SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6081
COMFORCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2262248
------------------------------- -----------------
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.
2001 Marcus Avenue, Lake Success, New York 11042
-------------------------------------- --------
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (516) 352-3200
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 30, 1996
------------------------------ -------------------------------
Common stock, $.01 par value 9,632,032
COMFORCE CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations
for the three and six Months ended
June 30, 1996 and June 30, 1995
Condensed Consolidated Statement of Changes in Shareholders'
Equity (Deficit) for the six Months ended June 30, 1996
Condensed Consolidated Statements of Cash Flows
for the six Months ended June 30, 1996 and June 30, 1995
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
June 30, December 31,
1996 1995
---------- ----------
ASSETS
Current assets:
Cash and equivalents $2,228 $649
Restricted cash and equivalents 50 -
Receivables including $487 unbilled revenue at June 30, 1996
and $151 of unbilled revenue at December 31, 1995 6,709 1,754
Prepaid expenses 119 -
Officer loans 331 -
Other 218 61
Receivable from ARTRA GROUP Incorporated - 1,046
---------- ----------
Total current assets 9,655 3,510
---------- ----------
Property, plant and equipment 420 97
Less accumulated depreciation and amortization 68 7
---------- ----------
352 90
---------- ----------
Other assets:
Excess of cost over net assets acquired,
net of accumulated amortization of $251 in 1996 and $51 in 1995 12,051 4,801
Other 66 135
---------- ----------
12,117 4,936
---------- ----------
$22,124 $8,536
========== ==========
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
June 30, December 31,
1996 1995
---------- ----------
LIABILITIES
Current liabilities:
Notes payable $- $500
Borrowings under revolving line of credit 1,500 -
Accounts payable 566 75
Accrued expenses, including $250 due to a related party in 1995 1,145 719
Income taxes 265 214
Liabilities to be assumed by ARTRA GROUP Incorporated
and net of liabilities of discontinued operations 1,794 3,699
---------- ----------
Total current liabilities 5,270 5,207
---------- ----------
Noncurrent liabilities to be assumed by
ARTRA GROUP Incorporated - 541
---------- ----------
Obligations expected to be settled by the
issuance of common stock 550 550
---------- ----------
Commitments and contingencies
SHAREHOLDERS' EQUITY (DEFICIT)
Series E convertible preferred stock, $.01 par value; 10
authorized 9 issued and outstanding, liquidation
Value of $100 per share ($887,100) 1 -
6%, Series D senior convertible preferred stock, $.01 par value;
15 authorized 7 issued and outstanding, liquidation Value of
$1,000 per share($7,002,000) 1 -
Common stock, $.01 par value; authorized 10,000 shares;
issued 9,632 shares in 1996 and 9,309 shares in 1995 96 92
Additional paid-in capital 15,754 95,993
Accumulated deficit - (93,847)
Retained earnings since January 1, 1996 452 -
---------- ----------
16,304 2,238
---------- ----------
$22,124 $8,536
========== ==========
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Net sales $ 9,893 $ -- $ 13,158 $ --
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold 8,424 -- 11,002 --
Selling, general and administrative 731 144 1,173 227
Depreciation and amortization 151 -- 228 --
-------- -------- -------- --------
9,306 144 12,403 227
-------- -------- -------- --------
Operating income (loss) 587 (144) 755 (227)
-------- -------- -------- --------
Other income (expense):
Interest expense (50) (74) (51) (131)
Other income, net 13 26 16 26
-------- -------- -------- --------
(37) (48) (35) (105)
-------- -------- -------- --------
Earnings (loss) from continuing operations
before income taxes 550 (192) 720 (332)
Provision for income taxes (198) -- (268) --
-------- -------- -------- --------
Earnnings (loss) from continuing operations 352 (192) 452 (332)
-------- -------- -------- --------
Discontinued operations
Earnings from operations -- (14,679) -- (14,787)
Provision for income taxes -- (1) -- (3)
-------- -------- -------- --------
Loss from discontinued operations -- (14,680) -- (14,790)
-------- -------- -------- --------
Earnings(loss) before extraordinary credit 352 (14,872) 452 (15,122)
Extraordinary credit,
net discharge of indebtedness -- -- -- 6,657
-------- -------- -------- --------
Net earnings (loss) $ 352 ($14,872) $ 452 ($ 8,465)
======== ======== ======== ========
Earnings (loss) per share:
Earnings (loss) from continuing operations $ 0.03 ($ 0.06) $ 0.03 ($ 0.10)
loss from discontinued operations -- (4.50) -- (4.54)
-------- -------- -------- --------
Earnings (loss) before extodinary credit 0.03 (4.56) 0.03 (4.64)
Extrodinary credit -- -- -- 2.04
-------- -------- -------- --------
Net earnings (loss) $ 0.03 ($ 4.56) $ 0.03 ($ 2.60)
======== ======== ======== ========
Weighted average number of shares of common stock
and common stock equivalents outstanding 13,921 3,163 13,819 3,257
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(Unaudited in thousands, except share data)
Retained
Series E Series D Earnings Total
Common Stock Prefered Stock Prefered Stock Additional Since Shareholders'
---------------- ----------------- --------------- Paid-in Accumulated January 1, Equity
Shares Dollars Shares Dollars Shares Dollars Capital (Deficit) 1996 (Deficit)
------- ------- ------- ------- ------- ------- -------- ----------- --------- ---------
Balance at December 31, 1995 9,309,198 $92 - - - - $95,993 ($93,847) $2,238
Quasi -Reorganization
as of January 1, 1996 - - - - - - ($93,847) $93,847
Net earnings - - - - - - - - $452 452
Exercise of stock options 4,500 1 - - - - 22 - - 23
Exercise of stock warrants 318,334 3 - - - - 999 - - 1,002
Issuance of Series E
convertible prefered stock - - 8,871 1 - - 4,635 - - 4,636
Issuance of Series D senior
convertible preferred stock - - - - 7,002 1 6,415 - - 6,416
Liabilities assumed by ARTRA - - - - - - 1,537 - - 1,537
-------- ---- ------- ----- ------ ------- -------- -------- --------- -------
Balance at June 30, 1996 9,632,032 $96 8,871 $1 7,002 $1 $15,754 $0 $452 $16,304
========= ==== ======== ==== ====== ======= ======== ======== ========= =======
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
Six Months Ended
June 30,
--------------------
1996 1995
-------- --------
Net cash flows used by operating activities ($ 3,318) ($ 1,377)
-------- --------
Cash flows from investing activities:
COMFORCE Global and Williams direct acquisition costs (31) --
Acquisition of Williams Telecommunications (2,074) --
Acquisition of RRA (5,345) --
Officer loans (331) --
Payment of liabilites with restricted cash -- 550
Additions to property, plant and equipment (323) (21)
Retail fixtures -- (609)
-------- --------
Net cash flows (used by) from investing activities (8,104) (80)
-------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit 1,500 1,475
Reduction of long-term debt -- (750)
Repayment of Note (500) --
Issuance of Preferred Stock Series E 4,636 --
Issuance of Preferred Stock Series D 6,416 --
Proceeds from stock warrants 999 --
Other -- 1
-------- --------
Net cash flows from financing activities 13,051 726
-------- --------
Increase (decrease) in cash and cash equivalents 1,629 (731)
Cash and equivalents, beginning of period 649 783
-------- --------
Cash and equivalents, end of period $ 2,278 $ 52
======== ========
Supplemental cash flow information: Cash paid during the period for:
Interest $ 51 $ 80
Income taxes paid, net -- 3
Supplemental schedule of noncash investing and financing activities:
Common stock issued as consideration for debt restructuring -- 378
Net change in ARTRA receivables and liabilites 1,537 --
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of COMFORCE
Corporation ("COMFORCE" or the "Company"), formerly The Lori Corporation
("Lori"), are presented on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company currently operates in one industry segment as a
provider of telecommunications and computer technical staffing and consulting
services worldwide. As discussed in Note 4, in September 1995, the Company
adopted a plan to discontinue its jewelry business ("Jewelry Business")
conducted by its two wholly-owned subsidiaries Lawrence Jewelry Corporation
("Lawrence") and Rosecraft, Inc.("Rosecraft").
