480) $ (2,184) $ (2,769)
(Increase) in interest expense (b) ........... (11,091) (12,553) (16,607)
Decrease in provision for income taxes (c) ... 4,721 4,509 5,937
-------- -------- --------
Total pro forma adjustments .................. $ (7,850) $(10,228) $(13,439)
======== ======== ========
(a) Amortization of intangibles assumes all of the acquisitions and
proposed acquisitions occurred on January 1, 1996. The table below reflects
the amortization of intangibles with lives ranging from 5 to 40 years,
including Uniforce goodwill amortized over 40 years:
Nine Months Ended Year ended
September 30, December 31,
1997 1996 1996
---- ---- ----
(In thousands)
Pro forma amortization:
Telecom ........................ $ 194 $ 194 $ 258
Williams ....................... 39 39 52
RRA ............................ 127 127 169
Force Five ..................... 39 39 52
Continental .................... 100 100 133
AZATAR ......................... 168 168 224
Rhotech ........................ 268 268 357
Uniforce ....................... 2,028 2,028 2,704
Less: historical amortization ........ (1,483) (779) (1,180)
------- ------- -------
Pro forma adjustment ................. $ 1,480 $ 2,184 $ 2,769
======= ======= =======
The allocation of excess purchase price over the fair value of the assets
acquired has not been finalized and management believes that any change to
the allocation will not have a material effect on the pro forma financial
statements of COMFORCE.
(b) The pro forma adjustment to interest expense reflects interest
expense on the placement of the Notes and Senior Debentures, borrowings
under the New Credit Facility and capital lease obligations aggregating
$167.8 million. Pro forma interest expense has been calculated using
interest rates of 8.25%, 12.0% and
F-8
<PAGE>
COMFORCE Corporation
Notes to Unaudited Pro Forma Combined Financial Statements (Continued)
15% per annum for the New Credit Facility, Notes and Senior Debentures,
respectively plus the amortization of debt financing costs. Financing costs
do not include the effects of the warrants.
(c) The pro forma adjustment for income taxes reflects the tax effect
of the proforma adjustments (excluding non-deductible amortization), the
tax effect of S Corporation earnings treated as C Corporation earnings and
the tax benefit of losses by other entities within the pro forma combined
group.
(4) Pro forma weighted average shares outstanding are calculated as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, December 31,
1997 1996 1996
---- ---- ----
(In thousands of shares)
<S> <C> <C> <C>
Historical weighted average shares outstanding ............... 13,256 12,661 12,991
Shares issued-Uniforce acquisition ........................... 1,585 1,585 1,585
Shares issued as compensation ................................ * * *
Shares issued-Telecom acquisition ............................ * * *
Shares issued-Force Five acquisition ......................... * * *
Shares issued-AZATAR acquisition ............................. * 243 *
Shares issued-Continental acquisition ........................ * 37 *
Common stock sold to fund Continental acquisition ............ * 460 *
Common stock equivalents Series D and E preferred stock ...... 671 1,107 893
Common stock equivalents on Series F preferred stock ......... ** ** **
Warrants issued in connection with the Continental acquisition ** ** **
Warrants issued in connection with the Telecom acquisition ... ** ** **
Shares issued to certain shareholders ........................ * ** **
Common stock equivalents which have become anti-dilutive ..... ** (3,113) (1,942)
Contingent shares ............................................ ** ** **
------ ------ ------
Total Pro Forma Shares ................................. 15,512 12,980 13,527
====== ====== ======
</TABLE>
- -----------
* Included in historical weighted average shares outstanding.
** Excluded as the effect would be anti-dilutive.
(5) Pro forma dividends for all periods presented represent dividends and
accretive dividends on $500,000 of Series F preferred stock remaining
outstanding as of September 30, 1997 and deemed outstanding for all periods
presented. Proceeds from this transaction of $167 million have been deemed
to be fully outstanding on a pro forma basis for all periods presented.
Accordingly, Series D preferred stock, the proceeds of which were utilized
for working capital purposes, and Series E preferred stock, the proceeds of
which were utilized to acquire RRA, have been deemed to have been converted
to common stock effective January 1, 1996, with the effects of such common
shares included in weighted average shares outstanding for all periods
presented.
F-9
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of Comforce Corporation, Inc.:
We have audited the accompanying consolidated financial statements of Comforce
Corporation and Subsidiaries (the "Company") as listed in the index on page F-1
of this registration statement. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Comforce Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
January 30, 1997, except as to Note 20
for which the date is March 21, 1997.
F-10
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Balance Sheets
as of December 31, 1996 and 1995 (in thousands)
Assets
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3608 $ 649
Accounts receivable, net 12042 1698
Prepaid expenses 243
Other assets 373 117
Receivable from ARTRA GROUP Incorporated 1046
Deferred income tax 278
--------- --------
Total current assets 16,544 3,510
Property and equipment, net 744 90
Intangible assets, net 24,756 4,801
Other assets 1,322 135
--------- --------
Total assets $ 43,366 $ 8,536
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under revolving line of credit $ 3,850
Notes payable $ 500
Accounts payable 1,398 75
Accrued expenses 2,930 719
Income taxes 354 214
Liabilities to be assumed by ARTRA GROUP Incorporated, and
net liabilities of discontinued operations 3,699
--------- --------
Total current liabilities 8,532 5,207
--------- --------
Noncurrent liabilities to be assumed by ARTRA GROUP Incorporated 541
Obligations expected to be settled by the issuance of common stock 550
Deferred income tax 90
--------- --------
Total liabilities 8,622 6,298
--------- --------
Commitments and contingencies
Stockholders' Equity:
Series D senior convertible preferred stock, $.01 par value; 15,000 shares authorized,
7,002 shares issued and outstanding, liquidation value of $1,000 per share
($7,002,000) 1
Series F convertible preferred stock, $.01 par value; 10,000 shares
authorized, 3,250 shares issued and outstanding, liquidation value of
$1,000 per share ($3,250,000) 1
Common stock, $.01 par value; 100,000,000 shares authorized, 12,701,934 shares
issued and outstanding in 1996 and 9,309,000 shares issued and outstanding in 1995 127 92
Additional paid-in capital 34,253 95,993
Accumulated deficit (93,847)
Retained earnings, since January 1, 1996 362
--------- --------
Total stockholders' equity 34,744 2,238
--------- --------
Total liabilities and stockholders' equity $ 43,366 $ 8,536
========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE>
<TABLE>
<CAPTION>
Comforce Corporation and Subsidiaries
Consolidated Statements of Operations
for the years ended December 31, 1996, 1995 and 1994 (in thousands, except per share data)
1996 1995 1994
<S> <C> <C> <C>
Net sales $ 55,867 $ 2,387
-------- --------
Costs and expenses:
Cost of goods sold 47,574 1,818
Stock compensation 3,425
Selling, general and administrative expenses 5,266 461 $ 966
Depreciation and amortization 614 362
-------- -------- --------
Total costs and expenses 53,454 6,066 966
-------- -------- --------
Operating income (loss) 2,413 (3,679) (966)
Other income (expense):
Interest expense (201) (585) (1,316)
Other income (expense), net 40 (33)
-------- -------- --------
(161) (618) (1,316)
Income (loss) from continuing operations before income taxes
and extraordinary credit 2,252 (4,297) (2,282)
Provision for income taxes (900) (35)
-------- -------- --------
Income (loss) from continuing operations 1,352 (4,332) (2,282)
Loss from discontinued operations (17,211) (16,220)
-------- -------- --------
Income (loss) before extraordinary credit 1,352 (21,543) (18,502)
Extraordinary credit, net discharge of indebtedness 6,657 8,965
-------- -------- --------
Net income (loss) 1352 (14,886) (9,537)
Dividends on preferred stock 325
-------- -------- --------
Accretive dividend on Series F preferred stock 665
-------- -------- --------
Income (loss) available to common stockholders $ 362 $(14,886) $ (9,537)
======== ======== ========
Income (loss) per share:
Continuing operations before accretive dividend $ .08 $ (0.95) $ (0.72)
Discontinued operations (3.74) (5.08)
-------- -------- --------
Income (loss) before extraordinary credit and accretive
dividend .08 (4.69) (5.80)
Extraordinary credit 1.45 2.81
Accretive dividend on Series F preferred stock (.05)
-------- -------- --------
Net income (loss) per share $ .03 $ (3.24) $ (2.99)
======== ======== ========
Weighted average shares outstanding 12,991 4,596 3,195
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
<TABLE>
<CAPTION>
Comforce Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994 (in thousands, except share amounts)
Restricted
Preferred Stock Common Stock Common Stock
----------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------- ------- --------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 7,459 $17,273 3,162,772 $31
Net loss
ARTRA capital contributions
Lori preferred stock issued in exchange for
ARTRA notes and advances 2,242 2,242
Common stock issued under terms of debt settlement agreement
settlement agreement 100,000 1
Restricted common stock 100,000 $(700)
Exercise of stock options and warrants 2,500
Fractional shares purchased (253)
------- ------- --------- ----- -------- --------
Balance at December 31, 1994 9,701 19,515 3,265,019 32 100,000 (700)
Net earnings
Common stock issued as consideration for debt restructuring 150,000 2
Common stock issued as additional consideration for short-term
borrowings 141,176 1
Common stock issued to pay liabilities 115,098 1
Common stock sold through private placements 1,946,667 19
Common stock issued under compensation agreements with
individuals to manage the Company's telecommunications and
computer technical staffing services business 3,091,304 31
Common stock issued as additional consideration for Telecom
purchase guarantee 350,000 3
Common stock issued as compensation for Telecom acquisition fees 150,000 2
Common stock issued to ARTRA in exchange for the Company's
entire preferred stock issue (9,701) (19,515) 100,000 1
Restricted common stock issued as additional consideration for
short-term borrowings (100,000) 700
Liabilities assumed by ARTRA
Fractional shares purchased (66)
------- ------- --------- ----- -------- --------
Balance at December 31, 1995 -- -- 9,309,198 92 -- --
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity
-------- -------- -------
<S> <C> <C> <C>
Balance at December 31, 1993 $60,680 $(69,424) $8,560
Net loss (9,537) (9,537)
ARTRA capital contributions 4,000 4,000
Lori preferred stock issued in exchange for
ARTRA notes and advances 2,242
Common stock issued under terms of debt settlement agreement
settlement agreement 699 700
Restricted common stock (700)
Exercise of stock options and warrants 13 13
Fractional shares purchased
-------- -------- -------
Balance at December 31, 1994 65,392 (78,961) 5,278
Net earnings (14,886) (14,886)
Common stock issued as consideration for debt restructuring 335 337
Common stock issued as additional consideration for short-term
borrowings 229 230
Common stock issued to pay liabilities 374 375
Common stock sold through private placements 5,820 5,839
Common stock issued under compensation agreements with
individuals to manage the Company's telecommunications and
computer technical staffing services business 2,844 2,875
Common stock issued as additional consideration for Telecom
purchase guarantee 587 590
Common stock issued as compensation for Telecom acquisition fees 251 253
Common stock issued to ARTRA in exchange for the Company's
entire preferred stock issue 19,514
Restricted common stock issued as additional consideration for
short-term borrowings 700
Liabilities assumed by ARTRA 647 647
Fractional shares purchased
-------- -------- -------
Balance at December 31, 1995 95,993 (93,847) 2,238
</TABLE>
F-13
Continued
<PAGE>
<TABLE>
<CAPTION>
Comforce Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
for the years ended December 31, 1996, 1995 and 1994 (in thousands, except share amounts)
Series E Series D
Common Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
------------ -------- ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 9,309,198 $92
Quasi-Reorganization as of January 1, 1996
Exercise of stock options 4,500 1
Exercise of stock warrants 449,445 5
Issuance of Series E convertible preferred stock 8,871 $1
Conversion of Series E preferred to common stock 887,100 9 (8,871) (1)
Issuance of Series D senior convertible preferred stock 7,002 $1
Issuance of Series F preferred stock
Common stock sold through private placement 810,000 8
SEC registration fees
Common stock issued as consideration for the
purchase of Force Five 27,398 1
Common stock issued as consideration for the
purchase of AZATAR 243,211 2
Common stock issued as consideration for the purchase
of Continental 36,800 1
Common stock issued to pay liabilities assumed by ARTRA 137,500 1
Liabilities assumed by ARTRA
Common stock issued to management for anti-dilution provision 796,782 7
Net earnings
Dividends:
Series E preferred stock
Series D preferred stock
Series F preferred stock
Accretive dividend on Series F preferred stock
------------ -------- ------ ------ -------- ------
12,701,934 $127 -- $ -- 7,002 $1
============ ======== ====== ====== ======== ======
<CAPTION>
Retained
Series F Earnings
Preferred Stock Additional Since Total
--------------- Paid-in Accumulated January 1, Stockholders'
Shares Amount Capital Deficit 1996 Equity
------ ------ ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $95,993 $(93,847) $2,238
Quasi-Reorganization as of January 1, 1996 (93,847) 93,847
Exercise of stock options 22 23
Exercise of stock warrants 2,041 2,046
Issuance of Series E convertible preferred stock 4,635 4,636
Conversion of Series E preferred to common stock (8)
Issuance of Series D senior convertible preferred stock 6,415 6,416
Issuance of Series F preferred stock 33 $1 2,957 2,958
Common stock sold through private placement 6,362 6,370
SEC registration fees (300) (300)
Common stock issued as consideration for the
purchase of Force Five 499 500
Common stock issued as consideration for the
purchase of AZATAR 4,118 4,120
Common stock issued as consideration for the purchase
of Continental 574 575
Common stock issued to pay liabilities assumed by ARTRA 275 276
Liabilities assumed by ARTRA 3,318 3,318
Common stock issued to management for anti-dilution provision 534 541
Net earnings $1,352 1,352
Dividends:
Series E preferred stock (18) (18)
Series D preferred stock (280) (280)
Series F preferred stock (27) (27)
Accretive dividend on Series F preferred stock 665 (665)
---- --- ------- -------- ------ -------
33 $1 $34,253 $ -- $362 $34,744
==== === ======= ======== ====== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 (in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,352 $(14,886) $ (9,537)
Adjustments to reconcile net earnings (loss) to cash flows from
operating activities:
Extraordinary gain from net discharge of indebtedness (6,657) (8,965)
Provision for disposal of fashion costume jewelry business 1,600
Depreciation of property, plant and equipment 139 101 438
Amortization of excess of cost over net assets acquired 475 261 1,018
Impairment of goodwill 12,930 10,800
Amortization of other assets 374 648
Common stock compensation 3,657
Allowance for doubtful accounts 212
Deferred taxes (189)
Changes in assets and liabilities, net of the effects of
acquisitions and the discontinued fashion costume
jewelry business (in 1995 and 1994):
(Increase) decrease in receivables (10,500) 913 2,117
Decrease in receivable from ARTRA 400
Decrease in inventories 2,105 1,098
Increase in prepaid expenses and other current assets (59) (56)
(Increase) decrease in other noncurrent assets (1,183) 170 153
Increase (decrease) in payables and accrued expenses 3,637 (2,127) (513)
Decrease in income taxes (60)
Decrease in other current and noncurrent
liabilities (408) (468)
-------- -------- --------
Net cash used by operating activities (5,776) (2,023) (3,211)
-------- -------- --------
Cash flows from investing activities:
Acquisition of COMFORCE Global, net of cash acquired (5,580)
Acquisition of Williams, RRA, Force Five, Continental and
Azatar, net of cash acquired (15,834)
Additions to property, plant and equipment (329) (656) (697)
Increase in receivable from officers (373)
Payment of liabilities with restricted cash 550 (550)
-------- -------- --------
Net cash used by investing activities (16,536) (5,686) (1,247)
-------- -------- --------
</TABLE>
F-15
Continued
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 1996, 1995 and 1994 (in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from financing activities:
Payment of note payable (500)
Net increase (decrease) in short-term debt 2,486 (138)
Proceeds from line of credit 4,750
Repayment on line of credit (900)
Proceeds from issuance of preferred stock 14,010
Proceeds from exercise of stock options 23
Proceeds from exercise of warrants 2,046
Payment of registration costs (300)
Dividends paid (228)
Proceeds from long-term borrowings 1,241
Reduction of long-term debt (750) (444)
Proceeds from private placement of common stock 6,370 5,839
ARTRA capital contribution 1,500
Notes and advances from ARTRA 2,531
Other 11
-------- -------- --------
Net cash from financing activities 25,271 7,575 4,701
-------- -------- --------
Increase (decrease) in cash and cash equivalents 2,959 (134) 243
Cash and cash equivalents, beginning of year 649 783 540
-------- -------- --------
Cash and cash equivalents, end of year $ 3,608 $ 649 $ 783
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 157 $ 273 $ 435
Income taxes paid, net 934 7 24
Supplemental schedule of noncash investing and financing activities:
Quasi-reorganization (93,848)
Common stock issued in connection with acquisitions 5,195 843
Accretive dividend on preferred stock 665
Common stock issued to settle liabilities 550 374
Amounts assumed by ARTRA 3,594
Accrued dividends 97
Common stock issued as consideration for debt
restructuring and short-term loans 567
ARTRA common stock issued to Lori's bank lender
under terms of the debt settlement agreement
2,500
Transfer New Dimensions assets, net of cash of $674 to Lori's
bank lender under terms of the debt settlement agreement
6,475
Lori preferred stock issued in exchange for ARTRA notes
and advances 2,242
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-16
<PAGE>
Comforce Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation:
COMFORCE Corporation ("COMFORCE" or the "Company"), formerly The Lori
Corporation ("Lori"), is a provider of telecommunications and computer
technical staffing and consulting services worldwide and maintains an
extensive global database of technical specialists. As discussed in Note 4,
in September 1995, the Company adopted a plan to discontinue its jewelry
business ("Jewelry Business") conducted by its two wholly-owned
subsidiaries, Lawrence Jewelry Corporation ("Lawrence") and Rosecraft, Inc.
("Rosecraft").
Effective January 1, 1996, the Company effected a quasi-reorganization
through the application of $93,847,000 of its $95,993,000 additional
paid-in capital account to eliminate its accumulated deficit. The Company's
Board decided to effect a quasi-reorganization given that the Company
achieved profitability following its entry into the technical staffing
business and discontinuation of its unprofitable Jewelry Business. The
Company's accumulated deficit at December 31, 1995 is primarily related to
the discontinued operations and is not, in management's view, reflective of
the Company's current financial condition.
ARTRA Group Incorporated ("ARTRA"), a public company whose shares are
traded on the New York Stock Exchange, was formerly the Company's parent
prior to October 17, 1995. At December 31, 1996, ARTRA owned less than 20%
of the Company's stock. ARTRA owns its shares of Common Stock in the
Company through a wholly-owned subsidiary, Fill-Mor Holding, Inc.
("Fill-Mor").
On October 17, 1995, Lori acquired one hundred percent of the capital stock
of COMFORCE Telecom Inc. ("COMFORCE Telecom"), formerly Spectrum Global
Services, Inc., d/b/a Yield Global, a wholly-owned subsidiary of Spectrum
Information Technologies, Inc. ("Spectrum"). In connection with the
re-focus of Lori's business, Lori changed its name to COMFORCE Corporation.
Since October 17, 1995, the Company has acquired a number of staffing and
consulting business throughout the United States. See Note 3.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of COMFORCE
Corporation, COMFORCE Telecom, Inc. COMFORCE Technical Services, Inc.
("CTS") and COMFORCE Information Technology, Inc. ("CIT"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
F-17
<PAGE>
Notes to Consolidated Financial Statements, Continued
Revenue Recognition
Revenue for providing staffing services is recognized at the time such
services are rendered.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid short-term investments with
an original maturity of three months or less. Cash equivalents consists
primarily of money market funds.
