REVISED
PRELIMINARY
COMFORCE Corporation
(formerly The Lori Corporation)
2001 Marcus Avenue
Lake Success, New York 11042
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on September 27, 1996
As a stockholder of COMFORCE Corporation, formerly The Lori
Corporation (the "Company"), you are invited to be present, or represented by
proxy, at the Annual Meeting of Stockholders, to be held at 2001 Marcus Avenue,
Lake Success, New York on September 27, 1996 at 10:00 a.m., New York City time,
and any adjournments thereof, for the following purposes:
1. To elect Michael Ferrentino, Dr. Glen Miller, Keith Goldberg and
Richard Barber to the Board of Directors of the Company for terms of
one (1) year. See "Proposal No. 1--Election of Directors" in the Proxy
Statement.
2. To ratify 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 act as officers of
or consultants to the Company to assist the Company in developing a
technical staffing business. See "Proposal No. 2--Ratification of the
Issuance of Stock to Certain Persons" in the Proxy Statement.
3. To ratify the Company's entering into the technical staffing business
and exiting the fashion jewelry business and transactions related
thereto, including (i) its acquisition of 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.), (ii) 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, (iii) its issuance of 100,000 shares and 150,000
shares, respectively, of its Common Stock to ARTRA GROUP Incorporated,
an affiliate of the Company ("ARTRA"), and Peter R. Harvey, formerly a
director of the Company, in consideration of their guarantees in
connection with the transactions, (iv) 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 (v) its disposition of its
discontinued fashion jewelry operations. See "Proposal No.
3--Ratification of the COMFORCE Global Transactions" in the Proxy
Statement.
4. To approve an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of the Company's capital
stock from 10,000,000 shares to 100,000,000 shares of Common Stock and
from 1,000,000 shares to 10,000,000 shares of Preferred Stock. See
"Proposal No. 4--Amendment to the Company's Certificate of
Incorporation to Increase Authorized Capital Stock" in the Proxy
Statement.
5. To approve an amendment to the Company's Certificate of Incorporation
to eliminate cumulative voting. See "Proposal No. 5--Amendment to the
Company's Certificate of Incorporation to Eliminate Cumulative Voting"
in the Proxy Statement.
6. To amend the Company's Long-Term Stock Investment Plan (i) to increase
the maximum number of shares which may be issued under such Plan from
1,500,000 to 4,000,000 shares, (ii) to provide
for the grant of options to non-employee directors, and (iii) in various
other respects, principally designed to permit the Plan administrator
additional flexibility in structuring option grants. See "Proposal No.
6--Amendments to Stock Option Plan" in the Proxy Statement.
7. To ratify the appointment of Coopers & Lybrand L.L.P. as the Company's
independent certified public accountants for the fiscal year ending
December 31, 1996. See "Proposal No. 7--Selection of Auditors" in the
Proxy Statement.
8. To transact such other business as may properly be brought before the
meeting or any adjournment thereof.
Stockholders of record at the close of business on September 2, 1996
are entitled to vote at the Annual Meeting of Stockholders and all adjournments
thereof. Since a majority of the outstanding shares of the Company's Common
Stock must be represented at the meeting in order to constitute a quorum, all
stockholders are urged either to attend the meeting or to be represented by
proxy.
If you do not expect to attend the meeting in person, please sign, date
and return the accompanying proxy in the enclosed reply envelope. Your vote is
important regardless of the number of shares you own. If you later find that you
can be present and you desire to vote in person or, for any other reason, desire
to revoke your proxy, you may do so at any time before the voting.
By Order of the Board of Directors
Christopher P. Franco, Secretary
August __, 1996
TABLE OF CONTENTS
Page
Summary
Proposal No. 1 - Election of Directors
Information Concerning Directors and Nominees
Proposal No. 2 - Ratification of the Issuance of Stock to Certain Persons
Proposal No. 3 - Ratification of the COMFORCE Global Transactions
Proposal No. 4 - Amendments to the Company's Certificate of Incorporation
to Increase Authorized Capital Stock
Proposal No. 5 - Amendments to the Company's Certificate of Incorporation
to Eliminate Cumulative Voting
Proposal No. 6 - Amendments to Stock Option Plan
Proposal No. 7 - Selection of Auditors
Description of the Business
Selected Historical and Pro Forma Financial Information
Management's Discussion and Analysis of Financial
Condition and Results of Operation
Information Regarding Executive Officers
Executive Compensation
Market Price of the Company's Common Stock
Principal Stock Holders
Transactions with Management and Others
Stockholders' Proposals
General and Other Matters
Index to Financial Statements
Annex F - Financial Statements
Annex A - Proposed Amendment to Long-Term Stock Investment Plan
REVISED
PRELIMINARY
COMFORCE Corporation
(formerly The Lori Corporation)
2001 Marcus Avenue
Lake Success, New York 11042
ANNUAL MEETING OF STOCKHOLDERS
September 27, 1996
PROXY STATEMENT
This Proxy Statement and the Notice of Annual Meeting and Form
of Proxy accompanying this Proxy Statement, which will be mailed on or about
August 27, 1996, are furnished in connection with the solicitation by the Board
of Directors of COMFORCE Corporation, a Delaware corporation (the "Company" or
"COMFORCE"), formerly The Lori Corporation ("Lori"), of proxies to be voted at
the annual meeting of stockholders to be held at 2001 Marcus Avenue, Lake
Success, New York on September 27, 1996 at 10:00 a.m., New York City time, and
any adjournments thereof.