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. Under generally accepted
accounting principles, when a business reaches a turnaround point and profitable
operations seem likely, a quasi-reorganization may be appropriate to eliminate
the accumulated deficit from past unprofitable operations. 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.
At December 31, 1994, ARTRA GROUP Incorporated ("ARTRA"), a public company whose
shares are traded on the New York Stock Exchange, owned, through its
wholly-owned subsidiary Fill-Mor Holding, Inc. ("Fill-Mor"), approximately 62.9%
of the common stock and all of the outstanding preferred stock of the Company.
At June 30, 1996, ARTRA owned approximately 25% of the Company's stock.
On October 17, 1995 Lori acquired one hundred percent of the capital stock of
COMFORCE Global Inc. ("COMFORCE Global"), formerly Spectrum Global Services,
Inc, d/b/a YIELD Global, a wholly owned subsidiary of Spectrum Information
Technologies, Inc. ("Spectrum"). In connection with the re-focus of Lori's
business, Lori changed its name to COMFORCE Corporation. See Note 2.
As discussed in Note 2, 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"). RRA is in
the business of providing contract employees to other businesses.
These condensed consolidated financial statements are presented in accordance
with the requirements of Form 10-Q and consequently do not include all the
disclosures required in the Company's annual report on Form 10-K. Accordingly,
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, as filed with the Securities and Exchange Commission, should be read in
conjunction with the accompanying consolidated financial statements. The
condensed consolidated balance sheet as of December 31, 1995 was derived from
the audited consolidated financial statements in the Company's Annual Report on
Form 10-K.
Reported interim results of operations are based in part on estimates which may
be subject to year-end adjustments. In addition, these quarterly results of
operations are not necessarily indicative of those expected for the year.
2. CERTAIN ACQUISITIONS
On September 11, 1995, Lori signed a stock purchase agreement to participate in
the acquisition of one hundred percent of the capital stock of COMFORCE Global.
On October 17, 1995, this transaction was completed. The price paid by the
Company for the COMFORCE Global 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
$700,000, including a fee of $500,000 to a related party, and 500,000 shares of
the Company's Common Stock issued as consideration for various fees and
guarantees associated with the transaction. Additionally, in conjunction with
the COMFORCE Global acquisition, ARTRA has agreed to assume substantially all
pre-existing Lori liabilities and indemnify COMFORCE in the event any future
liabilities arise concerning pre-existing environmental matters and business
related litigation.
COMFORCE Global provides telecommunications and computer technical staffing
services worldwide to Fortune 500 companies and maintains an extensive, global
database of technical specialists with an emphasis on wireless communications
capability. The acquisition of COMFORCE Global was accounted for by the purchase
method and, accordingly, the assets and liabilities of COMFORCE Global were
included in the Company's financial statements at their estimated fair market
value at the date of acquisition and COMFORCE Global's operations are included
in the Company's statement of operations from the date of acquisition. The
excess purchase price over the fair value of COMFORCE Global's net assets
acquired (goodwill) of $4,852,000 is being amortized on a straight-line basis
over 20 years.
The acquisition of COMFORCE was funded principally by private placements of
approximately 1,950,000 shares of the Company's Common Stock at $3.00 per share
plus detachable warrants to purchase approximately 970,000 shares of the
Company's Common Stock at $3.75 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. The excess purchase price over the fair value of Williams' net
assets acquired (goodwill) of $2,000,000 plus related direct costs of the
acquisition of $73,000 are being amortized on a straight-line basis over 20
years.