Accounts Receivable and Unbilled Accounts Receivable
Accounts receivable consists of those amounts due to the Company for
staffing services rendered to various customers. The Company's allowance
for doubtful accounts was $213,000 as of December 31, 1996. Unbilled
receivables consists of revenues earned and recoverable costs for which
billings have not yet been presented to the customers as of the balance
sheet date. Unbilled accounts receivable was $1,148,000 and $151,000 as of
December 31, 1996 and 1995, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
primarily on a straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of the life
of the lease or of the improvement. Maintenance and repairs are charged to
income as incurred and betterments that extend the useful life are
capitalized. Upon retirement or sale, the cost and accumulated depreciation
are eliminated from the respective accounts, and the gain or loss, if any,
is included in income.
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the
long-lived asset, an impairment loss is recognized. To date, no impairment
losses have been recognized.
Intangibles
The net assets of a purchased business are recorded at their fair value at
the date of acquisition. At December 31, 1996, the excess of purchase price
over the fair value of net assets acquired (primarily goodwill) is
reflected as an intangible asset and amortized on a straight-line basis
over a period of 20-40 years. (See Note 5.)
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through forecasted future operations.
Impairment is evaluated by comparing future cash flows (undiscounted and
without interest charges) expected to result from the use or sale of the
asset and its eventual disposition, to the carrying amount of the asset. To
date, no impairment losses have been recognized.
F-18
<PAGE>
Notes to Consolidated Financial Statements, Continued
Income Taxes
The Company recognizes deferred income taxes for the tax consequences in
future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense consists of the tax payable for
the period and the change during the period in deferred tax assets and
liabilities.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates relate to the
realizability of accounts receivable, long-lived assets and deferred tax
assets. Actual results could differ from those estimates.
Fair Values of Financial Instruments
Cash and cash equivalents and fixed rate debt obligations are reflected in
the accompanying consolidated balance sheets at amounts considered by
management to reasonably approximate fair value.
Management is not aware of any factors that would significantly affect the
value of these amounts.
Accounting for Long-Lived Assets
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges)
expected to result from the use or sale of the asset and its eventual
disposition, to the carrying amount of the asset.
Accounting for Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), in 1996. As
permitted by SFAS 123, the Company continues to measure compensation cost
in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," but provides pro forma disclosures of net
income and earnings per share as if the fair value method (as defined in
SFAS 123) had been applied beginning in 1995.
F-19
<PAGE>
Notes to Consolidated Financial Statements, Continued
Earnings Per Share Calculation
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"), which establishes standards for computing and presenting
earnings per share (EPS). SFAS No. 128 will be effective for financial
statements issued for periods ending after December 15, 1997. Earlier
application is not permitted. Management has not yet evaluated the effects
of this change on the Company's financial statements.
Reclassification
Certain items in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
3. Certain Acquisitions:
On October 17, 1995, Lori acquired one hundred percent of the capital stock
of COMFORCE Telecom. The price paid by the Company for the COMFORCE Telecom
stock and related acquisition costs was approximately $6.4 million, net of
cash acquired. This consideration consisted of cash to the seller of
approximately $5.1 million, fees of approximately $950,000, including a fee
of $750,000 to a related party, and 500,000 shares of the Company's common
stock valued at $843,000 (at a price per share of $1.68) issued as
consideration for various fees and guarantees associated with the
transaction. The 500,000 shares issued by the Company consisted of (i)
100,000 shares issued to a then unrelated party for guaranteeing the
purchase price to the seller, (ii) 100,000 shares issued to ARTRA, then the
majority stockholder of the Company, in consideration of its guaranteeing
the purchase price to the seller and agreeing to enter into the Assumption
Agreement, (iii) 150,000 issued to two unrelated parties for advisory
services in connection with the acquisition, and (iv) 150,000 shares issued
to Peter R. Harvey, then a Vice President and director of the Company, for
guaranteeing the payment of the purchase price to the seller and other
guarantees to facilitate the transaction. Additionally, in conjunction with
the COMFORCE Telecom acquisition, ARTRA agreed to assume substantially all
pre-existing Lori liabilities and indemnify COMFORCE in the event any
future liabilities arise concerning pre-existing environmental matters and
business related litigation.
COMFORCE Telecom provides telecommunications and computer technical
staffing services worldwide to Fortune 500 companies and maintains an
extensive, global database of technical specialists with an emphasis on
wireless communications capability. The acquisition of COMFORCE Telecom was
accounted for by the purchase method and, accordingly, the assets and
liabilities of COMFORCE Telecom were included in the Company's financial
statements at their estimated fair market value at the date of acquisition
and COMFORCE Telecom's operations are included in the Company's statement
of operations from the date of acquisition. (See Note 5.)
The acquisition of COMFORCE was funded principally by private placements of
approximately 1,950,000 shares of the Company's common stock at $3.00 per
share plus detachable warrants to
F-20
<PAGE>
Notes to Consolidated Financial Statements, Continued
purchase approximately 970,000 shares of the Company's common stock at
$3.375 per share. The warrants expire five years from the date of issue.
On March 3, 1996, the Company acquired all of the assets of Williams
Communications Services, Inc. ("Williams"), a regional provider of
telecommunications and technical staffing services. The purchase price for
the assets of Williams was $2 million with a four year contingent payout
based on earnings of Williams. The value of the contingent payouts will not
exceed $2 million, for a total purchase price not to exceed $4 million. The
acquisition of Williams was accounted for by the purchase method and,
accordingly, Williams' operations are included in the Company's statement
of operations from the date of acquisition. (See Note 5.)
On May 10, 1996, the Company purchased all of the stock of Project Staffing
Support Team, Inc. and substantially all of the assets of RRA Inc. and
Datatech Technical Services, Inc. (collectively, "RRA") for an aggregate
purchase price of $5,100,000, plus acquisition costs and contingent
payments payable over three years in an aggregate amount not to exceed
$650,000. RRA is in the business of providing contract employees to other
businesses. The Company's headquarters are located in Tempe, Arizona. The
acquisition of RRA enables the Company, through its COMFORCE Technical
Services, Inc. subsidiary ("CTS"), to provide specialists for supplemental
staffing assignments as well as outsourcing and vendor-on-premises
programs, primarily in the electronics, avionics, telecommunications and
information technology business sectors. The acquisition was accounted for
by the purchase method and, accordingly, its operations are included in the
Company's statement of operations from the date of acquisition. (See Note
5.)
Effective July 31, 1996, the Company purchased all of the stock of Force
Five, Inc. ("Force Five") for an aggregate purchase price of $2,000,000,
payable in $1,500,000 cash, and 27,398 shares of the Company's Common Stock
valued at $500,000, plus a three-year contingent payout based on future
earnings of Force Five in an aggregate amount not to exceed $2,000,000.
Force Five, renamed COMFORCE Information Technologies, Inc. ("CIT"),
located in Dallas, Texas, provides information technology consulting
services to leading companies nationwide. The acquisition of Force Five was
accounted for under the purchase method and, accordingly, Force Five's
operations are included in the Company's statement of operations from the
date of acquisition. (See Note 5.)
On November 1, 1996, COMFORCE IT Acquisition Corp., a wholly-owned
subsidiary of the Company, merged with Azatar Computer Systems, Inc.
("Azatar") pursuant to the terms of an Agreement and Plan of Reorganization
entered into by such parties and W. Mark Holbrook, formerly the controlling
stockholder of Azatar (the "Merger Agreement"). Under the terms of the
Merger Agreement, the stockholders of Azatar received cash payments of
$1.03 million, 243,211 shares of the Company's common stock valued at $4.12
million, and contingent payments payable over three years in an aggregate
amount not to exceed $1.2 million payable in stock. Azatar is in the
business of information technology consulting. The acquisition of Azatar
was accounted for under the purchase method and, accordingly, Azatar's
operations are included in the Company's statement of operations from the
date of acquisition. (See Note 5.)
On November 8, 1996, the Company, through its subsidiary, COMFORCE Telecom
Inc., purchased, substantially all of the assets of Continental Field
Services Corporation and its affiliate, Progressive Telecom, Inc.,
(collectively "Continental") for a purchase price of $4.425 million in
F-21
<PAGE>
cash, 36,800 shares of the Company's common stock valued at $575,000, and
contingent payments payable over three years in an aggregate amount not to
exceed $1.02 million. The acquisition of Continental was accounted for
under the purchase method and, accordingly, Continental's operations are
included in the Company's statement of operations from the date of
acquisition. (See Note 5.)
The aforementioned acquisitions were acquired through funding raised from
the issuance of common stock, preferred stock and bank borrowings.
The following unaudited proforma summary presents the consolidated results
of operations as if the acquisition has occurred on January 1, 1995 and
does not purport to be an indication of what would have occurred had the
acquisition been made as of that date or of results which may occur in the
future (in thousands).
Year Ended December 31,
1996 1995
(Unaudited) (Unaudited)
Revenue $ 98,692 $ 91,571
Net income (loss) from continuing operations 2,015 (1,934)
Loss from discontinued operations -- (17,211)
Extraordinary credits, net discharge of indebtedness -- 6,657
---------- --------
Net income (loss) $ 2,015 $(12,488)
========== ========
Income (loss) per share from continuing operations $ .07 $ (.22)
Income (loss) per share from discontinued operations (1.74)
Extraordinary credits .67
---------- --------
Net income (loss) per share $ .07 $ (1.29)
========== ========
The above proforma data assume the issuance of Series F preferred stock and
the borrowing under the revolving line of credit to finance these
transactions. Proforma adjustments include an interest cost increase of
$96,000 in 1996, a reduction of interest expense of $126,000 in 1995,
additional goodwill amortization of $290,000 and $619,000 in the 1996 and
1995 periods, respectively, and the related income tax effect.
F-22
<PAGE>
Notes to Consolidated Financial Statements, Continued
4. Fixed Assets:
Fixed assets consist of (in thousands):
Estimated
Useful Lives
in Years 1996 1995
Office equipment 3-5 $ 225 $ 97
Furniture, fixtures and vehicles 3-7 592
Leasehold improvements 3-7 73
----- ----
890 97
Less, accumulated depreciation and amortization (146) (7)
----- ----
$ 744 $ 90
===== ====
Depreciation expense was $139,000, $101,000 and $438,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
5. Intangibles:
Intangibles as of December 31, 1996 and 1995 consisted of (in thousands):
Estimated
Useful
Lives
in Years 1996 1995
Excess of cost over net assets acquired (goodwill) 20-40 $ 24,547 $4,852
Non-compete covenants 5 730
Other 5 5
25,282 4,852
-------- ------
Less accumulated amortization (526) (51)
-------- ------
$ 24,756 $4,801
======== ======
Amortization expense was $475,000, $261,000 and $1,081,000 in the years ended
December 31, 1996, 1995 and 1994, respectively.
F-23
<PAGE>
Notes to Consolidated Financial Statements, Continued
6. Accrued Expenses:
Accrued expenses consist of the following (in thousands):
1996 1995
Payroll and payroll taxes $ 969
Pension plan 660
Vacation 324
Professional fees 288 $320
Medical insurance 171
Management fees 178
Other 518 221
------ ----
$2,930 $719
====== ====
7. Income Taxes:
The provision (benefit) for income taxes as of December 31, 1996 consists
of (in thousands):
1996 1995
Current:
Federal $ 867
State 222 35
Deferred (189)
----- ----
$ 900 $ 35
===== ====
The 1995 and 1994 extraordinary credits represent net gains from discharge
of bank indebtedness under the loan agreements of Lori and its discontinued
fashion costume jewelry subsidiaries. No income tax expense is reflected in
the Company's financial statements resulting from the extraordinary credits
due to the utilization of tax loss carryforwards.
The difference between the statutory Federal income tax rate and the
effective income tax rate is reconciled as follows (in thousands):
1996 1995 1994
Statutory Federal tax rate provision (benefit) $34.0 $(34.0) $(34.0)
State and local taxes, net of Federal benefit 5.0 .3 .1
Current year tax loss not utilized 4.7
Impairment of goodwill 30.0 38.6
Amortization of goodwill .9 .6 3.6
Previously unrecognized benefit from utilizing tax
loss carryforwards (8.2)
----- ----- ------
$39.9 $ 1.6 $ .1
===== ===== ======
F-24
<PAGE>
Notes to Consolidated Financial Statements, Continued
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the
deferred tax liabilities and deferred tax assets at December 31, 1996 and
1995 (in thousands) are as follows:
1996 1995
Deferred tax assets:
Bad debt reserve $ 89
Accrued liabilities and other 189 $ 800
Net operating loss 16,400
-------- --------
Total deferred tax asset 278 17,200
-------- --------
Deferred tax liability:
Deductible intangibles 90
Machinery and equipment 100
-------- --------
Total deferred tax liability 90 100
-------- --------
Valuation allowance (17,100)
-------- --------
Net deferred tax asset $ 188 $ --
======== ========
At December 31, 1995, the Company and its subsidiaries had Federal income
tax loss carryforwards of approximately $42,000,000 available to be applied
against future taxable income. As a result of the discontinuance of the
Jewelry business it has been determined that the Company will be unable to
utilize losses from those businesses in the future.
In 1995, the Company recorded a valuation allowance with respect to the
future tax benefits and the net operating loss reflected in deferred tax
assets as a result of the uncertainty of their ultimate realization.
8. Debt:
On July 22, 1996, the Company and certain subsidiaries entered into a $10
million Revolving Credit Agreement (the "Credit Agreement") with the Chase
Manhattan Bank ("Chase") to provide working capital for the Company's
operations. The Company, COMFORCE Telecom and COMFORCE Technical Services,
Inc. are co-borrowers under the Credit Agreement and Project Staffing
Support Team, Inc. ("PSST") is a guarantor of the obligations. Principal
outstanding under the Credit Agreement is due June 30, 1998. Chase agreed
to make revolving credit loans outstanding as prime rate loans or LIBOR
loans, provided that, during the occurrence and continuance of an event of
default, the Company and its subsidiaries could not elect, and Chase had no
obligation to make, LIBOR loans. Interest on LIBOR loans is payable in the
amount of the LIBOR rate plus 2.0% per annum. Interest on the prime rate
loans is payable in the amount of Chase's prime rate as announced from time
to time (8.25% at December 31, 1996). The amount outstanding at December
31, 1996 was $3,850,000. As of December 31, 1996, the Company was not in
compliance with certain loan covenants. In March 1997, the Company repaid
its debt to Chase in full. (See Note 20.)
F-25
<PAGE>
Notes to Consolidated Financial Statements, Continued
At December 31, 1995, notes payable and long-term debt (in thousands)
consisted of:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
<S> <C> <C>
Outstanding debt:
Revolving credit borrowings $ 3,850
Amount due to a former related party, interest at
the prime rate plus 1% $ 750
Accounts receivable credit facility, discontinued operations 1,535
Other, interest principally at 15% 1,736
Less:
Liabilities to be assumed by ARTRA (1,986)
Liabilities included with discontinued operations (1,535)
------- -------
$ 3,850 $ 500
======= =======
</TABLE>
As discussed in Note 11, ARTRA, Fill-Mor, Lori and Lori's fashion costume
jewelry subsidiaries entered into an agreement with Lori's bank lender to
settle obligations due the bank. As partial consideration for the debt
settlement agreement the bank received a $750,000 Lori note payable due
March 31, 1995.
The $750,000 note due the bank was paid and the remaining indebtedness of
Lori and Fill-Mor was discharged, resulting in an additional extraordinary
gain to Lori of $6,657,000 in 1995. The $750,000 note payment was funded
with the proceeds of a $850,000 short-term loan from a former director of
the Company. The loan provided for interest at the prime rate plus 1%. As
consideration for assisting with the debt restructuring, the former
director received 150,000 shares of the Company's common stock valued at
$337,500 ($2.25 per share) based upon the closing market value on March 30,
1995. The $337,500 represented additional compensation for debt
restructuring and, as such, was charged against the extraordinary gain from
debt restructuring in 1995. The principal amount of the loan was reduced to
$750,000 at July 31, 1995. The remaining loan principal was not repaid on
its scheduled maturity date of July 31, 1995. Per terms of the loan
agreement, the former director received an additional 50,000 of the
Company's common stock as compensation for the non-payment of the loan at
its originally scheduled maturity. The additional 50,000 shares at a value
of approximately $82,000 has been charged to interest expense in 1995. At
December 31, 1995, the $750,000 note was classified in the Company's
consolidated balance sheet as liabilities to be assumed by ARTRA. The loan
was paid in full in March 1996 by ARTRA pursuant to the assumption
agreement as discussed in Note 9.
During the second and third quarters of 1995, Lori entered into a series of
agreements with certain unaffiliated lenders that provided for short-term
loans with interest at 15%. As additional compensation certain lenders
received an aggregate of 91,176 shares of the Company's common stock valued
at approximately $149,000 (which amount was included in interest expense in
1995) and certain lenders received warrants to purchase an aggregate of
195,000 shares of the Company's common stock at prices ranging from $2.00
per share to $2.50 per share, the fair market value at the dates of grant.
The warrants expire five years from the date of issue. The proceeds from
these loans were used to fund the September $500,000 down payment on the
COMFORCE Global
F-26
<PAGE>
Notes to Consolidated Financial Statements, Continued
acquisition, with the remainder used to fund working capital requirements
of the Company's discontinued Jewelry Business. At December 31, 1995,
short-term loans with an aggregate principal balance of $1,236,000 were
classified in the Company's consolidated balance sheet as liabilities to be
assumed by ARTRA.
In August 1995, Lori obtained a credit facility for the factoring of the
accounts receivable of its discontinued Jewelry Business. The credit
facility provides for advances of 80% of receivables assigned, less
allowances for markdowns and other merchandise credits. The factoring
charge, a minimum of 1.75% of the receivables assigned, increased on a
sliding scale if the receivables assigned were not collected within 45
days. Borrowings under the credit facility were collateralized by the
accounts receivable, inventory and equipment of Lori's discontinued fashion
costume jewelry subsidiaries and guaranteed by Lori. At December 31, 1995,
outstanding borrowings under this credit facility of $1,535,000, along with
other net liabilities of the discontinued Jewelry Business, were classified
in the Company's consolidated balance sheet as liabilities to be assumed by
ARTRA and net liabilities of the discontinued Jewelry Business.
In 1996, ARTRA completed the assumption of the agreed upon recorded
liabilities (see Note 9).
9. Liabilities to be Assumed by ARTRA Group Incorporated:
Under the Assumption Agreement between ARTRA and the Company in October
1995 (the "Assumption Agreement") entered into in connection with the
COMFORCE Telecom acquisition (see Note 3), ARTRA agreed to assume
substantially all pre-existing Lori liabilities and indemnify COMFORCE in
the event any future liabilities arise concerning pre-existing
environmental matters and business related litigation. Additionally, ARTRA
agreed to acquire all of the assets and assume all liabilities of the
Company's discontinued Jewelry Business aggregating a net liability of
$4,240,000 as of December 31, 1995. In April 1996, ARTRA sold the business
and certain assets of the Jewelry Business.
At December 31, 1995, liabilities to be assumed by ARTRA and net
liabilities of the discontinued Jewelry Business (in thousands) consist of:
Current:
Liabilities to be assumed by ARTRA
Notes payable $1,986
Court ordered payments 990
Accrued expenses 349
------
3,325
Net liabilities of the discontinued Jewelry Business 374
$3,699
======
Noncurrent:
Liabilities to be assumed by ARTRA Court ordered payments $ 541
======
As of December 31, 1996, ARTRA paid or assumed all of the above
liabilities. ARTRA continues to assume certain contingent liabilities
relating to outstanding litigation (see Note 16).
F-27
<PAGE>
Notes to Consolidated Financial Statements, Continued
On December 19, 1996, the Company and ARTRA agreed to settle various
differences in the interpretation of the Assumption Agreement dated October
1995. In addition, ARTRA has agreed to deposit into an escrow account
125,000 shares of COMFORCE common stock to collateralize its obligation
with respect to (1) a warrant to a lender to purchase 50,000 shares of
common stock at $5 per share with a put option for $500,000, which the
Company and ARTRA believe is no longer effective, (2) potential liability
for clean-up costs, if any, or other damages in connection with the Gary,
Indiana site as discussed in Note 16, and (3) the remaining assumed
liabilities of the jewelry operations of $350,000 due to certain creditors.