Stockholders of record at the close of business on September
2, 1996 (the "record date") will be entitled to vote at the meeting for each
share then held. On the record date, there were 9,632,032 shares of Common Stock
of the Company outstanding. All shares represented by proxy will be voted in
accordance with the instructions, if any, given in such proxy. A stockholder may
abstain from voting or may withhold authority to vote for the nominees by
marking the appropriate box on the accompanying proxy card, or may withhold
authority to vote for an individual nominee by drawing a line through such
nominee's name in the appropriate place on the accompanying proxy card. UNLESS
INSTRUCTIONS TO THE CONTRARY ARE GIVEN, EACH PROPERLY EXECUTED PROXY WILL BE
VOTED, AS SPECIFIED BELOW.
Each share is entitled to one vote in person or by proxy, with
the privilege of cumulative voting in connection with the election of directors.
Cumulative voting means each stockholder shall be entitled to as many votes as
shall equal the number of shares owned multiplied by the number of directors to
be elected. The stockholder may cast all of such votes for a single nominee for
director or any two or more of them as the stockholder sees fit. The Company has
not adopted any pre-conditions to the exercise of cumulative voting for
directors. The Board of Directors is soliciting discretionary authority to
cumulate votes.
All proxies may be revoked and execution of the accompanying
proxy will not affect a stockholder's right to revoke it by giving written
notice of revocation to the Secretary at any time before the proxy is voted or
by the mailing of a later-dated proxy. Any stockholder attending the meeting in
person may vote his or her shares even though he or she has executed and mailed
a proxy. A majority of all of the issued and outstanding shares of the Company's
Common Stock is required to be present in person or by proxy to constitute a
quorum. Directors are elected by a plurality. The favorable vote of the holders
of a majority of the shares of Common Stock represented in person or by proxy at
the meeting is required to approve or adopt the other proposals presented to the
meeting.
This Proxy Statement is being solicited by the Board of
Directors of the Company. The expense of making this solicitation is being paid
by the Company and consists of the preparing, assembling and mailing of the
Notice of Meeting, Proxy Statement and Proxy, tabulating returns of proxies, and
charges and expenses of brokerage houses and other custodians, nominees or
fiduciaries for forwarding documents to stockholders. In addition to
solicitation by mail, officers and regular employees of the Company may solicit
proxies by telephone, telegram or in person without additional compensation
therefor.
SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere in this Proxy
Statement, in the Annexes hereto and the document referred to herein, to which
reference is made for a complete statement of the matters discussed below.
This Proxy Statement contains proposals with respect to action
to be voted upon by the stockholders of the Company at the Annual Meeting of
Stockholders. These proposals are as follows:
Election of Directors
To elect Michael Ferrentino, Dr. Glen Miller, Keith Goldberg
and Richard Barber to the Board of Directors of the Company
for terms of one (1) year. See "Proposal No. 1--Election of
Directors."
Ratification of Stock Awards
To ratify 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 act as officers of or consultants to the Company
to assist the Company in developing a technical staffing
business. See "Proposal No. 2--Ratification of the Issuance of
Stock to Certain Persons."
Ratification of Certain Transactions
To ratify the Company's entering into the technical staffing
business and exiting the fashion jewelry business and
transactions related thereto, including (i) its acquisition of
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")), (ii) 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, (iii) its
issuance of 100,000 shares and 150,000 shares, respectively,
of its Common Stock to ARTRA, an affiliate of the Company, and
Peter R. Harvey, a former director of the Company, in
consideration of their guarantees in connection with the
transactions, (iv) 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 (v) its
disposition of its discontinued fashion jewelry operations.