On May 10, 1996, the Company acquired RRA for an aggregate purchase price of
$5,000,000, plus contingent payments payable over three years in an aggregate
amount not to exceed $750,000. The acquisition of RRA was accounted for by the
purchase method and, accordingly, RRA operations are included in the Company's
statement of operations from the date of acquisition. The excess purchase price
over the fair value of RRA net assets acquired (goodwill) of $5,410,000 plus
related acquisition costs, are being amortized on a straight-line basis over 20
years. RRA is in the business of providing contract employees to other
businesses. The Company's headquarters are located in Tempe, Arizona. The
acquisition of RRA enables the Company, through its COMFORCE Technical Services,
Inc. subsidiary, to provide specialists for supplemental staffing assignments as
well as outsourcing and vendor-on-premises programs, primarily in the
electronics, avionics, telecommunications and information technology business
sectors.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following unaudited pro forma condensed consolidated statements of
operations for the three and six months ended June 30, 1996 and June 30, 1995
present the Company's results of operations as if the acquisition of COMFORCE
Global, Williams, and RRA and the related revolving line of credit and private
placement of the Company's Common Stock and Series D Preferred Stock and Series
E Preferred Stock had been consummated as of January 1, 1995.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended June 30, 1996
(In thousands)
Pro Forma
Historical RRA (A) Adjustments Pro Forma
------------- ------------- ------------- -------------
Revenues $ 9,893 $ 7,649 $ 17,542
---------- ------------- ----------
Operating costs and expenses:
Cost of revenues 8,424 6,670 15,094
Other operating costs and expenses 882 683 $ 43 (B) 1,608
---------- ------------- ----------- ----------
9,306 7,353 43 16,702
---------- ------------- ----------- ----------
Operating earnings (loss) 587 296 (43) 840
---------- ------------- ----------- ----------
Other income net 13 13
Interest and other non-operating expenses (50) (14) - (64)
---------- ------------- ----------- ----------
(37) (14) - (51)
---------- ------------- ----------- ----------
Earnings (loss) from continuing operations
before income taxes 550 282 (43) 789
(Provision) credit for income taxes (198) (113) 17 (294)
---------- ----------- ----------- ----------
Income from continuing operations $ 352 $ 169 $(26) $ 495
========== =========== =========== ==========
Income per share from continuing operations $ .03 $ .04
========== =========
Weighted average shares outstanding (E) 13,921 13,921
========== =========
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended June 30, 1995
(In thousands)
Lori COMFORCE Pro Forma
Historical Global (A) Williams(A) RRA (A) Adjustments Pro Forma
---------- ------------ ---------- ------------ ------------ ------------
Revenues $ - $ 2,963 $ 1,026 $ 12,969 $ 16,958
---------- ------------ ---------- ------------ ------------
Operating costs and expenses:
Cost of Revenues 2,208 727 11,985 14,830
Other operating costs and
expenses 144 484 68 713 139 (B) 1,548
---------- ------------ ---------- ------------ ------------ ------------
144 2,692 795 12,608 139 16,378
---------- ------------ ---------- ------------ ------------ ------------
Operating earnings (loss) (144) 271 231 361 (139) 580
---------- ------------ ---------- ------------ ------------ ------------
Spectrum corporate management
fees (D) (357) (357)
Other Income 26 2 3 31
Interest and other non-operating
expenses (74) (44) (40) (C) (158)
---------- ------------ ---------- ------------ ------------ ------------
(51) (355) (41) (40) (484)
---------- ------------ ---------- ------------ ------------ ------------
Earnings (loss) from continuing
operations before income taxes (192) (84) 231 320 (179) 96
(Provision) credit for income taxes (1) (2) (92) (128) 179 -
---------- ------------ ---------- ------------ ------------ ------------
Income (loss) from continuing
operations $ (193) $ (86) $ 139 $ 192 $ - $ 96
========== ============ =========== ============ ============ ============
Loss per share from continuing
operations $ (.06) $ (.01)
========== ============
Weighted average shares
outstanding (E) 3,257 9,790
========== ============
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Pro forma adjustments to the unaudited condensed consolidated statement of
operations:
A) The pro forma data presented for COMFORCE Global's and Williams'
operations is for the periods prior to their acquisitions (i.e., in
the case of COMFORCE Global, the period from April 1, 1995 through
June 30, 1995, which precedes the October 17, 1995 acquisition of
COMFORCE Global; in the case of Williams, the period from April 1,
1995 through June 30, 1995, which precedes the March 3, 1996
acquisition of Williams; and, in the case of RRA, the periods from
April 1, 1996 through May 10, 1996 and from April 1, 1995 through June
30, 1995, which precede the May 10, 1996 acquisition of RRA).
B) Amortization of intangibles arising from the COMFORCE Global, Williams
and RRA acquisitions. The table below reflects where the amortization
of intangibles have been recorded.
Three Months Three Months
June 1996 June 1995
--------- ---------
Historical COMFORCE $137
Historical Global $ 41
Williams
RRA
Pro forma Adjustment 43 139
---- ----
Adjusted Pro forma per
Financial statement $180 $180
==== ====
C) Interest expense incurred for the purchase of Williams assuming $1,900,000
outstanding under the line of credit at an interest rate of 8.5%.
D) Corporate management fees from COMFORCE Global's former parent, Spectrum
Information Technologies, Inc. The amount of these management fees may not
be representative of costs incurred by COMFORCE Global on a stand alone
basis.
E) Pro forma weighted average shares outstanding includes shares of the
Company's Common Stock issued in the private placement that funded the
COMFORCE Global transaction, Including 100,000 shares issued to a non
related party , and 150,000 shares issued to Peter Harvey then a Vice
President of the Company for guaranteeing the payment of the purchase price
to the seller and other guarantees associated with the COMFORCE Global
acquisition, shares issued to certain individuals to manage the Company's
entry into and development of the telecommunications and computer technical
staffing services business, and Series D and Series E Preferred Stock
issued in conjunction with the purchase of RRA.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the six months ended June 30, 1996
(In thousands)
Pro Forma
Historical Williams(A) RRA (A) Adjustments Pro Forma
---------- ---------- ------------ ------------ ------------
Revenues $ 13,158 $ 654 $ 22,786 $ 36,598
---------- ---------- ------------ ------------
Operating costs and expenses:
Cost of Revenues 11,002 281 20,762 32,045
Other operating costs and
expenses 1,401 38 1,491 154 (B) 3,084
---------- ---------- ------------ ------------ ------------
12,403 319 22,253 154 35,129
---------- ---------- ------------ ------------ ------------
Operating earnings (loss) 755 335 533 (154) 1,469
---------- ---------- ------------ ------------ ------------
Other Income 16 16
Interest and other non-operating
expenses (51) (36) (30) (C) (117)
---------- ---------- ------------ ------------ ------------
(35) (36) (30) (101)
---------- ---------- ------------ ------------ ------------
Earnings (loss) from continuing
operations before income taxes 720 335 497 (184) 1,368
(Provision) credit for income taxes (268) (265) (199) 131 (601)
---------- ---------- ------------ ------------ ------------
Income (loss) from continuing
operations $ 452 $ 70 $ 298 $ (53) $ 767
========== =========== ============ ============ ============
Loss per share from continuing
operations $ .03 $ .06
========== ============
Weighted average shares
outstanding (F) 13,819 13,819
========== ============
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the six months ended June 30, 1995
(In thousands)
Lori COMFORCE Pro Forma
Historical Global (A) Williams(A) RRA (A) Adjustments Pro Forma
---------- ------------ ---------- ------------ ------------ ------------
Revenues $ - $ 5,653 $ 1,678 $ 24,424 $ 31,755
---------- ------------ ---------- ------------ ------------
Operating costs and expenses:
Cost of Revenues 4,183 1,227 22,618 28,028
Stock compensation (E) 3,425 3,425
Other operating costs and
expenses 227 913 131 1,348 278 (B) 2,897
---------- ------------ ---------- ------------ ------------ ------------
227 5,096 1,358 23,966 3,703 34,350
---------- ------------ ---------- ------------ ------------ ------------
Operating earnings (loss) (227) 557 320 458 (3,703) (2,595)
---------- ------------ ---------- ------------ ------------ ------------
Spectrum corporate management
fees (D) (625) (625)
Other Income 26 2 3 31
Interest and other non-operating
expenses (131) (60) (80) (C) (271)
---------- ------------ ---------- ------------ ------------ ------------
(105) (623) (57) (80) (865)
---------- ------------ ---------- ------------ ------------ ------------
Earnings (loss) from continuing
operations before income taxes (332) (66) 320 401 (3,783) (3,460)
(Provision) credit for income taxes (3) (19) (128) (160) 1,513 1,203
---------- ------------ ---------- ------------ ------------ ------------
Income (loss) from continuing
operations $ (335) $ (85) $ 192 $ 241 $ (2,270) $ (2,257)
========== ============ =========== ============ ============ ============
Loss per share from continuing
operations $ (.07) $ (.23)
========== ============
Weighted average shares
outstanding (F) 3,257 9,790
========== ============
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Pro forma adjustments to the unaudited condensed consolidated statement of
operations:
A) The pro forma data presented for COMFORCE Global's and Williams'
operations is for the periods prior to their acquisitions (i.e., in
the case of COMFORCE Global, the period from January 1, 1995 through
June 30, 1995, which precedes the October 17, 1995 acquisition of
COMFORCE Global; in the case of Williams, the periods from January 1,
1996 through March 3, 1996 and from January 1, 1995 through June 30,
1995, which precede the March 3, 1996 acquisition of Williams; and, in
the case of RRA, the periods from January 1, 1996 through May 10, 1996
and from January 1, 1995 through June 30, 1995, which precede the May
10, 1996 acquisition of RRA).