10. Discontinued Operations:
In September 1995, the Company adopted a plan to discontinue its Jewelry
Business. A provision of $1,000,000 was recorded in September 1995 and an
additional provision of $600,000 was recorded during the fourth quarter of
1995 for the estimated costs to complete the disposal of the Jewelry
Business. The Jewelry Business was disposed of in 1996 with no cost to the
Company.
The Company's 1995 consolidated financial statements have been reclassified
to report separately results of operations of the discontinued Jewelry
Business. Additionally, in conjunction with the Comforce Telecom
acquisition (see Note 3), ARTRA agreed to assume substantially all
pre-existing liabilities of the Company and its discontinued Jewelry
Business and indemnify Comforce in the event any future liabilities arise
concerning pre-existing environmental matters and business related
litigation. Accordingly, the Company's 1995 consolidated balance sheet has
been reclassified to report separately the remaining net liabilities to be
assumed by ARTRA, including net liabilities of the discontinued Jewelry
Business. (See Note 9.)
The operating results of the discontinued Jewelry Business for the years
ended December 31, 1995 and 1994 (in thousands) consists of:
Year Ended December 31,
------------------------
1995 1994
Net sales $ 10,588 $ 34,431
======== ========
Loss from operations before income taxes $(15,606) $(16,210)
Provision for income taxes (5) (10)
-------- --------
Loss from operations (15,611) (16,220)
-------- --------
Provision for disposal of business (1,600)
Provisions for income taxes
-------- --------
Loss on disposal of business (1,600)
-------- --------
Loss from discontinued operations $(17,211) $(16,220)
======== ========
F-28
<PAGE>
Notes to Consolidated Financial Statements, Continued
11. Extraordinary Gains Related to Discontinued Operations:
In accordance with the terms of the debt settlement agreement, borrowings
due a bank under the loan agreements of Lori and its fashion costume
jewelry subsidiaries and Fill-Mor (approximately $25,000,000 as of December
23, 1994), plus amounts due the bank for accrued interest and fees, were
reduced to $10,500,000 (of which $7,855,000 pertained to Lori's obligation
to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank).
Upon the satisfaction of certain conditions of the Amended Settlement
Agreement in March 1995, the balance of this indebtedness was discharged.
(See Note 12.)
The Company recognized an extraordinary gain of $8,965,000 ($2.81 per
share) in December 1994 as a result of the reduction of amounts due the
bank under the loan agreements of Lori and its operating subsidiaries and
Fill-Mor to $10,500,000 (of which $7,855,000 pertained to Lori's obligation
to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank)
as of December 23, 1994. The 400,000 shares of ARTRA common stock issued as
consideration for the debt settlement agreement (with a fair market value
of $2,500,000 based upon the closing market price on the date of issue)
were contributed by ARTRA to Lori's capital account. The extraordinary gain
was calculated (in thousands) as follows:
<TABLE>
<S> <C>
Amounts due the bank under loan agreements of Lori and its fashion
costume jewelry subsidiaries $ 22,749
Less, amounts due the bank at December 29, 1994 (7,855)
--------
Bank debt discharged 14,894
Accrued interest and fees discharged 3,635
Other liabilities discharged 1,985
Less consideration to the bank per terms of the amended
settlement agreement
Cash (1,900)
ARTRA common stock (400,000 shares) (2,500)
New Dimensions assets assigned to the bank at estimated fair value (7,149)
--------
Net extraordinary gain $ 8,965
========
</TABLE>
On March 31, 1995, the $750,000 note due the bank was paid and the
remaining indebtedness of Lori and Fill-Mor was discharged, resulting in an
additional extraordinary gain to the Company of $6,657,000 ($1.45 per
share) in the first quarter of 1995. The $750,000 note payment was funded
with the proceeds of a $850,000 short-term loan from a former director of
the Company. As consideration for assisting in the debt restructuring, the
former director received 150,000 shares of the Company's common stock
valued at $337,500 ($2.25 per share) based upon the Company's closing
market value on March 30, 1995. The first quarter 1995 extraordinary gain
was calculated (in thousands) as follows:
F-29
<PAGE>
Notes to Consolidated Financial Statements, Continued
Amounts due the bank under loan agreements of Lori and its
operating subsidiaries $ 7,855
Less, amounts due the bank applicable to Lori (561)
-------
Bank debt discharged 7,294
Less fair market value of the Company's common stock issued as
consideration for the debt restructuring (337)
Other fees and expenses (300)
-------
Net extraordinary gain $ 6,657
=======
12. Related Party Transactions:
During 1996, the Company made loans of $367,000 in the aggregate to Michael
Ferrentino, the President and a Director of the Company, Christopher P.
Franco, an Executive Vice President of the Company, Kevin W. Kiernan, an
employee of the Company, and James L. Paterek, a consultant to the Company,
to cover their tax liabilities resulting from the issuance of the Company's
common stock to them as inducements to direct the Company's entry into the
technical staffing business. Of this amount, $55,000 was advanced in 1995,
$38,000 was advanced in February 1996, $238,000 was advanced in April 1996,
and $36,000 was advanced in July 1996. Yield Industries, Inc., a
corporation wholly-owned by Messrs. Paterek and Ferrentino, earned a
delivery fee of $750,000 in connection with the Company's acquisition of
COMFORCE Telecom, $250,000 of which was paid in 1995 and the balance of
which was paid in 1996.
The Company paid L.H. Friskoff & Company, a certified public accounting
firm at which Richard Barber, a Director of the Company, is a partner,
approximately $104,000 in fees during 1996 for tax-related advisory
services.
Effective July 4, 1995, Lori's management agreed to issue up to a 35%
common stock interest in the Company to certain individuals to manage the
Company's entry into the technical staffing business (approximately
3,888,000 after certain anti-dilutive provisions). In October 1995, the
Company issued approximately 3,100,000 shares of its common stock to such
individuals. The remaining common shares due these individuals were issued
in 1996 after shareholder approval of an increase in the Company's
authorized common shares. The Company recognized a non-recurring
compensation charge of $3,425,0000 in 1995 related to the issuance of this
stock since these stock awards were 100% vested when issued, and were
neither conditioned upon these individuals' service to the Company as
employees nor the consummation of the COMFORCE Telecom's acquisition. The
cost of the remaining common shares of $500,000 is classified in the
Company's consolidated balance sheet at December 31, 1995 as obligations
expected to be settled by the issuance of common stock, and is classified
as equity as of December 31, 1996.
In conjunction with an agreement (see Note 11) to settle borrowings due a
bank under the loan agreements of Lori and its fashion costume jewelry
subsidiaries and Fill-Mor, ARTRA entered into a $1,850,000 short-term loan
agreement with a non-affiliated corporation, the proceeds of which were
advanced to Lori and used to fund amounts due Lori's bank. The loan, due
June 30, 1995,
F-30
<PAGE>
Notes to Consolidated Financial Statements, Continued
was collateralized by 100,000 shares of Lori common stock. These 100,000
Lori common shares, originally issued to the bank under terms of the August
18, 1994 Settlement Agreement, were carried in the Company's consolidated
balance sheet at December 31, 1994 as restricted common stock. In August
1995, the loan was extended until September 15, 1995 and the lender
received the above mentioned 100,000 Lori common shares as consideration
for the loan extension. The loan was repaid by ARTRA in February, 1996.
Accordingly, the carrying value of these 100,000 Lori common shares was
transferred to ARTRA as reduction of amounts due to ARTRA.
In the fourth quarter of 1995, ARTRA agreed to exchange its interest in the
entire issue of the Company's Series C cumulative preferred stock for
100,000 newly issued shares of the Company's common stock. During 1995,
ARTRA received $399,000 of advances from the Company. In 1996, the Company
advanced ARTRA an additional $54,000. ARTRA repaid the above advances and
paid down $647,000 of the pre-existing Lori liabilities it assumed in
conjunction with the COMFORCE Global acquisition as discussed in Note 9.
The $399,000 advance to ARTRA and the $647,000 payment on pre-existing Lori
liabilities made by ARTRA have been classified in the Company's
consolidated financial statements at December 31, 1995 as amounts
receivable from ARTRA.
Through 1995, ARTRA had provided certain financial, accounting and
administrative services for the Company's corporate entity. Additionally,
the Company's corporate entity had leased its administrative office space
from ARTRA. During 1995 and 1994, fees for these services amounted to
$91,000 and $151,000, respectively.
During 1994, ARTRA made net advances to Lori of $2,531,000. The advances
consisted of a $1,850,000 short-term note with interest at 10%, the
proceeds of which were used to fund the $1,900,000 cash payment to the bank
in conjunction with the Amended Settlement Agreement with Lori's bank
lender, and certain non-interest bearing advances used to fund Lori working
capital requirements.
Effective December 29, 1994, ARTRA exchanged $2,242,000 of its notes and
advances for additional Lori Series C preferred stock. Additionally, the
August 18, 1994 Settlement Agreement required ARTRA to contribute cash of
$1,500,000 and ARTRA common stock with a fair market value of $2,500,000 to
Lori's capital account.
13. Equity:
In March 1996, 4,500 stock options were exercised at an average price of $5
per share.
In April 1996, 301,667 warrants were exercised at an average price of $3.12
per share.
In April 1996, in conjunction with the purchase of RRA, the Company sold
8,871 shares of Series E Preferred Stock at a selling price of $550 per
share for 8,470 shares and $750 per share for 401 shares. Each share of
Series E Preferred Stock will be automatically converted into 100 shares of
common stock on the date the Company's Certificate of Incorporation is
amended so that the Company has a sufficient number of authorized and
unissued shares of common stock to effect the conversion and any accrued
and unpaid dividends have been paid in full. Holders of shares of Series E
Preferred Stock are entitled to dividends equal to those declared on the
common stock, or
F-31
<PAGE>
Notes to Consolidated Financial Statements, Continued
if no dividends are declared on the common stock, nominal cumulative
dividends payable only if the Series E Preferred Stock fails to be
converted into common stock by September 1, 1996. The Series E Preferred
Stock has a liquidation preference of $100 per share ($887,100 in the
aggregate for all outstanding shares). Effective as of October 28, 1996,
each share of Series E Preferred Stock was automatically converted into 100
shares of common stock.
In May 1996, the Company sold 7,002 shares of Series D Preferred Stock at a
selling price of $1,000 per share. The holder of each share of Series D
Preferred Stock has the right to convert such shares into 83.33 fully paid
and nonassessable shares of common stock at any time subsequent to the date
the Company's Certificate of Incorporation is amended so that the
Corporation has sufficient number of authorized and unissued common stock
to effect the conversion. Holders of the shares of Series D Preferred Stock
are entitled to cumulative dividends of 6% per annum, payable quarterly in
cash on the first day of February, May, August and November in each year.
The Series D Preferred Stock has a liquidation preference of $1,000 per
share ($7,002,000 in the aggregate for all outstanding shares).
In May 1996, 16,667 warrants were exercised at an average price of $3.38
per share.
In July 1996, the Company issued 137,500 shares of common stock to pay
certain liabilities.
In August 1996, 20,000 warrants were exercised at an average price of $2.00
per share.
In September 1996, 27,398 common shares were issued as partial
consideration for the purchase of Force Five. (See Note 3.)
On October 25, 1996, the Board authorized the issuance of up to 10,000
shares of Preferred Stock, par value $0.01 per share, designated the Series
F Convertible Preferred Stock ("Series F Preferred Stock"). As subsequently
modified by agreement of the Company and the holders, each share of Series
F Preferred Stock will, (i) at the option of the holder or (ii)
automatically on the second anniversary of the date of issuance, be
converted into such number of shares of Common Stock determined by dividing
$1,000 plus all accrued, unpaid dividends thereon by the per share
conversion price. The conversion price is 83% of the average closing bid
price of the Common Stock for the five trading days immediately preceding
the conversion date, subject to certain limitations. Holders of shares of
Series F Preferred Stock are entitled to cumulative dividends of 5% per
annum, payable quarterly on the first day of March, June, September, and
December in each year, payable in cash or Common Stock (valued at the
closing price on the date of declaration), at the Company's election. The
Series F Preferred Stock has a liquidation preference over the Common Stock
in the event of any liquidation or sale of the Company. Except as otherwise
provided by law, the holders of Series F Preferred Stock will not be
entitled to vote. As of December 31, 1996, there were 3,250 shares of
Series F Preferred Stock outstanding. The Company recorded an accretive
dividend on Series F Preferred Stock related to the discount noted above of
$665,000.
In connection with the sale of the Series F Preferred Stock, the Company
issued warrants to purchase 15,000 shares of Common Stock at an exercise
price of $24.00 per share as a placement fee, which warrants expire in
October 1998.
F-32
<PAGE>
Notes to Consolidated Financial Statements, Continued
At the Company's annual meeting held on October 28, 1996, the Company's
stockholders ratified or approved, among other matters, (i) the Company's
issuance of 3,091,302 shares of its common stock and its agreement to issue
796,782 additional shares to certain individuals in consideration of their
agreement to direct the Company's entry into the technical staffing
business; (ii) the Company's entering into the technical staffing business
and exiting the fashion jewelry business and transactions related thereto,
including (a) its acquisition of all of the capital stock of Spectrum
Global Services, Inc. (formerly d/b/a/Yield Global and, following its
acquisition by the Company, renamed COMFORCE Telecom, Inc.), (b) its
issuance of 1,946,667 shares of its common stock plus detachable warrants
to purchase 973,333 shares of its common stock in a private placement, (c)
its issuance of 100,000 shares and 150,000 shares, respectively, of its
common stock to ARTRA, and Peter R. Harvey, formerly a director of the
Company, in consideration of their guarantees in connection with the
transactions, (d) its exchange of 100,000 shares of its common stock to
ARTRA for the 9,701 shares of the Company's Series C Preferred Stock held
by ARTRA, and (e) its disposition of its discontinued fashion jewelry
operations; (iii) an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
capital stock from 10,000,000 shares to 100,000,000 shares of common stock
and from 1,000,000 shares to 10,000,000 shares of Preferred Stock (upon
which approval, the 8,871 shares of Series E Preferred Stock which were
outstanding automatically converted to 8,871,000 shares of common stock);
(iv) an amendment to the Company's Certificate of Incorporation to
eliminate cumulative voting; (v) and to amend the Company's Long-Term Stock
Investment Plan (a) to increase the maximum number of shares which may be
issued under such Plan from 1,500,000 to 4,000,000 shares, (b) the grant of
options to non-employee directors, and (c) in various other respects,
principally designed to permit the Plan administrator additional
flexibility in structuring option grants.
In November 1996, 111,111 warrants were exercised at a price of $9 per
share.
In November 1996, the Company issued 243,211 shares and 36,800 shares as
partial consideration for the purchase of Azatar Computer Systems, Inc. and
Continental Field Services, Inc.
Effective December 26, 1996, the Company sold 460,000 shares of its Common
Stock, together with a related payment right, for $3.5 million. This
payment right requires the Company to make a payment to the investors in
either cash or Common Stock, at the Company's option, equal to the amount,
if any, by which $10.00 per share exceeds the average closing bid price for
the ten trading days prior to a specified payment date (not later than
April 1, 1997). See Note 20 for additional rights given to these holders of
Common Stock.
In addition, effective December 26, 1996, the Company sold 350,000 shares
of its Common Stock, together with a related payment right, for $3.5
million. This payment right requires the Company to make a payment to the
investors in either cash or Common Stock, at the Company's option, equal to
the amount, if any, by which $12.05 per share exceeds the average closing
bid price for the ten trading days prior to a specified payment date (not
later than May 1, 1997). In lieu of this amount, a payment of $2.05 per
share will be payable if, among other things, as of April 1, 1997, such
average trading price is between $10.00 and $15.00 and the Company's daily
trading volume does not meet specified levels.
F-33
<PAGE>
Notes to Consolidated Financial Statements, Continued
In connection with this private placement of Common Stock, the Company
issued warrants to purchase 198,928 shares of Common Stock at $19 per share
which expire on December 26, 1999. In addition, the Company paid a
placement fee of 8,000 shares of Common Stock and warrants to purchase
25,000 shares of Common Stock at $14.25 per share (market price) which
expire on December 26, 1999.
The Company's Series C cumulative preferred stock, which was owned in its
entirety by ARTRA, accrued dividends at the rate of 13% per annum on its
liquidation value. Book value and accumulated dividends of $7,011,000 on
this stock aggregated $19,515,000 at December 31, 1994. In the fourth
quarter of 1995, ARTRA agreed to exchange its Series C cumulative preferred
stock for 100,000 newly issued shares of the Company's common stock.
14. Earnings Per Share:
Earnings per common share is computed by dividing net earnings available
for common shareholders, by the weighted average number of shares of common
stock and common stock equivalents (stock options and warrants),
outstanding during each period. Common stock equivalents relate to
outstanding stock options and warrants. For this computation, shares of the
Series F Preferred Stock are anti-dilutive and as such are not considered
common stock equivalents for this calculation. The shares of Series D
Preferred Stock are not considered common stock equivalents and are
excluded from primary earnings per share. The dividends accrued or paid on
the Series D Preferred Stock of $175,000, Series E Preferred Stock of
$18,000, Series F Preferred Stock of $27,000, and accretive dividends on
Series F Preferred Stock of $665,000, have been deducted for computing
earnings available to common shareholders. Fully diluted earnings per share
have not been presented as the result is anti-dilutive or does not differ
from primary earnings per share. Primary earnings per share is calculated
as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Earnings (loss) available for common shareholders $ 362 $ (14,886) $ (9,537)
======== ======== ========
Weighted average number of shares outstanding
for the period 11,049 4,596 3,195
Dilutive effect of common stock equivalents 1,942
-------- -------- --------
$ 12,991 $ 4,596 $ 3,195
======== ======== ========
Primary earnings (loss) per share $ .03 $ (3.24) $ (2.99)
======== ======== ========
</TABLE>
15. Stock Options and Warrants:
Long-Term Stock Investment Plan
On December 16, 1993, Lori's stockholders approved the Long-Term Stock
Investment Plan (the "1993 Plan"), effective January 1, 1993, which
authorizes the grant of options to purchase
F-34
<PAGE>
Notes to Consolidated Financial Statements, Continued
the Company's common stock to executives, key employees and non-employee
consultants and agents of the Company and its subsidiaries. The 1993 Plan
authorizes the awarding of Stock Options, Incentive Stock Options and
Alternative Appreciation Rights. The 1993 Plan reserved 1,500,000 shares of
the Company's common stock for grant on or before December 31, 2002. In
October 1996, the Stock Option Plan was amended to allow for the issuance
of an additional 2,500,000 options under the plan for a total of 4,000,000
shares.
Incentive Stock Option Plan
Options to purchase common shares of the Company have been granted to
certain officers and key employees under the 1982 Incentive Stock Option
Plan (the "Plan"), which initially reserved 250,000 shares of the Company's
common stock. On December 19, 1990, the Company's stockholders approved an
increase in the number of shares available for grant under the plan to
500,000. The plan expired in 1992.
Summary of Options
A summary of stock option transactions for the year ended December 31, 1996
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Outstanding at January 1,
Shares 1,541,378 959,378 1,098,544
Prices $1.125 to $6.75 $1.125 to $5.00 $1.125 to $12.19
Options granted:
Shares 1,120,275 601,250 --
Price $6.75 to $27.00 $6.00 to $6.75 --
Options exercised:
Shares (4,500) -- (2,500)
Price $5.00 -- $5.00
Options cancelled:
Shares (565,628) (19,250) (136,666)
Price $1.125 $3.125 to $5.00 $3.125 to $12.19
Outstanding at December 31, 1996:
Shares 2,091,525 1,541,378 959,378
========= ========= =======
Price $1.125 to $22.75 $1.125 to $6.75 $1.125 to $5.00
Options exercisable at December 31, 1996 1,537,500 945,128 940,710
========= ======= =======
Options available for future grant at
December 31, 1996 778,475
=======
</TABLE>
Approximately 555,628 of the options shown as cancelled were exercisable as
of December 31, 1995 at an exercise price of $1.125 per share. The Company
maintains that these options
F-35
<PAGE>
Notes to Consolidated Financial Statements, Continued
terminated in 1996. The former option holders maintain that these options
continue to be exercisable. The Company is attempting to resolve this
dispute.
Warrants
On November 23, 1988, Lori issued warrants to purchase 25,000 of its common
shares, at $4.00 per share, to an investment banker as additional
compensation for certain financial and advisory services. During 1993, the
warrant holder exercised warrants to purchase 8,750 shares of the Company's
common stock. At December 31, 1995, such warrants to purchase 16,250 shares
of the Company's common stock at $4.00 per share remained outstanding.
Principally during the second and third quarters of 1995, Lori entered into
a series of agreements with certain unaffiliated investors that provided
for $1,800,000 of short-term loans that provide for interest at 15%. As
additional compensation certain lenders received an aggregate of 91,176
Lori common shares and certain lenders received warrants to an aggregate of
195,000 shares of the Company's common stock at prices ranging from $2.00
per share to $2.50 per shares, the fair market value at the dates of grant.
The warrants expire five years from the date of issue.
The acquisition of COMFORCE Telecom was funded principally by private
placements of approximately 1,950,000 of the Company's common shares at
$3.00 per share (total proceeds of approximately $5,800,000) plus
detachable warrants to purchase 973,333 Lori common shares at $3.375 per
share. In 1996, 36,667 warrants were exercised for $98,751. The warrants
expire five years from the date of issue.
In April 1996, the Company amended the warrants included above held by two
stockholders to purchase 301,667 shares of the Company's Common Stock at
exercise prices ranging from $2.125 to $3.375 per share to permit immediate
exercise and to provide for the issuance of supplemental warrants to
purchase 301,667 at an exercise price of $9.00 per share (market value) for
each warrant exercised on or before April 12, 1996. Warrants to purchase
all 301,667 shares were exercised in April 1996. The Company used the
proceeds from the exercise of the warrants for working capital purposes.
In connection with the sale of the Series F Preferred Stock, the Company
issued warrants to purchase 15,000 shares of Common Stock at an exercise
price of $24.00 per share as a placement fee, which warrants expire in
October 1998.
On December 26, 1996, the Company sold 810,000 shares through a private
placement. In connection with this private placement of common stock, the
Company issued warrants to purchase 198,928 shares of common stock at $19
per share which expire on December 26, 1999 In addition, the Company paid a
placement fee of 8,000 shares of common stock and warrants to purchase
25,000 shares of common stock at $14.25 per share (market price) which
expire on December 26, 1999.
At December 31, 1996 and 1995, total warrants were outstanding to purchase
a total of 1,371,844 and 1,184,583 of the Company's common shares at prices
ranging from $2.00 per share to $24.00 per share. The warrants expire three
to five years from the date of issue at various dates through 1999.
F-36
<PAGE>
Notes to Consolidated Financial Statements, Continued
As discussed in Note 1, the Company has applied the disclosure-only
provision SFAS 123. Had compensation cost been determined based on the fair
value at the grant date consistent with the provisions of SFAS 123, the
Company's net income (loss) and earnings (loss) per share would have been
reduced to the pro forma amounts indicated below for the years ended
December 31, 1996 and 1995:
1996 1995
(in thousands) (in thousands)
Net income (loss) attributable to common
shareholders as reported $ 362 $ (14,886)
========== ==========
Pro forma (loss) $ (1,898) $ (16,010)
========== ==========
Earnings (loss) per share as reported $ .03 $ (3.24)
========== ==========
Pro forma $ (.17) $ (3.48)
========== ==========
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the
following weighted average assumptions used for grants in 1996 and 1995,
respectively: no dividend yield; expected volatility of 60%; risk-free
interest rate (ranging from 5.25% - 6.64%); and expected lives ranging from
approximately 4.5 to 5.5 years. Weighted averages are used because of
varying assumed exercise dates.
A summary of the status of the Company's stock option plans as of December
31, 1996 and 1995, and changes during the years ended on those dates is
presented below (shares in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,541,378 $ 3.24 959,378 $ 1.21
Granted 1,120,275 9.35 601,250 6.48
Exercised (4,500) 5.00
Canceled (565,628) 1.13 (19,250) 5.00
----------- -----------
Outstanding at end of year 2,091,525 7.08 1,541,378 3.24
=========== ===========
Options exercisable at year end 1,537,500 945,128
=========== ===========
Weighted average fair value of options granted during the year $ 4.37 $ 2.38
=========== ===========
</TABLE>
F-37
<PAGE>
Notes to Consolidated Financial Statements, Continued
The following table summarizes information about stock options outstanding
at December 31, 1996 (shares in thousands):
Weighted
average Weighted Weighted
Range of Remaining Average Average
Exercise Shares Contractual Exercise Shares Exercisable
Prices Outstanding Life Price Exercisable Price
$1 360 6 $ 1 360 $ 1
$3 10 6 3 10 3
$6 to $7 1,431 9 7 1,138 7
$10 to $12 56 9 12
$17 to $19 152 9 18 30 17
$22 to $27 4 9 26
$14 to $17 79 9 16
------------ ------- ------- ---------- --------
$1 to $27 2,092 9 7 1,538 6
16. Litigation:
Prior to its entry into the Jewelry Business in 1985, the Company operated
in excess of 20 manufacturing facilities for the production of, inter alia,
photocopy machines, photographic chemical and paper coating. These
operations were sold or discontinued in the late 1970s and early 1980s.
Certain of these facilities may have used and/or generated hazardous
materials and may have disposed of the hazardous substances, particularly
before the enactment of laws governing the safe disposal of hazardous
substances, at an indeterminable number of sites. Although the controlling
stockholders and current management had no involvement in such prior
manufacturing operations, the Company could be held to be responsible for
clean-up costs if any hazardous substances were deposited at these
manufacturing sites, or at off-site waste disposal locations, under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), or under other Federal or state environmental laws now or
hereafter enacted. However, except for the Gary, Indiana site described
below, the Company has not been notified by the Federal Environmental
Protection Agency (the "EPA") that it is a potentially responsible-party
for, nor is the Company aware of having disposed of hazardous substances
at, any site.
In December 1994, the Company was notified by the EPA that it is a
potentially responsible party under CERCLA for the disposal of hazardous
substances at a site in Gary, Indiana. The alleged disposal occurred in the
mid-1970s at a time when the Company conducted operations as APECO
Corporation. In this connection, in December 1994, the Company was named as
one of approximately 80 defendants in a case brought in the United States
District Court for the Northern District of Indiana by a group of 14
potentially responsible parties who agreed in a consent order entered into
with the EPA to clean up this site. The plaintiffs have estimated the cost
of cleaning up this site to be $45 million and have offered to settle the
case with the Company for $991,445. This amount represents the plaintiffs'
estimate of the Company's pro rata share of the clean-up costs. At the
direction of ARTRA, which, as described below, is contractually obligated
to the Company for any environmental liabilities, the Company declined to
accept this settlement proposal, which was subsequently withdrawn.
F-38
<PAGE>
Notes to Consolidated Financial Statements, Continued
The evidence produced by the plaintiffs to date is the testamentary
evidence of four former employees of a waste disposal company that
deposited wastes at the Gary, Indiana site identifying the Company as a
customer of such disposal company, and entries in such disposal company's
bookkeeping ledgers showing invoices to the Company. The Company, however,
has neither discovered any records which indicate, nor located any current
or former employees who have advised, that the Company deposited hazardous
substances at the site. Management and its counsel cannot determine whether
a negative outcome is probable regarding the Company's potential liability
at this site. Accordingly, no provision has been made for the potential
liability related to this matter.
Under the terms of the Assumption Agreement and a subsequent agreement
entered into between ARTRA and the Company, ARTRA has agreed to pay and
discharge substantially all of the Company's pre-existing liabilities and
obligations, including environmental liabilities at any sites at which the
Company allegedly operated facilities or disposed of hazardous substances,
whether or not the Company is currently identified as a potentially
responsible party therefor. Consequently, the Company is entitled to
indemnification from ARTRA for any environmental liabilities associated
with the Gary, Indiana site. In addition, ARTRA has deposited 50,000 shares
of Common Stock in escrow as additional collateral to satisfy any judgment
adverse to the Company or to pay any agreed upon settlement amount with
respect to the Gary, Indiana site. Proceeds from the sale of the shares
held in escrow might not be sufficient to satisfy any such judgment or pay
any such settlement amount. While ARTRA is obligated to indemnify the
Company for any environmental liabilities, no assurance can be given that
ARTRA will be financially capable of satisfying its obligations with
respect to any liability in connection with the Gary, Indiana site or any
other environmental liabilities. ARTRA has advised that it intends to
vigorously defend this case.
In September 1996, the Company received notice of litigation from a
competitor who charged that RRA obtained and benefited from a list of
confidential data provided by a former employee of the competitor prior to
the acquisition of RRA. RRA has denied such charges. The Acquisition
Agreement provides for indemnification from any claims prior to the
acquisition.
The Company is a party to routine contract and employment-related
litigation matters in the ordinary course of its business. No such pending
matters, individually or in the aggregate, if adversely determined, are
believed by management to be material to the business, results of
operations or financial condition of the Company.
17. Savings Incentive and Profit Sharing Plan:
The Company participates in a savings incentive and profit sharing plan
(the "Plan"). All eligible employees may make contributions to the Plan on
a pre-tax salary reduction basis in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. No contributions were made by
the Company in 1996 and 1995.
Certain employees who work for governmental agencies are required to be
covered under a separate pension plan. During 1996, the Company recorded
approximately $700,000 of expense related to these benefits.
F-39
<PAGE>
Notes to Consolidated Financial Statements, Continued
18. Lease Commitments:
The Company leases certain office space and equipment in its
telecommunications and computer staffing service business. Rent expense for
all operating leases in 1996 and 1995 approximated $200,000 and $17,000,
respectively.
As of December 31, 1996, future minimum rent payments due under the terms
of noncancelable operating leases excluding any amount that will be paid
for operating costs are:
Year ending Total
December (in thousands)
1997 $ 425
1998 410
1999 287
2000 244
2001 218
Thereafter 24
------------
$ 1,608
============
The aggregate commitment for future salaries at December 31, 1996,
excluding bonuses, during the remaining term of all management and
employment agreements, are approximately:
Year ending Total
December (in thousands)
1997 $ 1,372
1998 1,010
1999 602
2000 17
-------------
$ 3,001
============
19. Concentration of Credit Risk:
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash and cash equivalents and trade receivables.
The Company maintains cash in bank accounts which at times may exceed
federally insured limits. The Company has not experienced any losses in
such accounts and believes they are not exposed to any significant credit
risk on their cash balances. The Company believes it mitigates such risk by
investing its cash through major financial institutions.
F-40
<PAGE>
Notes to Consolidated Financial Statements, Continued
At December 31, 1996, the Company had four customers, and at December 31,
1995, the Company had nine customers with accounts receivable balances that
aggregated 23% and 67% of the Company's total accounts receivable,
respectively. Percentages of total revenues from significant customers for
the years ended December 31, 1996 and from October 17, 1995 (entry into
staffing business) to December 31, 1995 are summarized as follows:
December 31, December 31
1996 1995
Customer 1 19.0% 17.3%
Customer 2 * 12.6%
Customer 3 * 10.1%
*Less than 10%.
20. Subsequent Events:
On February 28, 1997, the Company purchased all of the stock of RHO Company
Incorporated ("RHO") for $14.8 million payable in cash, plus a contingent
payout to be paid over three years based on future earnings of RHO payable
in stock in an aggregate amount not to exceed $3.3 million. The total
number of shares issuable under the contingent payout can not exceed
386,249 shares. The cash portion of the purchase price paid at closing was
principally funded through the Company's offering of convertible
debentures, as described below. RHO is a defendant in a lawsuit by its
former insurance carrier who alleges that RHO is obligated to repay to it
$1,600,000 that the carrier was required to pay in connection with a claim
settlement. The Company is defending against this claim and management
believes that the case is without substantial merit. However, in the event
of any adverse judgment in the case or if the Company determines to settle
the case, any payments relating to this pre-acquisition contingency will be
added to the purchase price of RHO.
From February 27 to March 21, 1997, the Company sold $25.2 million of its
Subordinated Convertible Debentures ("Debentures") to certain institutional
investors for cash or in exchange for shares of the Company's Series F
Preferred Stock (discussed below). The Debentures bear interest at the rate
of 8% per annum during the 180 day period following closing and thereafter
at the rate of 10% per annum continuing until fully paid or converted.
Interest on the Debentures is payable quarterly in cash or in common stock
of the Company, at the Company's option. The Debentures may be redeemed by
the Company in whole or in part at any time from the date of issuance,
within 360 days after any disbursement to the Company of net proceeds from
the sale of Debentures at a redemption price equal to the sum of (i) the
principal amount thereof, (ii) all accrued, unpaid interest thereon, and
(iii) premiums ranging from 5% (2.5% in the case of Debentures exchanged
for Series F Preferred Stock) for Debentures redeemed within 60 days after
closing increasing up to 25% for Debentures redeemed between 181 and 360
days after closing. The Company is currently seeking long-term financing to
redeem these Debentures and to provide capital for continued expansion of
its operations.
F-41
<PAGE>
Notes to Consolidated Financial Statements, Continued
From February 27 to March 21, 1997 the Company issued or agreed to issue
three year warrants ("Warrants") to purchase up to 504,000 share of its
Company's Common Stock to the Debenture holders. Warrants to purchase
100,800 shares of common stock were issued at the time of the offering and
become exercisable six months after closing. If the debt is not repaid in
60 days, the Company will issue additional warrants to purchase 100,800
shares of common stock for each additional 30 day period the debt is
outstanding up to issuing an aggregate of warrants to purchase 504,000
shares of common stock. The exercise price of the warrants issued ranges
from $6.85 to $7.65 per share. The Company is also required to issue
additional warrants ("Additional Warrants") to purchase 504,000 shares of
the Company's common stock if the Debentures are not redeemed within 180
days following closing. The Additional Warrants will have an exercise price
equal to the average closing price of the Company's common stock over the
five-day trading period ending 179 days after the closing.
On February 27, 1997, in connection with the sale of $5 million of
debentures to various holders of the Company's Common Stock purchased on
December 26, 1996, the Company issued a put option whereby, if such
debentures are not repaid by April 28, 1997, May 28, 1997, June 27, 1997 or
July 27, 1997, such stockholders will have the option to put back 115,000
shares of Common Stock at the above listed dates, at $10.00 per share
payable in cash, reduced by the value of any cash or stock issued under
payment rights.
As part of the issuance of the Debentures, the Company has also effected
the repurchase of 2,750 of the 3,250 outstanding shares of its Series F
Preferred Stock by issuing additional Debentures in the amount of 115% of
its original principal amount ($1,000 per share) for total Debentures
issued of $3,162,500. Approximately $3,900,000 of the proceeds from the
Debenture offering was utilized to repay the Company's bank debt.
F-42
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30,
1997
-------------
(unaudited)
ASSETS
Current assets:
Cash and equivalents $ 2,670
Restricted cash
360
Accounts receivable, net of allowance of doubtful
accounts of $501 in 1997 26,547
Prepaid expenses 1,050
Deferred income tax 2,028
Deferred financing fees 1,628
Income tax receivable 590
Other 243
-------
Total current assets 35,116
-------
Property, plant and equipment 1,937
Less: accumulated depreciation and amortization 488
-------
1,449
-------
Other assets:
Excess of cost over net assets acquired, net of
accumulated amortization of $1,425 in 1997 38,722
Other 452
-------
39,174
-------
Total Assets $75,739
=======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-43
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, Continued
(in thousands)
September 30,
1997
-------------
(unaudited)
LIABILITIES
Current liabilities:
Borrowings under revolving line of credit $16,488
Accounts payable 956
Accrued expenses 5,232
Payroll tax liabilities 3,337
Income taxes --
-------
Total current liabilities 26,013
-------
Deferred income tax 90
Long-term debt 20,000
Other liabilities 690
-------
Total liabilities 46,793
-------
Commitments and contingencies
STOCKHOLDERS EQUITY
5% Series F convertible preferred stock,
$.01 par value; 10,000 shares authorized,
500 shares issued and outstanding in 1997
Liquidation value of $1,000 per share
($500,000 in 1997) 1
Common stock, $.01 par value; 100,000,000
shares authorized, 13,744,039 shares issued
and outstanding in 1997 137
Additional paid-in capital 30,485
Retained earnings (deficit) since
January 1, 1996 (1,677)
-------
Total stockholders' equity 28,946
-------
Total liabilities and stockholders' equity $75,739
=======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-44
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited in thousands, except per share data)
Nine Months Ended
September 30,
-----------------------
1997 1996
--------- ---------
Net Sales $ 145,986 $ 33,514
--------- ---------
Costs and expenses:
Cost of goods sold 127,227 28,690
Selling, general and administrative 11,842 2,891
Depreciation and amortization 1,241 343
--------- ---------
140,310 31,924
--------- ---------
Operating income 5,676 1,590
--------- ---------
Other income 344 29
Interest expense:
Bridge financing costs (5,822) --
Other interest, net of interest income (2,151) (102)
--------- ---------
(7,629) (73)
--------- ---------
Income (loss) before income taxes (1,953) 1,517
Provision (credit) for income taxes (646) 610
--------- ---------
Net income (loss) (1,307) 907
Dividends on preferred stock 732 193
--------- ---------
Income (loss) available to common stockholders $ (2,039) $ 714
========= =========
Earnings (loss) per share $ (0.15) $ 0.06
========= =========
Weighted average number of shares of common
stock and common stock equivalents outstanding 13,256 12,661
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-45
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(unaudited in thousands, except per share data)
<TABLE>
<CAPTION>
Series D Series F Retained
Common Stock Preferred Stock Preferred Stock Earnings
------------ --------------- --------------- (Deficit)
Additional Since Total
Paid-in January 1, Stockholders'
Shares Dollars Shares Dollars Shares Dollars Capital 1996 Equity
------ ------- ------ ------- ------ ------- ------- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 12,701,934 $127 7,002 $1 3,250 $1 $34,253 $362 $34,744
Exercise of stock options 124,000 1 -- -- -- -- 141 -- 142
Exercise of stock warrants 65,000 1 -- -- -- -- 170 -- 171
Redemption of Series F
preferred stock -- -- -- -- (2,750) -- (3,162) -- (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 (493) --
SEC Registration fees -- -- -- -- -- -- (619) -- (619)
Issuance of warrants in
connection with debt
placement -- -- -- -- -- -- 1,004 -- 1,004
Issuance of common stock in
connection with payment
right 385,591 4 -- -- -- -- (4) -- --
Issuance of common stock as
consideration for interest
owed on debt 118,145 1 -- -- -- -- 632 -- 633
Redemption of common
stock (321,867) (4) -- -- -- -- (2,417) -- (2,421)
Redemption of partial shares
of common stock (14) -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- (1,307) (1,307)
Dividends:
Series D preferred stock -- -- -- -- -- -- -- (195) (195)
Series F preferred stock -- -- -- -- -- -- -- (44) (44)
---------- ---- --- --- --- --- ------- ------- -------
Balance as of September 30, 1997 13,744,039 $137 0 $0 500 $1 $30,485 $(1,677) $28,946
========== ==== === === === === ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-46
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited in thousands)
Nine Months Ended
September 30,
-----------------------
1997 1996
--------- ---------
Net cash flows used by operating activities $ (2,755) $ (4,321)
--------- ---------
Cash flows from investing activities:
Acquisition payments, net of cash acquired (14,355) (9,442)
Officer loans 30 (367)
Restricted cash (360) (50)
Additions to property, plant and equipment (548) (183)
--------- ---------
Net cash flows (used by) from investing activities (15,233) (10,042)
--------- ---------
Cash flows from financing activities:
Payment of note payable -- (500)
Proceeds from revolving lines of credit 52,835 4,150
Repayment on revolving lines of credit (45,481) (900)
Proceeds from short-term debt 20,628 --
Payment of short-term debt (27,930) --
Proceeds from long-term debt 20,000 --
Repurchase of common stock (2,421) --
Proceeds from issuance of Preferred Stock -- 11,052
Proceeds from exercise of stock options 142 23
Proceeds from exercise of warrants 171 1,046
Payment of registration costs (619) (100)
Dividends paid (275) (105)
--------- ---------
Net cash flows from financing activities 17,050 14,666
--------- ---------
Increase (decrease) in cash and cash equivalents (938) 303
Cash and equivalents, beginning of period 3,608 649
--------- ---------
Cash and equivalents, end of period $ 2,670 $ 952
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 1,044 $ 103
Income taxes paid 227 119
Supplemental schedule of noncash investing
and financing activities:
Quasi-reorganization -- (93,847)
Common stock issued to settle liabilities 633 276
Issuance of short-term debt to redeem
Series F preferred stock
3,162 --
Dividends accrued but not yet paid 102 88
Net change in ARTRA receivables and liabilities -- (2,968)
Warrants issued in connection with the sale
of convertible debentures 1,004 --
Warrants issued in connection with short-term loan 100 --
Warrants issued in connection with credit facility 170 --
Common stock issued for purchase of Force Five, Inc. -- 500
Repayment of officer loans (see note 9) 352 --
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-47
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
COMFORCE Corporation ("COMFORCE" or the "Company") currently operates in one
industry segment as a provider of telecommunications and computer technical
staffing and consulting services worldwide.