B) Amortization of intangibles arising from the COMFORCE Global, Williams
and RRA acquisition. The table below reflects where the amortization
of intangibles have been recorded
Six Months Six Months
June 1996 June 1995
--------- ---------
Historical COMFORCE $ 206
Historical Global $ 82
Williams
RRA
Pro forma Adjustment 154 278
-------- --------
Adjusted Pro forma per
Financial statement $ 360 $ 360
======== ========
C) To record interest expense incurred for the purchase of Williams for the
pro forma six months ended June 30, 1995 and for the period January 1, 1996
through March 3, 1996. Interest expense represents interest on the line of
credit assuming all $1,900,000 was outstanding for the six months ended
June 30, 1995 and for the period January 1, 1996 through March 3, 1996 at
the interest rate in effect of 8.5%.
D) Represents a non-recurring compensation charge related to the issuance of
the 35% common stock interest in the Company to certain individuals to
manage the Company's entry into and development of the telecommunications
and computer technical staffing business.
E) Corporate management fees from COMFORCE Global's former parent, Spectrum
Information Technologies, Inc. The amount of these management fees may not
be representative of costs incurred by COMFORCE Global on a stand alone
basis.
F) Pro forma weighted average shares outstanding includes shares of the
Company's Common Stock issued in the private placement that funded the
COMFORCE Global transaction, Including 100,000 shares issued to a non
related party , and 150,000 shares issued to Peter Harvey then a Vice
President of the Company for guaranteeing the payment of the purchase price
to the seller and other guarantees associated with the COMFORCE Global
acquisition , shares issued to certain individuals to manage the Company's
entry into and development of the telecommunications and computer technical
staffing services business, and Series D and Series E Preferred Stock
issued in conjunction with the purchase of RRA.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
3. NOTES PAYABLE
Notes payable and long-term debt (in thousands) consists of:
June 30, December 31,
1996 1995
------- -------
Notes payable
Amounts due to a former related party,
interest at the prime rate plus 1% $ -- $ 750
Other, interest at 15% 263 1,736
Note payable to a bank under a revolving line of credit, due in 1,500 --
March 1997, with interest payable monthly at the bank's prime
rate plus a varying percentage not to exceed 1% based on certain
financial criteria. At June 30 the Company was
paying prime (8.25%) plus 1%.
Accounts Receivable credit facility, discontinued operations -- 1,535
Less:
Liabilities to be assumed by ARTRA (see Note 7) (263) (1,986)
Liabilities included with discontinued operations -- (1,535)
------- -------
$ 1,500 $ 500
======= =======
The revolving line of credit agreement allowing for borrowings up to a maximum
of $2,250,000 replaces the $800,000 revolving line of credit which was in place
at December 31, 1995. Borrowings against the line can not exceed 80% of
acceptable receivables as defined. The note is collateralized by accounts
receivable and other assets of COMFORCE Global and guaranteed by COMFORCE. The
fair value of the Company's notes payable is estimated based on the quoted
market prices of the same or similar issues or on the current rates offered to
the Company for notes of the same remaining maturity.
See Note 10 for discussion of the Company's new $10,000,000 credit facility.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 principal amount of the
loan was reduced $750,000 at July 31, 1995. The remaining loan principal was not
repaid on its scheduled maturity date of July 31, 1995. Per terms of the loan
agreement, the former director received an additional 50,000 of the Company's
Common Stock as compensation for the non-payment of the loan at its originally
scheduled maturity date. 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 as required by the
Assumption Agreement discussed in Note 7.
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 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, 1995
$500,000 down payment on the COMFORCE Global acquisition, with the remainder
used to fund working capital requirements of the Company's discontinued Jewelry
Business. At June 30, 1996 and December 31, 1995, short-term loans with an
aggregate principal balance of $886,000 and $1,236,000 respectively were
classified in the Company's consolidated balance sheet as liabilities to be
assumed by ARTRA. In the second quarter of 1996, the loans were paid in full by
ARTRA as required by the Assumption Agreement discussed in Note 7.
In August 1995, Lori obtained a credit facility for the factoring of the
accounts receivable of its discontinued Jewelry Business. The credit facility
provides for advances of 80% of receivables assigned, less allowances for
markdowns and other merchandise credits. The factoring charge, a minimum of
1.75% of the receivables assigned, increases on a sliding scale if the
receivables assigned are not collected within 45 days. Borrowings under the
credit facility are collateralized by the accounts receivable, inventory and
equipment of Lori's discontinued fashion costume jewelry subsidiaries and
guaranteed by Lori. At June 30, 1996, due to the sale of the Jewelry Business,
this credit facility is no longer available. 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. At June 30, 1996, there
were no outstanding borrowings under this credit facility.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
4. EQUITY
In March 1996, 4,500 stock options were exercised at an average price of $5 per
share.
In April 1996, 301,667 warrants were exercised at an average price of $3.12 per
share.
In April 1996, in conjunction with the purchase of RRA, the Company sold 8,871
shares of Series E Preferred Stock at a selling price of $550 per share for
8,470 shares and $750 per share for 401 shares. Each share of Series E Preferred
Stock will be automatically converted into 100 shares of Common Stock on the
date the Company's Certificate of Incorporation is amended so that the Company
has a sufficient number of authorized and unissued shares of Common Stock to
effect the conversion and any accrued and unpaid dividends have been paid in
full. Holders of shares of Series E Preferred Stock are entitled to dividends
equal to those declared on the Common Stock, or if no dividends are declared on
the Common Stock, nominal cumulative dividends payable only if the Series E
Preferred Stock fails to be converted into Common Stock by September 1, 1996.
The Series E Preferred Stock has a liquidation preference of $100 per share
($887,100 in the aggregate for all outstanding shares).
In May 1996, the Company sold 7,002 shares of Series D Preferred Stock at a
selling price of $1,000 per share. The holder of each share of Series D
Preferred Stock will have the right to convert such shares into 83.33 fully paid
and nonassessable shares of Common Stock at any time subsequent to the date the
Company's Certificate of Incorporation is amended so that the Corporation has
sufficient number of authorized and unissued Common Stock to effect the
conversion. Holders of the shares of Series D Preferred Stock are entitled to
cumulative dividends of 6% per annum, payable quarterly in cash on the first day
of February, May, August and November in each year. The Series D Preferred Stock
has a liquidation preference of $1,000 per share ($7,002,000 in the aggregate
for all outstanding shares).
5. EARNINGS PER SHARE
Earnings (loss) per share is computed by dividing net earnings (loss) by the
weighted average number of shares of Common Stock and Common Stock equivalents
(stock options and warrants), unless anti-dilutive, outstanding during each
period. Fully diluted earnings per share are not presented since the result is
equivalent to primary earnings per share.
6. INCOME TAXES
The 1995 extraordinary credit represents a net gain from discharge of bank
indebtedness. No income tax expense is reflected in the Company's financial
statements resulting from the extraordinary credit due to the utilization of tax
loss carryforwards. In 1995, the Company issued a significant number of shares
of its Common Stock in conjunction with the COMFORCE Global acquisition and
certain related transactions. Accordingly, the Company is currently subject to
significant limitations regarding the utilization of its Federal income tax loss
carryforwards.
7. LIABILITIES TO BE ASSUMED BY ARTRA GROUP INCORPORATED AND NET
LIABILITIES OF DISCONTINUED OPERATIONS
Under the Assumpiton Agreement between the parties in October, 1995 (the
"Assumption Agreement") entered into in connection with the COMFORCE Global
acquisition (see Note 2), ARTRA has agreed to assume substantially all
pre-existing Lori liabilities and indemnify COMFORCE in the event any future
liabilities arise concerning pre-existing environmental matters and business
related litigation. Additionally, ARTRA agreed to assume all of the assets and
liabilities of the Company's discontinued Jewelry Business. In April 1996, ARTRA
sold the business and certain assets of the Jewelry Business.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
At June 30, 1996 and December 31, 1995, liabilities to be assumed by ARTRA and
net liabilities of the discontinued Jewelry Business (in thousands) consist of:
June 30 December 31
Current: 1996 1995
------- --------
Liabilities to be assumed by ARTRA
Notes payable $ 263 $1,986
Court ordered payments 1,531 990
Accrued expenses - 349
------- -------
1,794 3,325
Net liabilities of the discontinued
Jewelry Business - 374
------- -------
$ 1,794 $ 3,699
======= =======
Noncurrent:
Liabilities to be assumed by ARTRA
Court ordered payments $ - $ 541
======= =======
As noted in the table above, as of June 30, 1996, remaining pre-existing Lori
liabilities assumed by ARTRA are $1,794,000. To the extent ARTRA is able to make
subsequent payments, they will be recorded as additional paid-in capital. The
ability of ARTRA to satisfy these obligations is uncertain. The financial
statements of ARTRA include an explanatory paragraph indicating substantial
doubt about the ability of ARTRA to continue as a going concern. The amounts
receivable from ARTRA, exclusive of subsequent payments, have not been reflected
in the Company's financial statements at June 30, 1996. No collateral has been
provided in support of these obligations.
At December 31, 1995, liabilities to be assumed by ARTRA included $1,531,000 of
court ordered payments arising from the May 3, 1993 reorganization of New
Dimensions. As of August 7, 1996, the $541,000 installment payment due December
31, 1995 had not been paid.
8. 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In December 1994, the Company was notified by the EPA that it is a potentially
responsible party under CERCLA for the disposal of hazardous substances at a
site in Gary, Indiana. The alleged disposal occurred in the mid-1970s at a time
when the Company conducted operations as APECO. In this connection, in December
1994, the Company was named as one of approximately 80 defendants in a case
brought in the United States District Court for the Northern District of Indiana
by a group of 14 potentially responsible parties who agreed in a consent order
entered into with the EPA to clean-up this site. The plaintiffs have estimated
that the cost of cleaning up this site to be $45 million, and have offered to
settle the case with the Company for $991,445. This amount represents the
plaintiffs' estimate of the Company's pro rata share of the clean-up costs. The
Company declined to accept this settlement proposal, which was subsequently
withdrawn.
The plaintiffs have produced only limited testamentary evidence, and no
documentary evidence, linking the Company to this site, and the Company has
neither discovered any records which indicate, nor located any current or former
employees who have advised, that the Company deposited hazardous substances at
the site. Based on the foregoing, management of the Company does not believe
that it is probable that the Company will have any liability for the costs of
the clean-up of this site. The Company intends to vigorously defend itself in
this case.
Under the terms of the Assumption Agreement, ARTRA 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.
No assurance can, however, be given that ARTRA will be financially capable of
satisfying its obligations under the Assumption Agreement.
The Company and its subsidiaries are parties in various business related
litigation which, in the opinion of management, will not have a material adverse
effect on the Company's financial position and results of operations.
9. RELATED PARTY TRANSACTIONS
The Company made a loan of $331,000 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 inducement
to join the Company. Of this amount, $55,000 was advanced in 1995, $38,000 was
advanced in February 1996, and $238,000 was advanced in April 1996.
Yield Industries, Inc., a corporation wholly-owned by Messrs. Paterek and
Ferrentino, earned a delivery fee of $500,000 in connection with the Company's
acquisition of COMFORCE Global, $250,000 of which was paid in 1995 and the
balance of which was paid in January 1996.