Effective January 1, 1996, the Company effected a quasi-reorganization through
the application of $93,847,000 of its $95,993,000 Additional Paid in Capital
account to eliminate its Accumulated Deficit. The Company's Board decided to
effect a quasi-reorganization given that the Company achieved profitability
following its entry into the technical staffing business and discontinuation of
its unprofitable jewelry business.
As discussed in Note 3, on February 28, 1997, the Company purchased all of the
stock of RHO Company Incorporated ("Rhotech"). Rhotech is in the business of
providing contract employees to other businesses.
The accompanying unaudited interim financial statements of COMFORCE Corporation
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and note disclosures
normally included in annual financial statements have been condensed or omitted
pursuant to those rules and regulations. In the opinion of management, all
adjustments, consisting of normal, recurring adjustments considered necessary
for a fair presentation, have been included. Although management believes that
the disclosures made are adequate to ensure that the information presented is
not misleading, it is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996. The results of the nine months ended September 30, 1997 and 1996 are not
necessarily indicative of the results of operations for the entire year.
2. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"),
which establishes standards for computing and presenting earnings per share
(EPS). SFAS No. 128 will be effective for financial statements issued for
periods ending after December 15, 1997. Earlier application is not permitted.
Management has not yet evaluated the effects of this change on the Company's
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 becomes effective in fiscal 1999. Management
has not yet evaluated the effects of this change on the Company's financial
statements.
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"), which changes the way public companies report
information about segments. SFAS 131, which is based on the management approach
to segment reporting, includes requirements to report selected segment
information quarterly and entity-wide disclosures about products and services,
major customers, and the material countries in which the entity holds and
reports revenues. SFAS 131 becomes effective in fiscal 1999. Management has not
yet evaluated the effect of this change on the Company's financial statements.
3. CERTAIN ACQUISITIONS AND PROPOSED ACQUISITIONS
Rhotech Acquisition
On February 28, 1997, the Company purchased all of the stock of Rhotech for
$14.8 million in cash, plus a contingent payout to be paid over three years on
future earnings of Rhotech payable in stock in an aggregate amount not to exceed
$3.3 million. The maximum number of shares issuable under the contingent payout
is 386,249 shares. The acquisition of Rhotech was accounted for under the
purchase method and, accordingly, Rhotech's operations are included in the
Company's statement of operations from the date of acquisition. The cash portion
of the purchase price paid at closing
F-48
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
was principally funded through the Company's offering of Subordinated
Convertible Debentures. (See Note 4.) Rhotech provides specialists primarily in
the technical services and information technology sectors. In connection with
the closing of the Rhotech acquisition and in recognition of the efforts of
James L. Paterek, Chairman of the Company, Christopher P. Franco, Chief
Executive Officer of the Company, and Michael Ferrentino, President of the
Company, including providing their personal guarantees on certain loans to the
Company through the pledging of their shares of Company stock, the Company paid
each of these officers $75,000.
Proposed Uniforce Acquisition and Related Financing
On August 13, 1997, the Company, Uniforce Services, Inc. ("Uniforce") and
COMFORCE Columbus, Inc., a wholly-owned subsidiary of the Company (the
"Subsidiary"), executed an Agreement and Plan of Merger (the "Merger Agreement")
which provides for the acquisition of Uniforce by the Company. Pursuant to the
Merger Agreement, on October 27, 1997, the Company caused the Subsidiary to
commence a tender offer (the "Offer") to acquire all of the outstanding Uniforce
common stock (the "Uniforce Shares") for a per share price of $28 in cash and
0.5217 shares of the Company's Common Stock (collectively the "Per Share
Amount"), or an aggregate purchase price of approximately $93.6 million in cash
and approximately 1.6 million shares of the Company's Common Stock. The Merger
Agreement also provides, subject to various conditions some of which are
described below, for a merger (the "Merger") pursuant to which all holders of
Uniforce Shares who have not tendered their stock to the Subsidiary will receive
the Per Share Amount, and Uniforce will become a wholly-owned subsidiary of
COMFORCE Operating, Inc., a newly-formed, wholly-owned subsidiary of the Company
("COI").
Pursuant to the Merger Agreement, the Company's obligation to accept for payment
and pay for shares of Uniforce Shares pursuant to the Offer is subject to the
condition that at least two-thirds of the then outstanding Uniforce Shares are
tendered or otherwise held by the Company, and to certain other conditions. In
addition, the Merger is subject to various conditions set forth in the Merger
Agreement, and may also be terminated by either party in circumstances specified
in the Merger Agreement.
The Company estimates that the total amount of funds required by the Subsidiary
to purchase all of the Uniforce Shares issued and outstanding and Uniforce
Shares issuable upon exercise of the outstanding Uniforce stock options pursuant
to the Offer and the Merger will be approximately $93.6 million. In addition,
the Company estimates that the total amount of funds required to refinance
certain existing indebtedness of the Company and Uniforce, provide for working
capital and pay fees and expenses incurred in connection with the Offer and the
Merger will be approximately $80.6 million.
The Company and COI expect to obtain debt financing in the aggregate amount of
$210 million (which includes a $75 million revolving credit facility as
discussed below), of which approximately $93.6 million will be applied to
purchase the Uniforce Shares in the Offer and effect the Merger and $80.6
million will be used to pay related fees and expenses and refinance certain
existing indebtedness of Uniforce and the Company. The Offer and the Merger are
both conditioned upon the receipt of this financing by the Company.
In August 1997, the Company engaged NatWest Capital Markets Limited ("NatWest")
to act as its exclusive financial advisor and initial purchaser or lead
placement agent in connection with certain debt offerings to fund the Uniforce
acquisition, such offerings to be conducted on a best efforts basis. No
assurance can be given that NatWest will be successful in consummating such
offerings.
In addition, in November 1997, the Company received a commitment letter from
Heller Financial, Inc. ("Heller") for a $75 million revolving credit facility
(the "New Credit Facility") to refinance the existing credit facilities of the
Company and Uniforce. This financing is subject to various conditions, and no
assurance can be given the New Credit Facility will be made available to the
Company or, if so, on terms which are acceptable to the Company.
In accordance with the foregoing, the Company expects to finance the Uniforce
acquisition and to refinance the existing credit facilities of the Company and
Uniforce through (i) the issuance of $110 million in principal amount of Senior
Notes due 2007 to be issued by COI, a wholly-owned subsidiary of the Company,
(ii) the issuance of 25,000 Units representing $25 million in principal amount
of Senior Secured PIK Debentures due 2009 with Warrants to purchase the
Company's Common Stock to be issued by the Company, (iii) an initial draw under
the New Credit Facility to be entered into by COI and Heller, together with
existing cash balances, aggregating $39.2 million (the New Credit Facility,
together with the issuance of the Senior Notes and the Units, the "New
Financings").
F-49
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
4. DEBT
At September 30, 1997, current and long-term debt (in thousands) consists of:
September 30,
1997
-------------
Current debt
Revolving line of credit, due in July 1998, with interest
payable monthly at the bank's prime rate plus .75%. At
September 30, 1997, the bank's prime rate was 8.5%. $16,488
Long-term debt
Term loan with interest payable at the bank's prime rate
plus 1.75%. At September 30, 1997, the bank's prime rate
was 8.5%. $20,000
From February 27 to March 21, 1997 (each date of sale a "Closing Date"), the
Company sold $25.2 million of its Subordinated Convertible Debentures ("Old
Debentures") to certain institutional investors for cash or in exchange for
shares of the Company's Series F Preferred Stock. In the case of the shares
exchanged, the Company effected the repurchase of 2,750 of the 3,250 outstanding
shares of its Series F Preferred Stock by issuing Old Debentures in the original
principal amount of 115% of the liquidation value of the Series F Preferred
Stock to the holders thereof (the "Series F Holders"), which premium had been
included as an accretive dividend in December 1996. The Old Debentures bore
interest at the rate of 8% per annum, and were to bear interest at the rate of
10% per annum commencing 180 days after each Closing Date. Interest on the Old
Debentures was payable quarterly in cash or in common stock of the Company, at
the Company's option. Warrants to purchase 302,400 shares of the Company's
common stock at prices ranging from $6.85 to $7.65 per share were issued in
connection with this financing, which were valued at $734,000. In connection
with this financing, the Company incurred costs of approximately $5.8 million
which were expensed during the first half of 1997.
On June 25, 1997, the Company completed a $40 million credit facility (the
"Existing Credit Facility") with Fleet National Bank, as lender and agent
("Fleet"), and U.S. Bank, Washington, as lender ("U.S. Bank") (collectively,
"Lenders"). The Existing Credit Facility consists of a revolving credit facility
of up to $20 million and a $20 million term loan.
The Company utilized all of the proceeds of the term loan and a portion of the
availability under the revolving credit facility to redeem the Company's $25.2
million in outstanding principal amount of Old Debentures issued principally to
fund the Company's acquisition of Rhotech in February 1997. Additional funds
available under the revolving credit facility were used to retire the existing
$7.5 million revolving credit facility of Rhotech with U.S. Bank. The Company
intends to use available funds under the revolving credit facility for working
capital and general corporate purposes, including for acquisitions, subject to
the satisfaction of the conditions therefore set forth in the Existing Credit
Facility. Borrowings under the revolving credit facility are subject to various
financial covenants and other conditions. At September 30, 1997, the Company was
in compliance with all covenants and conditions of the Existing Credit Facility.
The revolving credit facility and the term loan bear interest at a rate equal to
0.75% and 1.75%, respectively, in excess of Fleet's prime rate as announced from
time to time. The Company's obligations under the Existing Credit Facility are
secured by substantially all of its assets. In addition, James L. Paterek, the
Chairman of the Company, Christopher P. Franco, the Chief Executive Officer of
the Company, and Michael Ferrentino, the President of the Company, each pledged
500,000 shares of the Company's common stock held by them and all of the options
to purchase common stock held by them as additional collateral for the Company's
obligations under the Existing Credit Facility. The scheduled maturity date of
the revolving credit facility is July 10, 1998. Subject to Fleet's right to
issue a call notice requiring repayment of the term loan at any time on or after
July 10, 1998, the term loan is payable in quarterly installments as follows:
$750,000 on July 1, 1998 and at the end of each calendar quarter thereafter
through and including December 31, 1999; $1,475,000 at the end of each calendar
quarter beginning March 31, 2000 and ending March 31, 2002, and a final balloon
payment equal to the sum of unpaid principal plus accrued interest on June 30,
2002. The Company intends to restructure its financing with the New Financings
discussed in Note 3.
F-50
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company incurred fees and expenses of approximately $1.7 million in
connection with obtaining the Existing Credit Facility, which will be amortized
over the term of the Existing Credit Facility, including amounts awarded to
Messrs. Paterek, Franco and Ferrentino for pledging their shares to further
collateralize the Company's obligations under the Existing Credit Facility (see
Note 9). In addition, the Company agreed to issue to Fleet warrants to purchase
(i) 100,000 shares of common stock at an exercise price of $7.30 per share
($1.50 per share in excess of the average closing price of the common stock for
the five business days ended June 24, 1997), exercisable until June 25, 2000 and
(ii) upon the occurrence of certain specified conditions, 100,000 shares of
common stock at an exercise price of $0.75 per share in excess of the average
closing price of the common stock for the five business days ending prior to the
date of the occurrence of the specified conditions, exercisable commencing on
such date and for a period of three years thereafter (see Note 5).
5. EQUITY
During the first nine months of 1997, options to purchase 124,000 shares of
common stock at a price of $1.125 per share were exercised.
During the first nine months of 1997, the Company issued warrants with a value
of $734,000 to purchase 302,400 shares of common stock at prices ranging from
$6.85 to $7.65 in connection with issuance of the Old Debentures and warrants
with a value of $170,000 to purchase 100,000 shares of common stock at a price
of $7.30 per share in connection with a long-term credit facility.
During the first nine months of 1997, the Company issued 100,000 warrants with a
value of $100,000 in connection with a short-term loan made to the Company.
During the first nine months of 1997, warrants to purchase 65,000 shares of
common stock were exercised at prices ranging from $2.00 to $3.375 per share.
During the first nine months of 1997, the Company effected the repurchase of
2,750 of the 3,250 outstanding shares of its Series F Preferred Stock with a
value of $3,162,000 through the issuance of its Old Debentures. (See Note 4.)
During the first nine months of 1997, 7,002 shares of Series D Preferred Stock
were converted into 671,250 shares of common stock under the conversion terms.
Such common shares included 87,750 shares with a market value of $493,000 given
to induce certain conversions. These additional shares have been accounted for
as a preferred stock dividend in the second quarter of 1997.
In June 1997, 118,145 shares of common stock were issued in consideration for
interest of $633,000 owed on the Old Debenture financing.
In December 1996, the Company sold 460,000 shares of its common stock, together
with a related payment right requiring the Company to make a payment to the
investors in either cash or common stock, at the Company's option, equal to the
amount by which $10.00 per share exceeded the average closing bid price for the
five trading days prior to April 1, 1997. In addition, in December 1996, the
Company sold 350,000 shares of its common stock, together with a related payment
right requiring the Company to make a payment to the investors in either cash or
common stock, at the Company's option, equal to the amount by which $12.05 per
share exceeded the average closing bid price for the five trading days prior to
April 1, 1997. On April 1, 1997, the Company satisfied these payment rights by
issuing 385,591 shares of its common stock.
In February 1997, in connection with its sale of its Old Debentures to the
investors who purchased 460,000 shares of the Company's common stock in December
1996, described above, the Company granted to such investors put options under
which the Company agreed to repurchase 115,000 of the shares on each of April
28, 1997, May 28, 1997, June 27, 1997 and July 27, 1997 made in satisfaction of
the payment right described above, subject to termination of such put options
upon earlier repayment of the Old Debentures. In the case of cash payments under
the payment right, this adjustment is effected through a reduction of the put
option price by the amount of the cash payment. In the case of payments in stock
under the payment right, this adjustment is effected through an increase in the
aggregate number of shares subject to the put option, without adjustment of the
aggregate put option price. On April 28 and May 28, 1997, the investors elected
to exercise the put option. As a result of the Company's satisfaction
F-51
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
of the payment right through its issuance of shares of common stock, the number
of shares the Company was required to repurchase was increased by 80,782 shares.
Consequently, the Company repurchased 310,782 shares of its common stock for
$2,300,000. The put options for June 27, 1997 and July 27, 1997 terminated by
their terms by reason of the Company's repayment of the Old Debentures on June
25, 1997.
6. EARNINGS PER SHARE
Earnings per common share is computed by dividing net earnings available for
common stockholders by the weighted average number of shares of common stock and
common stock equivalents (stock options and warrants), outstanding during each
period. Common stock equivalents relate to outstanding stock options and
warrants. For this computation, shares of the Series F Preferred Stock are
anti-dilutive and as such are not considered common stock equivalents and are
excluded from this calculation. The dividends of $688,000 accrued or paid on the
Series D Preferred Stock for the nine months ended September 30, 1997, and the
dividends of $44,000 accrued or paid on the Series F Preferred Stock for the
nine months ended September 30, 1997, have been deducted for computing earnings
available to common stockholders. For the nine month period ended September 30,
1997, common stock equivalents have not been included in this calculation as
their effect is antidilutive. For the nine month period ended September 30, 1997
and the nine month period ended September 30, 1996, fully diluted earnings per
share have not been presented as the result is anti-dilutive or does not differ
from primary earnings per share.
Primary earnings per share is calculated as follows (in thousands):
Nine Months Ended
September 30,
-----------------------
1997 1996
--------- ---------
Earnings (loss) available for common
stockholders $ (2,039) $ 714
--------- ---------
Weighted average number of shares 13,256 9,548
outstanding for the period
Dilutive effect of common stock equivalents -- 3,113
--------- ---------
13,256 12,661
========= =========
Primary earnings (loss) per share $ (0.15) $ 0.06
========= =========
7. INCOME TAXES
In the nine month period ended September 30, 1997, the difference between the
federal statutory income tax rate and the Company's effective tax rate relates
primarily to state income taxes and the nondeductibility of certain intangible
assets amortization.
8. LITIGATION
In January 1997, Austin A. Iodice, who served as the Company's Chief Executive
Officer, President and Vice Chairman while the Company was engaged in the
jewelry business, and Anthony Giglio, who performed the functions of the
Company's Chief Operating Officer while the Company was engaged in the jewelry
business, filed separate suits against the Company in the Connecticut Superior
Court alleging that the Company had breached the terms of management agreements
entered into with them by failing to honor options to purchase Common Stock
awarded to them in connection with the management of the jewelry business under
the terms of such management agreements and the Company's Long-Term Stock
Investment Plan. The suits allege that the plaintiffs are entitled to an
unspecified amount of damages. The Company believes that the option to purchase
370,419 shares granted to Mr. Iodice (through Nitsua, Ltd., a corporation
wholly-owned by him) and the option to purchase 185,210 shares granted to Mr.
Giglio, each having an exercise price of $1.125 per share, expired in 1996,
three months after Messrs. Giglio and Iodice ceased to be employed by the
Company. Messrs. Giglio and Iodice maintain that they were agents and not
employees of the Company and that the options continue to be exercisable. In
March 1997, the Company filed motions to dismiss each of these suits, and the
court scheduled hearings on these motions for December 1997. The Company intends
to vigorously defend these suits.
F-52
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
In a case filed in U.S. District Court, Central District of California, against
Rhotech and Technical Staff Associates, Inc. ("TSA"), which was acquired by
Rhotech in 1992, TSA's former insurance carrier has alleged that TSA and Rhotech
are obligated to repay to it approximately $1.6 million that it was required to
pay in connection with an injury and death that occurred in November 1992 to a
temporary employee of TSA. The action has been referred to Rhotech's insurance
carrier, which is defending it with a reservation of rights. Rhotech has been
granted summary judgment with respect to all claims made in the action, which
judgment is the subject of an appeal by the plaintiff. Management believes that
the case is without substantial merit and intends to vigorously defend it.