10. SUBSEQUENT EVENTS
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 Global, and COMFORCE Technical Services, Inc.
are co-borrowers under the Credit Agreement and Project Staffing Support Team,
Inc. ("PSST") is a guarantor of the obligations. Principal outstanding under the
Credit Agreement is due June 30, 1998. Chase agrees to make revolving credit
loans outstanding as Prime Rate loans or LIBOR loans, provided that, during the
occurrence and continuance of an event of default, the Company and its
subsidiaries may not elect, and Chase shall have no obligation to make, LIBOR
loans. Interest on LIBOR loans is payable in the amount of the LIBOR rate plus
2.0% per annum. Interest on the Prime Rate loans is payable in the amount of
Chase's prime rate as announced from time to time.
Chase may also issue letters of credit, not to exceed $250,000 in the aggregate,
to support offsite payroll services, as security in connection with operating
leases, and for other general corporate purposes with the consent of Chase.
Interest on drawings under letters of credit shall be calculated at the Prime
Rate of interest. One percent of the face amount of each letter of credit is
payable to Chase per annum and certain fees on each letter of credit issued,
payable at the time of issuance.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Available advances under the Credit Agreement are based upon the amount equal to
80% of eligible receivables of COMFORCE Global and COMFORCE Technical Services,
Inc., less the aggregate amount of accrued payroll taxes due by those companies.
The Credit Agreement contains certain affirmative and negative covenants,
including restrictions on the creation of indebtedness or liens, the sale of
assets, the acquisition of stock or assets of another entity, the payment of
dividends, capital expenditures, and other financial covenants. Borrowings under
the Credit Agreement are secured by all goods, equipment, inventory, accounts,
contract rights, chattel paper, notes receivable, instruments, documents,
general intangibles, credits, claims, and obligations of the Company and its
subsidiaries. Additionally, all of the issued and outstanding stock of COMFORCE
Global, COMFORCE Technical Services, Inc. and PSST are pledged as security.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Change in Business
From 1985 until September 1995, the Company, under the name The Lori Corporation
("Lori"), designed and distributed fashion costume jewelry. Due to continuing
losses in the Jewelry Business and the erosion of the markets for its products,
Lori 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, the Company acquired all of the capital
stock of Spectrum Global Services, Inc. (formerly d/b/a YIELD TechniGlobal and,
following its acquisition by the Company, renamed COMFORCE Global Inc.
("COMFORCE Global")), a provider of technical staffing and consulting services
in the information technology and telecommunications sectors. Accordingly, on
October 17, 1995, the Company became a provider of technical staffing and
consulting services. Prior to its acquisition by COMFORCE, COMFORCE Global was a
wholly owned subsidiary of Spectrum Information Technologies, Inc. In connection
with its new business direction, the Company changed its name to COMFORCE
Corporation. Effective September 30, 1995, the Company adopted a plan to
discontinue the Jewelry Business.
The price paid by the Company for the COMFORCE Global stock and related
acquisition costs was approximately $6.4 million, net of cash acquired. This
consideration consisted of cash to the seller of approximately $5.1 million,
fees of approximately $700,000, including a fee of $500,000 to a related party,
and 500,000 shares of the Company's Common Stock issued as consideration for
various fees and guarantees associated with the transaction.
In order to facilitate the COMFORCE Global acquisition, ARTRA agreed to exchange
all of the Series C Preferred Stock of the Company then held by it (9,701
shares, which constituted all of the issued and outstanding Preferred Stock of
the Company) for 100,000 shares of the Company's Common Stock. The liquidation
value of the Series C Preferred Stock was $19.5 million in the aggregate. In
addition, the Company and ARTRA entered into an Assumption Agreement effective
as of October 17, 1995.
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 the effective date of the Assumption
Agreement, and is entitled to receive the net proceeds, if any, from the sale
thereof. On April 12, 1996, ARTRA sold the business and certain of the assets
related to the Company's discontinued Jewelry Business, and, accordingly, will
be entitled to the net proceeds, if any, from this disposition after the
satisfaction of its creditors.
In October and November 1995, in order to fund the acquisition of COMFORCE
Global and meet certain working capital requirements, the Company sold 1,946,667
shares of its Common Stock in a private offering in units consisting of one
share of Common Stock with a detachable warrant to purchase one-half share of
Common Stock (973,333 shares in the aggregate) for a selling price of $3.00 per
unit. The gross proceeds from the offering were $5,840,000. The warrants have an
exercise price of $3.375 per share and are exercisable for a period of five
years from the date of grant commencing June 1, 1996 (except for certain
warrants which were subsequently amended to provide for immediate exercise).
The acquisition of COMFORCE Global was accounted for by the purchase method and,
accordingly, the assets and liabilities of COMFORCE Global were included in the
Company's financial statements at their estimated fair market value at the date
of acquisition.
In March 1996, the Company acquired all of the assets of Williams Communication
Services, Inc. (" Williams"), a provider of telecommunications and technical
staffing. 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 was funded by a revolving line of credit
under the Credit Agreement between the Company, certain of its subsidiaries and
Chase.
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 $5,000,000 plus contingent payments payable over three years in an aggregate
amount not to exceed $750,000. RRA is in the business of providing contract
employees to other businesses. The headquarter offices for the companies are
located in Tempe, Arizona.
1996 Plan of Operations
The Company established its telecommunications staffing business with the
acquisition of COMFORCE Global in October 1995, and further strengthened its
base with the acquisition of Williams in March 1996. COMFORCE Global provides
telecommunications and computer specialists and expertise on a project
outsourcing basis, primarily to Fortune 500 companies worldwide. It offers
manpower on a contract basis to the telecommunications and computer industries,
on both a short-term and long-term basis, to meet its customers' needs for
virtually every staffing level within these industries, including wireless
infrastructure services, network management, engineering, design and technical
support.
The Company established its technical services platform with the acquisition of
RRA, and is actively seeking an acquisition of a platform company servicing the
information technology market sector. The Company's COMFORCE Technical Services,
Inc. subsidiary will 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 Company has identified the area of skilled technical contract labor and
consulting for the telecommunications and information technology sectors as a
high growth, profitable market niche that could benefit from new opportunities
in the wireless telephone industry and growth in networked information systems
and the "information superhighway." The Company believes that it is well
positioned to capitalize on the anticipated continued growth in the
telecommunications and information technology and technical sectors due to its
size, geographic breadth and industry expertise in providing a wide range of
staffing services. The Company will seek to grow significantly through strategic
acquisitions, the opening of offices in new and existing markets and aggressive
recruiting, training, and marketing of industry specialists with a wide range of
technical expertise.