In December 1994, the Company was notified by the Federal Environmental
Protection Agency that it was a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") for the disposal of hazardous substances at a site in Gary, Indiana.
The alleged disposal occurred in the mid-1970s at a time when the Company
conducted manufacturing operations. In this connection, in December 1994, the
Company was named as one of approximately 80 defendants in a case brought in the
United States District Court for the Northern District of Indiana by a group of
14 potentially responsible parties who agreed in a consent order entered into
with the EPA to clean-up this site. In October 1997, ARTRA entered into a
settlement agreement with the plaintiffs to settle the case for a cash payment
of $50,000. Under the terms of this settlement agreement, the Company was
dismissed as a defendant in the case and released and discharged from liability
in connection with this matter.
The Company is a party to routine contract and employment-related litigation
matters in the ordinary course of its business. No such pending matters,
individually or in the aggregate, if adversely determined, are believed by
management to be material to the business, results of operations or financial
condition of the Company. The Company maintains general liability insurance,
property insurance, automobile insurance, employee benefit liability insurance,
owner's and contractor's protective insurance and exporter's foreign operations
insurance with coverage of $1 million on a per claim basis and $2 million
aggregate (with $3 million umbrella coverage). The Company insures against
workers' compensation in amounts required under applicable state law and in the
amount of $500,000 in the case of foreign workers. The Company also maintains
fidelity insurance in the amount of $25,000 per claim and directors' and
officers' liability insurance in the amount of $5 million. The Company is
presently soliciting quotations to obtain errors and omissions coverage.
9. RELATED PARTY TRANSACTION
The Company paid L.H. Frishkoff & Company, a certified public accounting firm at
which Richard Barber, a Director of the Company, is a partner, approximately
$196,907 in fees during 1997 for tax-related advisory services.
As a condition to the funding of the Existing Credit Facility (see Note 4), the
Lenders required James L. Paterek, the Company's Chairman, Christopher P.
Franco, the Company's Chief Executive Officer, and Michael Ferrentino, the
Company's President, to each pledge as additional collateral to secure the
Company's obligations under the Existing Credit Facility 500,000 shares of the
Company's common stock owned by them and all of the options to purchase common
stock held by them (281,250 shares in the case of Messrs. Paterek and Ferrentino
and 112,500 shares in the case of Mr. Franco), which shares had a current market
value in excess of $12 million at the approximate time of the transaction. The
board of directors of the Company engaged an independent valuation firm to value
these pledges by the principals.
In recognition of both the substantial benefit afforded to the Company by the
pledges and the cost to the principals of making the pledges, the board of
directors authorized the issuance of an aggregate consideration of approximately
$650,000 to these principals, which amount was utilized to repay outstanding
loans of such officers due to the Company and related payroll withholding taxes.
The board of directors has deemed such consideration reasonable based on the
valuation of the pledges as determined by the appraisal performed by the
independent valuation firm. The aggregate amount of this consideration,
approximately $650,000, is included as a part of the fees and expenses incurred
in connection with the Existing Credit Facility (as described in Note 4).
10. POSSIBLE RESTRUCTURING CHARGE
The Company currently expects that it will incur a restructuring charge in the
fourth quarter of 1997, in connection with certain potential severance and other
costs related to the integration of COMFORCE and Uniforce. Management currently
believes that such restructuring charge will be approximately $2.0 million;
however, no assurance can be given that any such charge, if incurred, will not
exceed such amount.
F-53
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Rho Company Incorporated:
We have audited the accompanying balance sheets of Rho Company Incorporated (a
Washington Corporation) as of December 31, 1995 and 1996, and the related
statements of income, changes in shareholders' deficit and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rho Company Incorporated as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington,
January 24, 1997
F-54
<PAGE>
RHO COMPANY INCORPORATED
BALANCE SHEETS -- DECEMBER 31, 1995 AND 1996
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
ASSETS
1995 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 412 $ 287
Restricted cash 705 1,133
Escrow deposit -- 500
Accounts receivable, less allowance for doubtful accounts of
$200 and $180, respectively 8,725 7,572
Prepaid expenses 167 155
-------- --------
Total current assets 10,009 9,647
-------- --------
FURNITURE AND EQUIPMENT, less accumulated depreciation of $1,065
and $1,007 513 575
-------- --------
OTHER ASSETS 132 51
-------- --------
Total assets $ 10,654 $ 10,273
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - bank $ 6,253 $ 6,223
Current portion of long-term debt, related party 130 396
Accounts payable 329 218
Wages payable 844 647
Payroll taxes and withholdings payable 1,167 630
Accrued interest 147 113
Accrued vacations, bonuses and other 605 625
-------- --------
Total current liabilities 9,475 8,852
-------- --------
LONG-TERM DEBT, RELATED PARTY 9,956 9,268
-------- --------
SHAREHOLDERS' EQUITY:
Common stock; $1.00 par value; authorized 50,000 and 1,000,000
shares, respectively, issued and outstanding 50,000 shares 50 50
Other capital -- 2,680
Deferred stock option charge -- (1,920)
Retained deficit (8,827) (8,657)
-------- --------
Total shareholders' equity (8,777) (7,847)
-------- --------
Total liabilities and shareholders' equity $ 10,654 $ 10,273
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-55
<PAGE>
RHO COMPANY INCORPORATED
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollar amounts in thousands)
1994 1995 1996
------- ------- -------
REVENUES $76,170 $83,631 $85,746
COST OF OPERATIONS 69,157 74,978 76,457
------- ------- -------
Gross profit 7,013 8,653 9,289
GENERAL AND ADMINISTRATIVE EXPENSES 5,266 6,510 7,512
------- ------- -------
Income from operations 1,747 2,143 1,777
------- ------- -------
OTHER EXPENSES:
Stock option expense -- -- 260
Interest expense, net 1,435 1,643 1,317
------- ------- -------
Total other expenses 1,435 1,643 1,577
------- ------- -------
Net income $ 312 $ 500 $ 200
======= ======= =======
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
RHO COMPANY INCORPORATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Deferred
Stock Total
Common Other Option Retained Shareholders'
Stock Capital Charge Deficit Deficit
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 $ 50 $ -- $ -- $(9,534) $(9,484)
Net income -- -- -- 312 312
------- ------- ------- ------- -------
BALANCE, December 31, 1994 50 -- -- (9,222) (9,172)
Net income -- -- -- 500 500
Dividends paid -- -- -- (105) (105)
------- ------- ------- ------- -------
BALANCE, December 31, 1995 50 -- -- (8,827) (8,777)
Net income -- -- -- 200 200
Dividends paid -- -- -- (30) (30)
Stock option granted -- 2,180 (2,180) -- --
Amortization of deferred
stock option charge -- -- 260 -- 260
Treasury stock subscribed -- (567) -- -- (567)
Common stock subscribed -- 1,067 -- -- 1,067
------- ------- ------- ------- -------
BALANCE, December 31, 1996 $ 50 $ 2,680 $(1,920) $(8,657) $(7,847)
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE>
RHO COMPANY INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollar amounts in thousands)
1994 1995 1996
------- ------- -------
OPERATING ACTIVITIES:
Net income $ 312 $ 500 $ 200
Depreciation 196 223 268
Amortization of intangible assets 4 4 35
Loss on retirement of furniture and fixtures -- 17 4
Deferred income taxes (37) -- --
Stock option expense -- -- 260
Net change in current assets and liabilities-
Accounts receivable and other (1,559) (1,778) 1,153
Prepaid expenses 214 (70) 12
Accounts payable 60 200 (111)
Wages payable 139 9 (197)
Payroll taxes and withholdings payable 72 296 (537)
Accrued interest 40 15 (34)
Accrued vacations, bonuses and other (56) 110 20
------- ------- -------
Cash flows from operating activities (615) (474) 1,073
------- ------- -------
INVESTING ACTIVITIES:
Purchase of furniture and equipment (136) (334) (334)
Decrease (increase) in other assets (8) (24) 46
------- ------- -------
Cash flows from investing activities (144) (358) (288)
------- ------- -------
FINANCING ACTIVITIES:
Increase in restricted cash (591) (35) (428)
(Decrease) increase in bank borrowings 1,482 1,302 (30)
Borrowings of long-term debt 114 168 --
Repayments of long-term debt (270) (266) (422)
Dividends paid -- (105) (30)
------- ------- -------
Cash flows from financing activities 735 1,064 (910)
------- ------- -------
(DECREASE) INCREASE IN CASH (24) 232 (125)
CASH, beginning of year 204 180 412
------- ------- -------
CASH, end of year $ 180 $ 412 $ 287
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 1,395 $ 1,628 $ 1,351
Income taxes 8 8 43
The accompanying notes are an integral part of these statements.
F-58
<PAGE>
RHO COMPANY INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business
The Company markets the services of temporary technical and clerical people to
various industries located primarily in the states of Washington and California.
Furniture and Equipment
Furniture and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided using the straight-line and accelerated methods over
expected useful lives of three to seven years.
Income Taxes
The Company has elected S-corporation status for reporting taxable income. Any
income or loss from the corporation is reportable on the personal returns of the
stockholders.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and those
differences could be significant.
Reclassifications
Certain reclassifications have been made to the prior year statements to conform
to the current year format.
2. RESTRICTED CASH:
Collections of accounts receivable are deposited in a restricted collateral
account used for repayment of advances under the Company's bank line of credit.
The balance in the collateral account at December 31, 1995 and 1996 was $705 and
$1,133, respectively, shown in the accompanying balance sheets. The remaining
cash balance is unrestricted.
F-59
<PAGE>
3. NOTE PAYABLE - BANK:
The Company has available a line of credit for up to $7.5 million in borrowings,
bearing interest at the bank's prime rate plus .875% (9.125% at December 31,
1996), collateralized by accounts receivable. The line of credit is limited to
75% of eligible accounts receivable and requires collections to be deposited in
a restricted collateral account. The outstanding balance on the line of credit
was $6,223 at December 31, 1996. The loan agreement contains various covenants,
including minimum levels of working capital and net worth. The loan agreement
expires June 15, 1997. Although there can be no assurance, the Company
anticipates it will be able to renew the line of credit. If it were not able to
renew the line of credit or obtain other acceptable financing, it then could
have adverse consequences, including possible cessation of operations.
4. LONG-TERM DEBT:
Long-term debt as of December 31, 1995 and 1996 consists of the following:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Subordinated notes payable to former stockholder in monthly installments equal
to 55% of average monthly net income, as defined, or $50, whichever is
greater, with total minimum payments of $195 per quarter, including interest
at 6.6% (10.5% prior to January 1, 1996), collateralized by a stock pledge
agreement with shareholders of Rho Company Incorporated $ 6,882 $ 6,531
Subordinated note payable to former stockholder, 9.125%, collateralized by
accounts receivable, subordinate to the bank line of credit. Due on demand,
but stockholder does not intend to call the note before January 1, 1998 1,548 1,548
Subordinated note payable to stockholder, 9.125%, collateralized by
accounts receivable, subordinate to the bank line of credit
Due on demand, but stockholder does not intend to call the note
before January 1, 1998 1,369 1,369
Subordinated note payable to stockholder, 9.125%, collateralized by
accounts receivable, subordinate to the bank line of credit
Due on demand, but stockholder does not intend to call the note
before January 1, 1998 178 178
Other 109 38
-------- --------
10,086 9,664
Less- Current portion (130) (396)
-------- --------
$ 9,956 $ 9,268
======== ========
</TABLE>
All of the notes payable agreements are with related parties. Total interest
expense related to these notes was $987, $1,038 and $744 for the years ended
December 31, 1994, 1995 and 1996.
F-60
<PAGE>
Effective as of January 1, 1996, the Company's 10.5% subordinated notes were
modified to provide for a new interest rate of 6.6% and for accelerated payments
based on net income. The noteholder was granted an option to purchase up to 25%
of the Company's common stock (after giving effect to the exercise of the
option) at a price based on a formula. The noteholder has the right to use the
interest calculated using the difference between the old interest rate and the
new lower interest rate as a credit toward the option price. The Company has
valued the option using the fair value method. The option was valued at $2,180
based on the present value of the foregone interest payments under the modified
note agreement. This amount is being amortized using the effective interest
method over the life of the note payable.
Debt maturities on these notes are as follows:
1997 $ 396
1998 3,478
1999 409
2000 436
2001 466
Thereafter 4,479
------
$9,664
======
5. LEASE COMMITMENTS:
The Company leases office and storage space and equipment under noncancelable
operating leases. Future minimum rentals are as follows:
Year ending December 31,
------------------------
1997 $ 608
1998 547
1999 389
2000 337
2001 99
------
$1,980
======
Rental expense under operating leases totaled $316, $457 and $659 for the years
ended December 31, 1994, 1995 and 1996, respectively.
6. COMMITMENTS:
The Company has covenant not-to-compete agreements with the former stockholders
of an acquired/merged company. Payments under the agreements are the greater of:
(a) $50 per year for five years; or (b) 8% of the gross margin (defined as gross
billings minus temporary employee wages) generated by the merged company's
clients.
The minimum future payment under these covenant not-to-compete agreements is $50
for the year ending December 31, 1997.
The Company expensed $236, $167 and $118 under these agreements for the years
ended December 31, 1994, 1995 and 1996, respectively.
F-61
<PAGE>
7. EMPLOYEE BENEFIT PLAN:
The Company has a qualified 401(k) profit sharing plan covering eligible
employees. The plan provides for contributions by the Company without regard to
current or accumulated earnings at the discretion of the Board of Directors. The
Company did not make any matching contributions to the plan for the years ended
December 31, 1994 and 1995. Matching contributions totaling $44 were made during
the year ended December 31, 1996.
8. MAJOR CUSTOMERS:
During the year ended December 31, 1996, the Company had two customers with
sales greater than 10% of the Company's revenues. Contracts with one customer in
the software industry accounted for approximately $22,600, $29,000 and $26,100,
of the Company's sales for the years ended December 31, 1994, 1995 and 1996,
respectively. As of December 31, 1995 and 1996, this customer's accounts
receivable balance was $1,540 and $680, respectively. Contracts with one
customer in the aerospace industry accounted for approximately $12,800 of the
Company's sales for the year ended December 31, 1996. As of December 31, 1996,
this customer's accounts receivable balance was $1,484. Contracts with these two
customers can be terminated at any time with 30 days' notice.
9. PRIOR PERIOD ADJUSTMENT:
During 1995, the Company began accruing for vacations earned but unpaid to its
permanent employees and the portion of bonuses earned but unpaid to its contract
employees. The effect of this correction on the prior year financial statements
was as follows:
Net income, year ended December 31, 1994, as
previously reported $ 364
Less: Adjustment for correction of error (52)
-------
Net income, year ended December 31, 1994, as restated $ 312
=======
Retained deficit, as previously reported for
December 31, 1993 $(9,221)
Less: Adjustment for correction of error (313)
-------
Retained deficit, as restated for December 31, 1993 $(9,534)
=======
10. CONTINGENCIES:
The Company is the defendant in litigation with a previous insurer regarding a
settlement paid by the insurer which the insurer alleges should be indemnified
by the Company in the amount of approximately $1.6 million. The Company is
vigorously defending the lawsuit and management, in consultation with legal
counsel, believes it is more likely than not that the Company will prevail. In
November 1996, the Court granted a motion for summary judgment to dismiss the
case in favor of the Company. The plaintiff may still appeal the decision.
F-62
<PAGE>
11. PURCHASE AGREEMENT:
The stockholders of the Company have signed a definitive purchase agreement
whereby the Company will repurchase their shares concurrent with issuing shares
to COMFORCE Corporation. COMFORCE would then own all of the outstanding shares
of the Company. As part of this agreement, COMFORCE has advanced, on behalf of
the Company, $567 to a shareholder as a prepayment for the purchase of his
shares, which represent 1/3 of the outstanding shares of the Company. This
amount represents treasury stock subscribed and is shown as a reduction of
shareholders' equity. COMFORCE has also placed $500 in an earnest money escrow
account. In the event the stock purchase agreement fails to close as a result of
a breach of or material representative by the Company, the Company would be
required to return the entire $1,067 to COMFORCE, which was advanced as common
stock subscribed.
F-63
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Uniforce Services, Inc.:
We have audited the accompanying consolidated balance sheets of Uniforce
Services, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Uniforce Services,
Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Jericho, New York
March 7, 1997
F-64
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,283,422 6,444,859
Accounts receivable (net of allowance for doubtful accounts of
$68,000 and $167,000, in 1996 and 1995, respectively) 17,224,885 14,827,862
Funding and service fees receivable (net of allowance for doubtful
accounts of $212,000 and $402,000 in 1996 and 1995,
respectively) 18,759,814 20,918,753
Current maturities of notes receivable from licensees (net of
allowance for possible loss of $42,000 and $67,000 in 1996 and
1995, respectively) 87,051 132,258
Prepaid expenses and other current assets 1,710,969 1,270,268
Deferred income taxes 201,149 347,149
------------ ------------
Total current assets 43,267,290 43,941,149
------------ ------------
Notes receivable from licensees (net of current maturities and allowance for
possible loss of $64,000 and $92,000
in 1996 and 1995, respectively) 136,157 182,642
Fixed assets - net 3,775,661 2,125,413
Deferred costs and other assets (net of accumulated amortization of
$2,105,777 and $1,685,970 in 1996 and 1995, respectively) 1,402,032 821,244
Cost in excess of fair value of net assets acquired (net of accumulated
amortization of $681,601 and $335,954 in 1996 and 1995, respectively) 6,388,240 3,525,741
------------ ------------
$ 54,969,380 50,596,189
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Loan payable $ 1,000,000 750,000
Payroll and related taxes payable 6,372,319 7,540,947
Payable to licensees and clients 1,484,238 2,025,563
Income taxes payable -- 351,690
Accrued expenses and other liabilities 5,408,070 4,092,058
------------ ------------
Total current liabilities 14,264,627 14,760,258
------------ ------------
Loan payable - non-current 25,750,000 11,250,000
Capital lease obligation - non-current 732,658 426,109
Stockholders' equity:
Common stock $.01 par value, authorized 10,000,000 shares; issued 5,109,788
and 4,991,213 shares in 1996 and 1995,
respectively 51,098 49,912
Additional paid-in capital 8,825,128 7,789,598
Retained earnings 27,296,463 23,990,043
------------ ------------
36,172,689 31,829,553
Treasury stock, at cost, 2,084,245 and 829,500 shares in
1996 and 1995, respectively (21,950,594) (7,669,731)
------------ ------------
Total stockholders' equity 14,222,095 24,159,822
------------ ------------
$ 54,969,380 50,596,189
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-65
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales of supplemental staffing services $ 134,437,421 126,267,842 108,485,992
Service revenues and fees 7,713,935 8,203,490 6,694,742
------------- ------------- -------------
Total revenues 142,151,356 134,471,332 115,180,734
Cost of supplemental staffing services 104,685,598 98,162,571 83,766,726
Licensees' share of gross margin 7,976,831 9,473,431 9,895,870
General and administrative 20,074,672 19,450,728 15,730,938
Litigation settlement 360,000 -- --
Depreciation and amortization 1,073,759 940,668 941,196
------------- ------------- -------------
Total costs and expenses 134,170,860 128,027,398 110,334,730
------------- ------------- -------------
Earnings from operations 7,980,496 6,443,934 4,846,004
Other income (expense):
Interest expense - net of interest and dividend
income of $105,389, $161,504 and $131,970 in
1996, 1995 and 1994, respectively (2,170,386) (727,980) (127,378)
Other income 44,621 29,439 7,125
------------- ------------- -------------
Earnings before provision for income taxes 5,854,731 5,745,393 4,725,751
Provision for income taxes 2,185,000 2,182,000 1,775,000
------------- ------------- -------------
Net earnings $ 3,669,731 3,563,393 2,950,751
============= ============= =============
Weighted average number of shares outstanding 3,257,685 4,311,358 4,553,303
============= ============= =============
Net earnings per share $ 1.13 .83 .65
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-66
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional Total
Common stock paid-in Retained Treasury stockholders'
Shares Par value capital earnings stock equity
------ --------- ------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 4,721,443 $ 47,214 $ 5,842,145 $ 18,534,895 $ (3,716,141) $ 20,708,113
Common stock issued 225,370 2,254 1,399,303 -- -- 1,401,557
Cash dividend declared ($.12 per share) -- -- -- (533,052) -- (533,052)
Stock option compensation expense -- -- 18,000 -- -- 18,000
Tax benefit of disqualifying dispositions -- -- 152,124 -- -- 152,124
Treasury stock acquired -- -- -- -- (1,585,086) (1,585,086)
Net earnings -- -- -- 2,950,751 -- 2,950,751
---------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 4,946,813 49,468 7,411,572 20,952,594 (5,301,227) 23,112,407
Common stock issued 44,400 444 259,806 -- -- 260,250
Cash dividend declared ($.12 per share) -- -- -- (525,944) -- (525,944)
Stock option compensation expense -- -- 18,000 -- -- 18,000
Tax benefit of disqualifying dispositions -- -- 100,220 -- -- 100,220
Treasury stock acquired -- -- -- -- (2,368,504) (2,368,504)
Net earnings -- -- -- 3,563,393 -- 3,563,393
---------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 4,991,213 49,912 7,789,598 23,990,043 (7,669,731) 24,159,822
Common stock issued 118,575 1,186 870,908 -- -- 872,094
Cash dividend declared ($.12 per share) -- -- -- (363,311) -- (363,311)
Stock option compensation expense -- -- 18,000 -- -- 18,000
Tax benefit of disqualifying dispositions -- -- 146,622 -- -- 146,622
Treasury stock acquired -- -- -- -- (14,280,863) (14,280,863)
Net earnings -- -- -- 3,669,731 -- 3,669,731
---------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 5,109,788 $ 51,098 $ 8,825,128 $ 27,296,463 $(21,950,594) $ 14,222,095
========== ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-67
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,669,731 3,563,393 2,950,751
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Depreciation and amortization 1,073,759 940,668 941,196
Deferred income taxes 146,000 32,622 175,000
Provision (recovery) for possible losses on
receivables (207,361) 583,998 140,651
Provision (recovery) for possible losses on notes
receivable and other assets (245,850) 247,165 (258,599)
Stock option compensation expense 18,000 18,000 18,000
(Increase) in accounts receivable (1,480,962) (3,137,221) (1,203,381)
(Increase) decrease in funding and service fees
receivable 2,294,726 (6,907,658) (5,164,472)
(Increase) in prepaids and other assets (431,020) (769,180) (44,131)
Increase (decrease) in payroll and related taxes
payable (1,168,628) 533,026 799,426
Increase (decrease) in payable to licensees and clients (541,325) 115,452 414,379
Increase (decrease) in income taxes payable (205,068) 451,910 (217,336)
Increase in accrued expenses and other liabilities 1,211,623 843,043 1,713,010
------------ ------------ ------------
Net cash provided (used) by operating activities 4,133,625 (3,484,782) 264,494
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of certain assets in connection with
business combinations (3,783,655) -- (3,204,772)
Purchase of receivables in connection with
acquisitions (844,487) -- (1,301,595)
Notes receivable from licensees (100,325) (163,741) (391,557)
Repayments on notes receivable from licensees 244,018 548,748 638,749
(Increase) in deferred costs and other assets (178,027) (134,358) (121,950)
Purchases of fixed assets (1,464,477) (669,979) (591,796)
------------ ------------ ------------
Net cash (used) by investing activities (6,126,953) (419,330) (4,972,921)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on capital lease obligations (146,029) (15,654) --
Borrowings under loans payable 14,750,000 15,700,000 6,300,000
Principal payments on loans payable -- (10,000,000) --
Proceeds from issuance of common stock 872,094 260,250 670,307
Cash dividends paid (363,311) (525,944) (533,052)
Purchase of treasury stock (14,280,863) (2,368,504) (1,585,086)
------------ ------------ ------------
Net cash provided by financing activities 831,891 3,050,148 4,852,169
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,161,437) (853,964) 143,742
Cash and cash equivalents at beginning of year 6,444,859 7,298,823 7,155,081
------------ ------------ ------------
Cash and cash equivalents at end of year $ 5,283,422 6,444,859 7,298,823
============ ============ ============
Supplemental disclosures:
Cash paid for:
Interest $ 1,894,606 590,524 131,328
============ ============ ============
Income taxes, net of refunds $ 2,376,805 1,690,040 1,835,734
============ ============ ============
</TABLE>
Non-cash Investing and Financing Activities:
During 1994, 127,720 shares of the Company's Common Stock, with an aggregate
market value of $731,250 were issued in connection with the purchase of certain
assets of Brannon & Tully(R).
During 1996 and 1995, the Company entered into capital leases for software and
office equipment in the amounts of $556,967 and $524,909, respectively.
See accompanying notes to consolidated financial statements.
F-68
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) Description of Business
Uniforce Services, Inc., together with its subsidiaries (the "Company"),
provides supplemental personnel services to businesses, educational
institutions, professional and service organizations, federal, state and
local governmental agencies and others in the United States. The Company
has selected specialized product lines within several of its licensed and
company owned offices to provide skilled Information Services ("IS")
professional employees, office automation specialists and medical office
support. The Company also supplies financial, payroll and billing support
services to independent supplemental staffing services. In addition,
subsidiaries of the Company provide temporary laboratory staffing support
to the scientific community; and provide confidential employee conversion
and consulting services which enable client companies to utilize the
services of former independent contractors and consultants. One of the
Company's customers represented 10.2% of revenues in 1996.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Uniforce
Services, Inc. and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
(b) Depreciation and Amortization
Depreciation and amortization of fixed assets is computed on a
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the lesser of their
estimated useful lives or the respective lease periods.
Intangible assets, which include covenants not to compete and
territorial rights acquired, are being amortized over their estimated
useful lives ranging from five to ten years using the straight-line
method. The unamortized balance is included in deferred costs and
other assets in the accompanying consolidated balance sheets.
(c) Deferred Licensee Acquisition Costs
The Company has executed contracts for affiliation with existing
supplemental staffing service companies. Such contracts require the
Company to pay an affiliation fee which is amortized on a
straight-line method over the minimum terms of the affiliation
agreements which are generally five or ten years. In addition, the
Company has paid similar fees for existing supplemental staffing
service companies acquired by the Company's licensees. Under these
arrangements, the Company has agreed to pay, on behalf of its
licensees, one-half of the acquisition cost. Such costs are amortized
on a straight-line basis over five or ten years. Amortization of
deferred licensee acquisition costs amounted to $121,796, $129,530 and
$183,649 in 1996, 1995 and 1994, respectively.
(d) Income Taxes
The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No.
109 "Accounting for Income Taxes." SFAS 109 provides that income taxes
be accounted for using the asset and liability method which requires
the recognition of deferred income taxes for temporary differences
between the financial reporting basis and tax basis of assets and
liabilities.
F-69
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(e) Earnings Per Share
Earnings per share amounts are determined using the weighted average
number of common shares and dilutive common share equivalents
(options) outstanding.
(f) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(g) Financial Instruments
The fair values of all financial instruments classified as current
assets or liabilities approximate their respective carrying values
because of the short maturity of those instruments. The fair value of
the Company's loans approximates book value since the interest rates
are variable and accordingly are adjusted for market rate
fluctuations.
(h) Long-Lived Assets
In March 1995, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was
issued. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used or disposed of by an
entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable measured by comparing the carrying amount of an asset to
the future net cash flows expected to be generated by the asset.
During 1996, the Company adopted SFAS No. 121 and determined that no
impairment loss need be recognized for applicable assets and thus, it
did not have a material impact on the Company's financial position or
results of operations.
(i) Accounting for Stock-Based Compensation
The Company records compensation expense for stock options only if the
current market price of the underlying stock exceeds the exercise
price on the date of the grant. On January 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The
Company has elected not to implement the fair value based accounting
method for stock options, but has elected to disclose the pro forma
net earnings and pro forma earnings per share for employee and
director stock option and warrant grants made beginning in 1995 as if
such method had been used to account for stock-based compensation cost
as described in SFAS No. 123.
(j) Reclassifications
Certain reclassifications have been made to the 1994 financial
statements to conform to the 1995 and 1996 presentation.
(3) Acquisitions
On May 17, 1996, the Company acquired certain assets of Montare
International, a provider of Information Technology ("IT") contract
professionals. The purchase price was $3,600,000 in cash. Pursuant to a
separate agreement, the Company also acquired certain accounts receivable
for $844,487. The purchase price and the accounts receivable acquired were
financed through borrowings available under the Company's credit facility.
This acquisition has been accounted for as a purchase and accordingly, the
purchase price was allocated to assets based on the estimated fair value as
of the date of the acquisition. The excess of the consideration paid over
the estimated fair value of assets acquired in the amount of $3,158,022 has
been recorded as cost in excess of fair value of net assets acquired
(goodwill) and is being amortized over 20 years on the straight-line
method. The Company assesses the recoverability of unamortized goodwill
using the undiscounted projected future earnings from the related
businesses. The operating results of Montare International have been
included in the consolidated
F-70
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
statement of earnings from the purchase date. The acquisition of Montare
did not have a material impact on the Company's results of operations.
On April 18, 1994, the Company acquired certain assets of Brannon & Tully,
a provider of IS contract professionals. The purchase price totaled
$3,881,250 and consisted of $3,150,000 in cash and the issuance of 127,720
shares of Common Stock of the Company. Pursuant to a separate agreement,
the Company also acquired certain accounts receivable, with recourse, for
$1,301,595. The cash portion of the purchase price and the accounts
receivable acquired were financed through borrowings available under the
Company's credit facility.
This acquisition has been accounted for as a purchase and accordingly, the
purchase price was allocated to assets based on the estimated fair value as
of the date of the acquisition. The excess of the consideration paid over
the estimated fair value of assets acquired in the amount of $3,781,925 has
been recorded as cost in excess of fair value of net assets acquired
(goodwill) and is being amortized over 20 years on the straight-line
method.
F-71
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The operating results of Brannon & Tully have been included in the
consolidated statements of earnings from the purchase date. The following
unaudited pro forma consolidated results of operations assume the
acquisition of Brannon & Tully occurred on January 1, 1994:
December 31,
1994
----
Revenues $118,826,683
Net earnings 3,181,632
Earnings per share $ .69
============
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the acquisition
occurred at the beginning of the period or of results which may occur in
the future.
One of the former principals of Brannon & Tully entered into an employment
agreement with the Company. His employment agreement was for a term of five
years, but could be terminated by either party at any time after one year,
upon not less than 90 days notice. Beginning in 1995, the employment
agreement provided for incentive compensation based upon improvements in
gross profits relating to certain offices to which the officer rendered
employment services and provided active assistance. The amount of incentive
compensation earned in 1995 under the agreement was $370,172. The
employment agreement was terminated during 1995.
(4) Fixed Assets
Fixed assets are stated at cost as follows:
Dec. 31, Dec. 31, Estimated
1996 1995 useful life
---- ---- -----------
Computer equipment $2,461,249 $2,050,173 8 years
Computer software 1,451,319 670,605 3-5 years
Furniture, fixtures, office
equipment and other 1,545,706 1,480,125 5-15 years
Leasehold improvements & signs 534,878 488,099 Life of lease
---------- ----------
5,993,152 4,689,002
Less accumulated depreciation and
amortization 2,217,491 2,563,589
---------- ----------
$3,775,661 $2,125,413
========== ==========
Depreciation and amortization expense on fixed assets amounted to $403,952,
$364,025 and $291,751 for the years ended December 31, 1996, 1995 and 1994,
respectively.
F-72
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Loan Payable
On December 8, 1995, the Company entered into an agreement with a financial
institution creating a three-year $35,000,000 credit facility (the "Credit
Facility"). The Credit Facility comprises a term loan in the amount of
$3,000,000 (the "Term Loan") to be paid in monthly installments of $62,500
in 1996, $83,333 in 1997 and $104,167 in 1998, with the balance outstanding
due on December 1, 1998 and a $32,000,000 revolving credit facility (the
"Revolving Facility") which expires on December 1, 1998 . The Company may
borrow against the Revolving Facility up to 85% of eligible accounts
receivable and eligible service and funding fees receivable. The Term Loan
bears interest at the Company's election at either the lender's floating
base rate plus .25%, or LIBOR (London Interbank Offered Rate) plus 2.25%.
Borrowings under the Revolving Facility bear interest at the Company's
election at either the lender's floating base rate, or LIBOR plus 2.125%.
Borrowings under the Credit Facility are secured by a first priority
security interest in all owned and after-acquired real and personal
property of the Company.
At December 31, 1996, the Company had outstanding borrowings of $2,250,000
under the Term Loan bearing interest at an average rate of 7.8% and
$24,500,000 of borrowings under the Revolving Facility bearing interest at
an average rate of 7.7%.
The Credit Facility contains a variety of affirmative and negative
covenants of types customary in an asset-based lending facility including,
among other things, minimum net worth and profitability levels, with which
the Company is in compliance as of December 31, 1996.
The Credit Facility was used to repay existing indebtedness as described
below and to finance the offer to purchase the Company's Common Stock in
January 1996 as described in Note 9.
Prior to December 8, 1995, the Company maintained, with two banks, a
working capital credit facility and a revolving credit and term loan
facility. The working capital credit facility represented an open line of
credit of up to $12,000,000 (increased from $10,000,000, effective in
November 1995), borrowings under which were payable on demand. Outstanding
borrowings bore interest, at the Company's option, at the banks' prime rate
or at a rate 120 basis points above the banks' LIBOR Rate. This working
capital credit facility was terminated on December 8, 1995. In addition,
the Company maintained a revolving credit and term loan agreement which
provided for a two-year $6,000,000 facility, outstanding borrowings under
which, at the Company's option, could be converted at the maturity of the
revolving credit facility into a five-year term loan. Effective November
1995, in connection with the increase in the Company's working capital
facility described above, the revolving credit and term loan agreement
(under which there were no outstanding borrowings) was terminated.
F-73
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
6) Income Taxes
The components of the provision for Federal and state income taxes are as
follows:
1996 1995 1994
---- ---- ----
Federal:
Current $1,756,500 $1,868,000 $1,384,000
Deferred 135,500 27,000 151,000
State:
Current 282,500 282,000 216,000
Deferred 10,500 5,000 24,000
---------- ---------- ----------
$2,185,000 $2,182,000 $1,775,000
========== ========== ==========
Income tax expense differed from that which would have resulted by applying
the statutory Federal income tax rates to earnings before provision for
income taxes as a result of the following items:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected tax on pre-tax
earnings $ 1,991,000 34.0% $ 1,953,000 34.0% $ 1,607,000 34.0%
Tax-exempt interest and
qualified dividends -- -- (5,000) (.1) (13,000) (.3)
State taxes, net of Federal
income tax benefit 193,000 3.3 189,000 3.3 158,000 3.4
Other, net 1,000 -- 45,000 .8 23,000 .5
----------- ---- ----------- ---- ----------- ----
Income tax provision $ 2,185,000 37.3% $ 2,182,000 38.0% $ 1,775,000 37.6%
=========== ==== =========== ==== =========== ====
</TABLE>
F-74
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The tax effect of temporary differences which give rise to significant
portions of deferred tax assets and liabilities are as follows:
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
Notes receivable, due primarily to allowances
for possible loss $ 122,960 $ 142,356
Receivables, due primarily to allowances
for doubtful accounts 104,803 212,148
Accrued expenses not currently deductible 67,140 --
Accelerated depreciation and amortization for
tax purposes (164,094) (61,240)
Other 70,340 53,885
--------- ---------
$ 201,149 $ 347,149
========= =========
(7) Employment Agreements and Transactions
The Company has employment agreements with two of its officers providing
for, among other things, their continued employment through December 31,
1997. In addition, the agreements provide for incentive compensation which
is based upon the Company's pre-tax earnings. Incentive compensation earned
in 1996, 1995 and 1994, pursuant to such agreements, was $273,592, $221,298
and $263,677, respectively.
In January 1996, the Company entered into arrangements with two of its
officers. Under such arrangements, the executive officers are entitled to
receive cash bonuses aggregating $1,041,018 payable to the extent of 10%
thereof three years after consummation of the tender offer described in
Note 9, to the extent of 30% thereof four years after consummation of the
offer and as to the balance thereof five years after consummation of the
offer, provided that the recipient is then employed by the Company. The
executive officers were granted options to purchase an aggregate of 92,535
shares of Common Stock, such options to vest in installments through
January 1999. The exercise price of such options was $11.25 per share. The
cash bonus installments and option installments are subject to acceleration
in the event of death, merger of the Company, sale of all or substantially
all of the Company's assets or a change in control of the Company.
(8) Stock Options
During 1991, the Board of Directors of the Company approved the 1991 Stock
Option Plan (the 1991 Plan) which provides for the issuance of up to
500,000 stock options to officers and employees of the Company. Each option
granted pursuant to the 1991 Plan shall be designated at the time of grant
as either an "incentive stock option" or as a "non-qualified stock option."
F-75
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In addition, the Company maintains two employee stock option plans, and a
non-qualified stock option plan for its Licensees. The plans (except for
options designated as non-qualified stock options) provide for options to
be granted at 100% of the fair market value of the Company's Common Stock
and provide that the exercise price of options may not be less than 110% of
such fair market value in the case of an employee owning 10% or more of the
voting power of the Company's stock. At the time options are granted, the
Company may impose a waiting period before options can be exercised.
Non-qualified stock options may not be granted at less than 75% of the fair
market value of the Company's Common Stock at the date of grant.
During 1991, non-qualified stock options with respect to 90,000 shares were
granted under the 1991 Plan at 75% of the fair market value of the
Company's Common Stock on the date of the grant. The grant resulted in
compensation expense of $180,000 to be allocated to current and future
periods as earned. Additional paid-in capital has been credited to the
extent of aggregate compensation earned since the grant of $103,500.
In 1995 the Stockholders of the Company approved the Directors' Stock
Option Plan (the "Directors' Plan") which permits the granting of a maximum
of 100,000 stock options to its outside Directors. The purpose of the plan
is to secure for the Company and its stockholders the benefits arising from
stock ownership by its outside Directors.
At December 31, 1996, an aggregate of 507,538 shares of common stock has
been reserved for issuance under the plans. Activity in stock options is
summarized as follows:
Outstanding Weighted average
options exercise price
------- --------------
December 31, 1993 534,575 $ 7.16
Options granted 41,878 11.37
Options exercised (97,650) 6.86
Options lapsed/canceled (18,800) 11.02
-------
December 31, 1994 460,003 7.45
Options granted 2,500 8.25
Options exercised (44,400) 5.86
Options lapsed/canceled (89,553) 10.74
-------
December 31, 1995 328,550 6.77
Options granted 121,035 11.31
Options exercised (118,575) 7.35
Options lapsed/canceled (500) 11.50
-------
December 31, 1996 330,510 $ 8.22
=======
F-76
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
There are 199,060 options exercisable as of December 31, 1996 at a weighted
average exercise price of $7.85.
The per share weighted average fair value of stock options granted during
1996 was $4.06 on the date of the grant using the Black Scholes
option-pricing model with the following weighted average assumptions: risk
free interest rate of 5.3%, expected stock volatility of 50% and an
expected option life of 3.5 years. The aggregate fair value of the options
granted in 1995 was not material.
The Company applies APB Opinion No. 25 in accounting for its stock option
grants and, accordingly, no compensation cost has been recognized in the
financial statements for its stock options which have an exercise price
equal to or greater than the fair value of the stock on the date of the
grant. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, the Company's
net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
1996
----
Net earnings:
As reported $3,669,731
Pro forma 3,523,089
Earnings per share:
As reported $ 1.13
Pro forma 1.08
Pro forma net earnings reflect only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net earnings
amounts presented above because compensation cost is reflected over the
options' vesting period and compensation cost for options granted prior to
January 1, 1995 was not considered.