The Company's growth strategy includes the acquisition of established,
profitable regional staffing companies in markets with attractive growth
opportunities. These "platform" companies are intended to serve as a basis for
future growth and, therefore, must have the management infrastructure and other
operating characteristics necessary to significantly expand the Company's
presence within a specific market sector or geographic area. In addition, the
Company has as an objective acquisitions of smaller companies, the operations of
which supplement, and can be integrated into, the established platform companies
to increase market share and profits with minimal incremental expense.
The Company believes it can also increase revenues though internal growth due to
its presence in the information technology and telecommunications sectors.
Further, the Company believes that it can achieve significant economies of scale
by opening and clustering branch offices in new and existing markets through the
allocation of management, advertising, recruiting and training costs over a
larger revenue base. In addition, the Company has targeted selected areas of the
technical services markets which it believes have high growth and profit
potential.
The statements above and elsewhere in this Report that suggest that the Company
will increase revenues, achieve significant growth through strategic
acquisitions or other means, realize operating efficiencies, and like statements
as to the Company's objectives and management's beliefs are forward looking
statements. Various factors could prevent the Company from realizing these
objectives, including the following:
Unfavorable economic conditions generally or in the telecommunications,
computing or technical services business sectors could cause potential users of
such services to decide to cancel or postpone capital expansion, research and
development or other projects which require the engagement of temporary
technical staff workers or the use of consulting and other technical expertise
offered by the Company.
The Company's ability to expand through acquisitions is dependent on its ability
to identify attractive acquisition opportunities and to finance such
acquisitions, and no assurance can be given that it will be successful in doing
so. Heightened competition in the staffing industry by existing or new
competitors could make such acquisitions uneconomic or otherwise more difficult
or costly. Unless the Company's operations are considered to be successful by
bank or other institutional lenders or investors, it may be difficult for the
Company to finance its expansion through acquisitions.
The Company is seeking to expand rapidly in what its management perceives as a
"window of opportunity" in the market. Expansion undertaken at an accelerated
pace, principally through acquisitions, creates added risk that the analysis of
businesses acquired will fail to uncover business risks or adequately reveal
weaknesses in the markets, management or operations being considered.
Furthermore, the Company expects in many cases to retain existing management of
acquired companies to manage the businesses acquired. Compensation incentives
designed to enroll the existing management, which the Company expects to offer,
are difficult to structure in a manner so as to provide lasting benefits to the
acquiring company.
Heightened competition for customers as well as for technical personnel could
adversely impact the Company's margins. Heightened competition for customers
could result in the Company being unable to maintain its current fee scales
without being able to reduce its personnel costs. Shortages of qualified
technical personnel, which currently exist in some technical specialties and
could occur in others in the future, could result in the Company being unable to
fulfill its customers' needs or in the customers electing to employ technical
staff directly (rather than using the Company's services) to ensure the
availability of such personnel. Many of the Company's competitors have more
extensive financial and personnel resources than does the Company.
Under the Assumption Agreement entered into between the parties in October 1995,
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. No assurance can,
however, be given that ARTRA will be financially capable of satisfying its
obligations under the Assumption Agreement, in which case the Company may be
required to satisfy such obligations.
Liquidity and Capital Resources
Management believes that the Company will generate cash flow from operations
which, together with proceeds from the exercise of certain warrants and the
issuance of Series D and E Preferred Stock in April and May 1996, will be
sufficient to fund its telecommunications and computer technical staffing
services business for the remainder of 1996; however, the Company does not
expect to have sufficient liquidity or capital resources to fund its planned
expansion through acquisitions and other means. The Company intends to seek debt
and/ or equity financing to fund such planned expansion. See"--Change in
Business" and "--1996 Plan of Operations" for a description of the Company's
current and proposed plans of expansion.
Cash and cash equivalents increased $1,629,000 during the six months ended June
30, 1996. Cash flows provided by financing activities of $13,051,000 exceeded
cash flows used in operating activities of $3,318,000 and cash flows used by
investing activities of $8,104,000. Cash flows used by operating activities were
principally attributable to the temporary need to fund Williams and RRA accounts
receivable and their carrying costs due to the purchase of Williams in March
1996 and RRA in May 1996. Cash flows used in investing activities are
principally related to the purchase of Williams and RRA for a total of
$7,450,000 including directly related costs, as well as loans made to certain
officers of the Company pursuant to their employment contracts in the amount of
$331,000 and the purchase of fixed assets in the amount of $323,000. Cash flows
from financing activities were attributable to borrowings under the revolving
line of credit of $1,500,000, the exercise of warrants in the amount of
$999,000, and the issuance of Series E Preferred Stock and Series D Preferred
Stock in the amount of $4,636,000 and $6,416,000, respectively.
During the six months ended June 30, 1996, the Company eliminated its working
capital deficiency and, at June 30, 1996, had excess working capital of
$4,385,000. The increase in working capital is principally attributable to the
Company's increase in accounts receivable due to the acquisitions of Williams
and RRA, the issuance of shares of Series D and E Preferred Stock and the
reduction in the liabilities assumed by ARTRA.
On July 22, 1996, the Company and certain of its subsidiaries entered into a $10
million Revolving Credit Agreement with The Chase Manhattan Bank ("Chase") to
provide working capital for the Company's operations. See Note 10 to the
condensed consolidated financial statements.
Results of Operations
On October 17, 1995, the Company completed the acquisition of all of the capital
stock of COMFORCE Global, a provider of technical staffing and consulting
services in the information technology and telecommunications sectors. Due to a
pattern of reduced sales volume resulting in continuing operating losses, in
September 1995, the Company adopted a plan to discontinue its Jewelry Business.
The Company's consolidated financial statements have been reclassified to report
separately results of operations of the discontinued Jewelry Business.
Therefore, a comparison of the Company's consolidated results of operations for
the three and six months ended June 30, 1996 and June 30, 1995 is not
meaningful. Accordingly, a discussion of pro forma results of operations for
these periods is provided.
Pro Forma Three Months ended June 30, 1996 vs. Pro Forma Three Months ended June
30, 1995
Pro forma revenues of $17,542,000 for the three months ended March 31, 1996 were
$584,000, or 3% higher than pro forma revenues for the three months ended June
30, 1995. The increase in 1996 pro forma revenues is attributable to the overall
growth and expansion of COMFORCE Global's telecommunications and computer
staffing business as well as growth in the operations of Williams and RRA. Pro
forma cost of revenues of the three months ended June 30, 1996 was 86% of pro
forma revenues compared to pro forma cost of revenues of 87% for the three
months ended June 30, 1995. The dollar increase in the 1996 pro forma cost of
revenues is principally attributable to increased sales volume. The 1996 pro
forma cost of revenues percentage decrease of 1% is primarily attributable to
higher margins of new business.