Optionees have made disqualifying dispositions of common stock which had
been acquired through the exercise of incentive and non-qualified stock
options. As a result of the disqualifying dispositions, the Company
receives a tax benefit for the difference between the option price and the
fair market value of its common stock. The benefit of $146,622, $100,220
and $152,124 in 1996, 1995 and 1994, respectively, has been reflected in
the accompanying consolidated statements of stockholders' equity.
F-77
<PAGE>
UNIFORCE SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Tender Offer
On December 11, 1995, the Company made an offer to purchase for cash up to
1,250,000 shares of its Common Stock at $11.25 net per share (the Offer).
The 1,250,000 shares that the Company offered to purchase represented
approximately 30% of the Shares outstanding. In January 1996, the Offer was
successfully completed. The total amount required to purchase the 1,250,000
shares was $14,062,500, exclusive of related fees and other expenses. The
purchase price and related expenses were funded with available borrowings
under the Credit Facility.
(10) Commitments and Contingencies
In April 1994, various prior insurance carriers and their not-for-profit
trade association filed a civil action against the Company, its officers
and various other parties. The Plaintiffs allege breach of contract and
tort causes of action for underpayment of premiums. The Company denies the
validity of the Plaintiffs' claims. The Company has asserted substantial
claims in opposition to the Plaintiffs' claims. Additionally, the Company
and its subsidiaries have filed suit against various prior worker
compensation carriers alleging claims mismanagement. Management regards as
unlikely that the outcome of those actions will have a material adverse
effect on the financial position of the Company.
In January 1996, various vendors of training films filed an action against
the Company. The plaintiffs alleged that the Company improperly used and/or
copied plaintiffs' tapes. In 1996 the Company settled this matter.
The Company is obligated under various leases for office space and
equipment through 2006. Net rental expense for the years ended December 31,
1996, 1995 and 1994 amounted to approximately $1,100,000, $871,000 and
$734,000, respectively.
Following is a schedule of total minimum lease payments under noncancelable
operating leases as of December 31, 1996:
1997 $1,153,272
1998 1,034,708
1999 857,584
2000 562,115
2001 534,847
Thereafter 2,596,140
----------
Total minimum lease payments $6,738,666
==========
F-78
<PAGE>
UNIFORCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
September 30, 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,555,275
Accounts receivable - net 20,677,331
Funding and service fees receivable - net 25,845,143
Prepaid expenses and other current assets 802,412
Deferred income taxes 201,149
------------
Total current assets 54,081,310
------------
Fixed assets - net 4,336,002
Deferred costs and other assets - net 1,252,509
Cost in excess of fair value of net assets acquired 6,122,188
------------
$ 65,792,009
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable $ 2,000,000
Payroll and related taxes payable 7,220,332
Payable to licensees and clients 1,273,888
Income taxes payable 485,147
Accrued expenses and other liabilities 2,705,757
------------
Total current liabilities 13,685,124
------------
Loan payable - non-current 34,097,655
Capital lease obligation - non-current 577,175
Stockholders' equity:
Common stock $.01 par value 51,228
Additional paid-in capital 9,027,840
Retained earnings 30,303,581
------------
39,382,649
Treasury stock, at cost, 2,084,245 shares (21,950,594)
------------
Total stockholders' equity 17,432,055
------------
$ 65,792,009
============
See accompanying notes to consolidated condensed financial statements.
F-79
<PAGE>
UNIFORCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
Nine Months Ended
September 30,
------------------------------
1997 1996
------------- -------------
Sales of supplemental staffing services $ 127,265,243 $ 97,804,122
Service revenues and fees 5,687,806 5,589,180
------------- -------------
Total revenues 132,953,049 103,393,302
------------- -------------
Costs and expenses:
Cost of supplemental staffing services 100,783,201 76,214,231
Licensees' share of gross margin 6,665,450 5,832,735
General and administrative 17,100,195 14,556,306
Merger transaction costs 225,000 --
Depreciation & amortization 952,779 783,419
------------- -------------
Total costs and expenses 125,726,625 97,386,691
------------- -------------
Earnings from operations 7,226,424 6,006,611
Other income (expense):
Interest - net (1,829,458) (1,563,728)
Other - net 9,170 18,954
------------- -------------
Earnings before provision for income taxes 5,406,136 4,461,837
Provision for income taxes 2,126,000 1,695,000
------------- -------------
NET EARNINGS $ 3,280,136 $ 2,766,837
============= =============
Weighted average number of shares outstanding:
Primary 3,231,505 3,273,265
Fully Diluted 3,286,096 3,293,492
NET EARNINGS PER SHARE:
Primary $ 1.02 $ .85
============= =============
Fully Diluted $ 1.00 $ .84
============= =============
See accompanying notes to consolidated condensed financial statements.
F-80
<PAGE>
UNIFORCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,280,136 $ 2,766,837
Adjustments to reconcile net earnings
to net cash (used) by operating activities:
Depreciation and amortization 952,779 783,419
(Increase) in receivables and prepaid expenses (9,542,167) (4,480,953)
Stock option compensation expense 13,500 13,500
(Decrease) in liabilities (1,424,021) (89,907)
------------ ------------
Net cash (used) by operating activities (6,719,773) (1,007,104)
------------ ------------
Cash flows from investing activities:
Purchases of fixed assets (1,084,964) (774,916)
(Increase) in deferred costs and other assets (31,906) (410,786)
Net assets acquired from Montare -- (4,628,142)
------------ ------------
Net cash (used) by investing activities (1,116,870) (5,813,844)
------------ ------------
Cash flows from financing activities:
Principal payments on capital lease obligations (155,483) (195,934)
Increase in loan payable 9,347,655 17,450,609
Cash dividends paid (273,018) (272,605)
Purchase of treasury stock -- (14,280,863)
Proceeds from issuance of common stock 189,342 1,034,716
------------ ------------
Net cash provided by financing activities 9,108,496 3,735,923
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,271,853 (3,085,025)
Cash and cash equivalents at beginning of period 5,283,422 6,444,859
------------ ------------
Cash and cash equivalents at end of period $ 6,555,275 $ 3,359,834
============ ============
Supplemental disclosures:
Cash paid for:
Interest $ 1,666,718 $ 1,310,366
------------ ------------
Income taxes $ 1,433,048 $ 1,601,379
------------ ------------
</TABLE>
Non-cash financing activities:
During 1996, the Company entered into capital leases in the amount of $551,405.
See accompanying notes to consolidated condensed financial statements.
F-81
<PAGE>
UNIFORCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Principles of consolidation
The consolidated financial statements include the accounts of Uniforce
Services, Inc. and its wholly-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
2. Consolidated condensed financial statements
The consolidated condensed financial statements, as shown in the
accompanying index, have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at September 30, 1997, and for all periods presented
have been made.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed, reclassified or omitted. It is suggested that
these consolidated condensed financial statements be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's December 31, 1996 financial statements. The results of operations for
the periods ended September 30, 1997 are not necessarily indicative of the
operating results which may be achieved for the full year.
Tax accruals have been made based on estimated effective annual tax rates
for the periods presented.
3. Litigation Settlement
In April 1994, various insurance carriers and their not-for-profit trade
association filed an action against the Company, its officers and various other
parties; in May 1996, the Plaintiffs filed their Third Amended Complaint. The
Plaintiffs alleged breach of contract and tort causes of action for underpayment
of premiums. The Company denied liability and asserted substantial claims in
opposition to the Plaintiffs' claims. Additionally the Company and its
subsidiaries filed suit against various prior workers' compensation carriers
alleging claims mismanagement. In July 1997, both matters were settled. The
terms of the settlement are confidential by agreement. The settlement did not
have a material effect on the Company's financial condition or operating
results.
4. Agreement and Plan of Merger
On August 13, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") under which it will be acquired by COMFORCE
Corporation. Pursuant to the Merger Agreement a subsidiary of COMFORCE is to
make a tender offer (the "Tender Offer") to acquire all of the issued and
outstanding common stock of the Company for $28.00 in cash and .5217 shares of
COMFORCE common stock for each share of Uniforce common stock. The consummation
of the Tender Offer is contingent upon a number of conditions, including
COMFORCE obtaining debt financing sufficient to complete the purchase of the
Company's shares. The Merger Agreement provides that after the consummation of
the Tender Offer the COMFORCE subsidiary will be merged with and into the
Company, with the Company being the surviving corporation and becoming a
wholly-owned subsidiary of COMFORCE. On October 27, 1997 a Joint Proxy
Statement/Prospectus relating to the Merger Agreement was declared effective by
the Securities and Exchange Commission and COMFORCE commenced the Tender Offer.
The Tender Offer is expected to remain open through November 24, 1997 unless
extended.
F-82
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of any offer to buy any
securities in any jurisdiction in which such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall under any circumstances create any implication that there has been no
change in the affairs of the Company since the date hereof.
--------------
TABLE OF CONTENTS
Page
----
Prospectus Summary .................................................... 6
Risk Factors........................................................... 31
Use of Proceeds........................................................ 41
Capitalization......................................................... 42
Historical Stock Prices and Dividend Policy............................ 43
Selected Unaudited Pro Forma Combined
Financial Statements ............................................. 44
Selected Historical Financial Information-
COMFORCE Corporation.............................................. 48
Selected Historical Financial Information-
Uniforce Services, Inc............................................ 51
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................................... 54
The Contingent Staffing and Consulting
Industry ......................................................... 62
Business .............................................................. 64
The Transactions....................................................... 78
Management .......................................................... 79
Certain Relationships and Related
Transactions..................................................... 85
Principal Stockholders................................................. 88
The Notes Exchange Offer............................................... 91
Description of Notes................................................... 100
The Debentures Exchange Offer.......................................... 125
Description of Units................................................... 135
Description of Senior Debentures....................................... 136
Description of Warrants................................................ 162
Description of Capital Stock........................................... 164
Plan of Distribution................................................... 165
Certain United States Federal Income
Tax Consequences.................................................. 167
Book-Entry, Delivery and Form.......................................... 171
Description of Other Indebtedness...................................... 173
Legal Matters.......................................................... 173
Experts................................................................ 173
Index to Consolidated Financial Statements............................. F-1
--------------
================================================================================
================================================================================
$20,000,000
15% Senior Secured
PIK
Debentures due 2009,
Series B
for
15% Senior Secured
PIK
Debentures due 2009,
Series A
COMFORCE
Corporation
--------------------
PROSPECTUS
--------------------
____________ , 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Registrant's Bylaws effectively provide that the Registrant, to the
full extent permitted by Section 145 of the General Corporation Law of the State
of Delaware, as amended from time to time ("Section 145"), shall indemnify all
directors and officers of the Company and may indemnify all employees,
representatives and other persons as permitted pursuant thereto.
Section 145 permits a corporation to indemnify its directors and officers
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by a third party if such directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit and only with respect to a matter
as to which they shall have acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interest of the corporation, except
that no indemnification shall be made if such person shall have been adjudged
liable to the corporation, unless and only to the extent that the court in which
the action or suit was brought shall determine upon application that the
defendant officers or directors are reasonably entitled to indemnity for such
expenses despite such adjudication of liability.
COMFORCE has entered into separate indemnification agreements with each of
its outside directors which provides for indemnification of such directors to
the fullest extent permitted by law. COMFORCE may also enter into
indemnification agreements with other directors, officers or employees or with
anyone else it is permitted to indemnify under Delaware law, but has no present
intention of doing so.
COMFORCE maintains insurance against liabilities under the Securities Act
of 1933 (the "Securities Act") for the benefit of its officers and directors.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling COMFORCE pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits
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
II-1
<PAGE>
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,
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).
II-2
<PAGE>
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).
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).
4.3* Form of Senior Debenture (included in Exhibit 4.2).
5.1 Opinion of Doepken Keevican & Weiss Professional Corporation.
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).
II-3
<PAGE>
10.2 Letter Agreement dated June 29, 1995, among the Company, ARTRA Group
Incorporated, James L. Paterek, Michael Ferrentino and Christopher P.
Franco (included as an exhibit to the Company's Current Report on Form
8-K dated September 11, 1995 and incorporated herein by reference).
10.3 Amendment dated October 6, 1995 of Letter Agreement dated June 29,
1995, among the Company, ARTRA Group Incorporated, James L. Paterek,
Michael Ferrentino and Christopher P. Franco (included as an exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference).
10.4 Assumption Agreement dated October 17, 1995 between the Company and
ARTRA GROUP Incorporated respecting ARTRA's assumption of
substantially all of the Company's pre-existing liabilities (included
as an exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.5 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).
10.6 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).
10.7* Purchase Agreement, dated as of November 19, 1997, by and between
COMFORCE Operating, Inc. and NatWest Capital Markets Limited, as
Initial Purchaser.
10.8* 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.
10.9* Exchange Offer and Registration Rights Agreement, dated as of November
26, 1997, by and between COMFORCE Operating, Inc. and NatWest Capital
Markets Limited, as Initial Purchaser.
10.10* Exchange Offer and Registration Rights Agreement, dated as of November
26, 1997, by and between the Company and NatWest Capital Markets
Limited, as Initial Purchaser.
10.11* Warrant Registration Rights Agreement, dated as of November 26, 1997,
by and between the Company and NatWest Capital Markets Limited, as
Initial Purchaser.
10.12* Warrant Agreement dated November 26, 1997 by and between the Company
and The Bank of New York, as Warrant Agent.
10.13* Unit Agreement dated November 26, 1997 by and between the Company and
NatWest Capital Markets Limited.
10.14* Pledge Agreement dated November 26, 1997 by and between the Company
and The Bank of New York, as Collateral Agent.
10.15* Employment Agreement dated December 1, 1997 between the Company,
COMFORCE Operating, Inc. and Christopher Franco.
10.16* Employment Agreement dated December 1, 1997 between the Company,
COMFORCE Operating, Inc. and James L. Paterek.
II-4
<PAGE>
10.17* Employment Agreement dated December 1, 1997 between the Company,
COMFORCE Operating, Inc. and Michael Ferrentino.
21.1* List of Subsidiaries.
23.1 Consent of Doepken Keevican & Weiss Professional Corporation (included
in the opinion filed as Exhibit 5.1 to this Registration Statement).
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Arthur Andersen L.L.P.
23.4 Consent of KPMG Peat Marwick LLP
24.1* Powers of Attorney (included on signature page of the Registration
Statement).
25.1* Statement of Eligibility on Form T-1 of The Bank of New York.
99.1* Form of Letter of Transmittal (New Senior Debentures).
99.2* Form of Notice of Guaranteed Delivery (New Senior Debentures).
- ----------
* Previously filed.
(b) Financial Statement Schedules.
None.
Item 22. Undertakings.
The Registrant hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(3) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification
II-5
<PAGE>
by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
(4) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement.
Provided, however, that paragraphs (5)(i) and (5)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(5) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(6) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be filed on its behalf by the
undersigned, thereupon duly authorized, in the City of Lake Success, State of
New York, on January 15, 1998.
COMFORCE Corporation
(Registrant)
By: /s/ Christopher P. Franco
----------------------------------------------
Christopher P. Franco, Chief Executive Officer
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ James L. Paterek* Chairman January 15, 1998
- -------------------------
James L. Paterek
/s/ Christopher P. Franco* Chief Executive Officer,
- ------------------------- Secretary and Director January 15, 1998
Christopher P. Franco
/s/ Michael Ferrentino* President and
- ------------------------- Director January 15, 1998
Michael Ferrentino
/s/ Paul Grillo* Chief Financial Officer
- ------------------------- (Principal Financial
Paul Grillo Officer) January 15, 1998
/s/ Andrew Reiben* Vice President of Finance and January 15, 1998
- ------------------------- Chief Accounting Officer
Andrew Reiben (Principal Accounting Officer)
Director
- -------------------------
Richard Barber
/s/ Keith Goldberg* Director January 15, 1998
- -------------------------
Keith Goldberg
Director
- -------------------------
Glen Miller
/s/ Marc Werner* Director January 15, 1998
- -------------------------
Marc Werner
Director
- -------------------------
Michael D. Madden
EXHIBIT 5.1
DOEPKEN KEEVICAN & WEISS
58th Floor, USX Tower
600 Grant Street
Pittsburgh, Pennsylvania 15219
January 15, 1998
COMFORCE Corporation
2001 Marcus Avenue
Lake Success, New York 11042
Ladies and Gentlemen:
We have acted as counsel to COMFORCE Corporation, a Delaware corporation
(the "Company"), in connection with the preparation and filing with the
Securities and Exchange Commission of the Company's Registration Statement on
Form S-4, File No. 333-43327 (as amended, the "Registration Statement"), under
the Securities Act of 1933, as amended, relating to $20,000,000 principal amount
of the Company's 15% Senior Secured PIK Debentures due 2009, Series B (the
"Senior Debentures").
In connection with the registration, we have examined the following:
(a) The Certificate of Incorporation and By-laws of the Company, each as
amended to date;
(b) The Registration Statement on Form S-4, including the Prospectus which
is a part thereof (the "Prospectus"), as filed with the SEC, the
Indenture dated as of November 19, 1997 (the "Senior Indenture")
between the Company, as issuer, and The Bank of New York, as trustee
(the "Trustee"), pursuant to which the Senior Debentures will be
issued, and the form of the Senior Debentures;
(c) Resolutions of the Board of Directors of the Company authorizing the
issuance and registration of the Senior Debentures; and
(d) Such other documents, records, opinions, certificates and papers as we
have deemed necessary or appropriate in order to give the opinions
hereinafter set forth.
<PAGE>
COMFORCE Corporation
January 15, 1998
Page 2
The opinions hereinafter expressed are subject to the following
qualifications and assumptions:
(i) In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the
conformity of all documents submitted to us as copies to the originals
thereof.
(ii) As to the accuracy of certain factual matters, we have relied on the
certificates of officers of the Company and certificates, letters,
telegrams or statements of public officials.
Based upon and subject to the foregoing, we are pleased to advise you that
it is our opinion that the Senior Debentures are duly authorized, and, when duly
executed on behalf of the Company, authenticated by the Trustee and delivered in
accordance with the terms of the Senior Indenture and as contemplated in the
Registration Statement, will constitute legal, valid and binding obligations of
the Company, enforceable against it in accordance with their terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally,
and subject, as to enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing (regardless
of whether enforcement is sought in a proceeding at law or in equity).
This opinion is rendered solely for your benefit in connection with the
transactions described above. This opinion may not be used or relied upon by any
other person and may not be disclosed, quoted, filed with a governmental agency
or otherwise referred to without our prior written consent, except that we
hereby consent to the filing of this opinion as an exhibit to the Registration
Statement, and to the use of our name in the Prospectus in connection with the
matters referred under the caption "Legal Matters."
Very truly yours,
/s/ Doepken Keevican & Weiss
DOEPKEN KEEVICAN & WEISS
PROFESSIONAL CORPORATION
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement of COMFORCE
Corporation on Form S-4 (File No. 333-43327) of our report dated January 30,
1997, except as to Note 20 for which the date is March 21, 1997, on our audits
of the consolidated financial statements and financial statement schedules of
COMFORCE Corporation as of December 31, 1996 and 1995 and for the years ended
December 31, 1996, 1995 and 1994, which is included in the Annual Report on Form
10-K. We also consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Melville, New York
January 15, 1998
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated January 24, 1997, on the financial statements of RHO Company
Incorporated, as of December 31, 1995 and December 31, 1996, and for the years
then ended, and to all references to our firm included in this Registration
Statement on Form S-4.
/s/ Arthur Andersen LLP
Seattle, Washington
January 15, 1998
Exhibit 23.4
The Board of Directors
Uniforce Services, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KMPG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Jericho, New York
January 8, 1998