Pro forma operating expenses for the three months ended June 30, 1996 increased
$60,000 as compared to pro forma operating expenses for the three months ended
June 30, 1995.
Pro forma operating income for the three months ended June 30, 1996 was $840,000
compared to pro forma operating income of $580,000 for the three months ended
June 30, 1995 due to both the increase in sales and the related improved margin
on those sales.
Corporate management fees of $357,000 from COMFORCE Global's former parent,
Spectrum Information Technologies, Inc., reflect an allocation of corporate
overhead; however, such charges will no longer continue as a result of COMFORCE
Global's acquisition by the Company in October 1995. In the opinion of
management, the amount of these fees are not representative of costs incurred by
COMFORCE Global on a stand alone basis.
Pro forma other expense, principally interest, net of other income for the three
months ended June 30, 1996 decreased $76,000 principally due to the discharge of
indebtedness of Lori and its Jewelry Business.
Pro Forma Six Months ended June 30, 1996 vs. Pro Forma Six Months ended June 30,
1995
Pro forma revenues of $36,598,000 for the six months ended June 30, 1996 were
$4,843,000, or 15% higher than pro forma revenues for the six months ended June
30, 1996. The increase in 1996 Pro forma revenues is attributable to the overall
growth and expansion of COMFORCE Global's telecommunications and computer
staffing business as well as the growth in Williams and RRA. Pro forma cost of
revenues for six months ended June 30, 1996 and June 30, 1995 was 88% of pro
forma revenues. The 1996 dollar increase in pro forma cost of revenues of
$43,017,000 is principally attributable to the increase in sales volume.
Pro forma operating expenses for the six months ended June 30, 1996 decreased
$3,238,000 compared to pro forma operating expenses for the six months ended
June 30, 1995. The 1996 decrease in pro forma operating expenses is principally
attributable to the 1995 compensation charge of $3,425,000 related to the
issuance of a 35% interest in the Company to certain individuals to manage the
Company's entry into and development of the telecommunications and computer
technical staffing services business.
Pro forma operating income for the six months ended June 30, 1996 was $1,469,000
as compared to pro forma operating loss of $2,595,000 for the six months ended
June 30, 1995. The improvement in 1996 is principally attributable to the
compensation charge discussed above plus the increased operating income
generated by increased revenues in the pro forma 1996 period.
Corporate management fees from COMFORCE Global's former parent, Spectrum
Information Technologies, Inc., reflect an allocation of corporate overhead;
however, such charges will no longer continue as a result of COMFORCE Global's
acquisition by the Company in October 1995. In the opinion of management, the
amount of these fees are not representative of costs incurred by COMFORCE Global
on a stand alone basis.
Pro forma other expenses, principally interest, net of other income for the six
months ended June 30, 1996 decreased $139,000 principally due to the discharge
of indebtedness of Lori and its Jewelry Business.
PART II - OTHER INFORMATION
Item 2. Changes in Securities
In April 1996, in connection with financing the RRA acquisition, the Company
sold 8,871 shares of its newly authorized Series E Preferred Stock (designated
as the Series E Convertible Preferred Stock, 10,000 shares authorized) 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 Corporation 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 (as has been proposed for
consideration of the stockholders at the Company's next annual meeting of
stockholders). Holders of shares of Series E Preferred Stock are entitled to
dividends equal to those declared on the Common Stock, or, if no dividends are
declared on the Common Stock, nominal cumulative dividends are payable if the
Series E Preferred Stock fails to be converted into Common Stock by September 1,
1996. In such event, no dividends shall be payable to the holders of the
Company's Common Stock to the extent there are any unpaid cumulated dividends on
the Series E Preferred Stock.
In May 1996, the Company sold 7,002 shares of its newly authorized Series D
Preferred Stock (designated as the Series D Senior Convertible Preferred Stock,
15,000 shares authorized) for $1,000 per share. The holder of each share of
Series D Preferred Stock will have the right to convert such share 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 a sufficient number of authorized and unissued shares of Common
Stock to effect the conversion. If at any time after the first anniversary of
the date of first issuance of the Series D Stock, the Common Stock of the
Company has a closing sale price of at least $20 per share for a period of 20
consecutive trading days, the Company may convert all shares of the Series D
Preferred Stock then outstanding into shares of Common Stock at $12 per share,
without prior notice to the Stockholder. All shares of Series D Preferred Stock
outstanding on the fifth anniversary of the date of first issuance of the Series
D Preferred Stock will automatically be converted into shares of Common Stock
based on the conversion price of $12 per share. Holders of shares of Series D
Preferred Stock are entitled to cumulative dividends of 6% per annum, payable
quarterly in cash on the first day of February, May, August and November in each
year. For the purposes of conversion, to the extent that the Company does not
pay any accrued and unpaid dividends within 15 days of the conversion with
respect to those shares, such amount shall be added to the conversion value for
those shares. Except as otherwise provided by law, the holders of Series D
Preferred Stock will not be entitled to vote. As a result of the issuance of
these shares, no dividends shall be payable to the holders of the Company's
Common Stock to the extent there are any unpaid cumulated dividends on the
Series D Preferred Stock.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Designation of Rights and Preferences of Series D Preferred Stock
(filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 and incorporated herein by reference).
3.2 Designation of Rights and Preferences of Series E Preferred Stock
(filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 and incorporated herein by reference).
10.1 Revolving redit Agreement dated as of July 22, 1996, among the
Company, COMFORCE Global, Inc., COMFORCE Technical Services, Inc.
and The Chase Manhattan Bank.
11.1 Computation of Earnings (Loss) Per Share and Equivalent Share of Common
Stock.
(b) Reports on Form 8-K.
On May 14, 1996, the Company filed Amendment No. 1 to a Current Report
on Form 8-K/A to include the financial statements and pro forma
financial statements required in connection with the Williams
acquisition.
On May 23, 1996, the Company filed a Current Report on Form 8-K to
disclose the RRA acquisition.
On June 3, 1996, the Company filed Amendment No. 1 to a Current Report
on Form 8-K/A to include the financial statements and pro forma
financial statements required in connection with the RRA acquisition.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
COMFORCE CORPORATION
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Registrant
Dated: August 14, 1996 PAUL J. GRILLO
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Vice President/Finance
Chief Financial Officer