See "Proposal No. 3--Ratification of the COMFORCE Global
Transactions."
Proposed Amendment to Certificate of Incorporation to Increase
Authorized Capital Stock
To approve an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of
the Company's capital stock from 10,000,000 shares to
100,000,000 shares of Common Stock and from 1,000,000 shares
to 10,000,000 shares of Preferred Stock. See "Proposal No.
4--Amendment to the Company's Certificate of Incorporation to
Increase Authorized Capital Stock."
Proposed Amendment to Certificate of Incorporation to
Eliminate Cumulative Voting
To approve an amendment to the Company's Certificate of
Incorporation to eliminate cumulative voting. See "Proposal
No. 5--Amendment to the Company's Certificate of Incorporation
to Eliminate Cumulative Voting."
Proposed Amendments to Option Plan
To amend the Company's Long-Term Stock Investment Plan (i) to
increase the maximum number of shares which may be issued
under such Plan from 1,500,000 to 4,000,000 shares, (ii) to
provide for the grant of options to non-employee directors,
and (iii) in various other respects, principally designed to
permit the Plan administrator additional flexibility in
structuring option grants. See "Proposal No. 6--Amendments to
Stock Option Plan."
Ratification of Auditors
To ratify the appointment of Coopers & Lybrand L.L.P. as the
Company's independent certified public accountants for the
fiscal year ending December 31, 1996. See "Proposal No.
7--Selection of Auditors."
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
Election of Directors
The Company's By-laws provide that the Board of Directors
shall consist of up to eight persons. The Board has been fixed at four persons
and four persons have been nominated to serve as directors to hold office until
the next annual meeting or until their successors shall be duly elected and
qualified. It is intended that proxies in the form enclosed granted by the
stockholders will be voted, unless otherwise directed, in favor of electing the
following persons as directors: Michael Ferrentino, Dr. Glen Miller, Keith
Goldberg and Richard Barber.
Unless you indicate to the contrary, the persons named in the
accompanying proxy will vote it for the election of the nominees named above.
If, for any reason, a nominee should be unable to serve as a director at the
time of the meeting, which is not expected to occur, the persons designated
herein as proxies may not vote for the election of any other person not named
herein as a nominee for election to the Board of Directors. See "Information
Concerning Directors and Nominees" for information concerning the nominees.
Recommendation
The Board of Directors recommends a vote "FOR" the election of
each of the nominees. Proxies solicited by the Board of Directors will be voted
in favor of this proposal unless a contrary vote or authority withheld is
specified.
INFORMATION CONCERNING DIRECTORS AND NOMINEES
Directors and Nominees
Set forth below is information concerning each director and
nominee for director of the Company, including his business experience during at
least the past five years, his positions with the Company and certain
directorships held by him. Each nominee is currently a director of the Company.
There are no family relationships among any of the directors or nominees, nor,
except as hereinafter described, are there any arrangements or understandings
between any director and another person pursuant to which he was selected as a
director or nominee. Current Directors and Nominees
Michael Ferrentino, age 33. President and Director of the
Company since December 1995. Mr. Ferrentino was a founder of COMFORCE Global
(telecommunications and computer staffing), and he served as COMFORCE Global's
Executive Vice President from 1987 to 1995. From 1984 through 1987, he worked
for Dunn & Bradstreet as a Senior Auditor. Mr. Ferrentino received a B.S. Degree
in Accounting from St. John's University.
Dr. Glen Miller, age 59. Director since December 1995. Vice
President - Business Development of TeleData International, a telecommunications
service company. From 1990 to 1994, Dr. Miller was responsible for strategic
planning for the Harris Corporation. From 1984 to 1990, he was responsible for
the direction and arrangement of business activities in various markets
nationwide for GTE Telecom, a telecommunications company. Dr. Miller is a
retired Colonel, U.S. Air Force, and earned a Ph.D. from Columbia Pacific
University.
Keith Goldberg, age 34. Director since December 1995. Partner
at J. Walter Thompson Advertising. Previously, he worked for BBDO Advertising as
an Associate Creative Director from 1994 to 1995. From 1989 through 1994, he
served as a Vice President at Young & Rubicam. Mr. Goldberg is the recipient of
several Clio and Effie awards. He received a B.A. Degree in Communications from
St. John's University.
Richard Barber, age 36. Director since December 1995. Partner
at L.H. Friskoff & 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. Mr. Barber
received a B.A. Degree from Sheffield Polytechnic in the United Kingdom.
Each director shall hold office until the next annual meeting
of the stockholders or until his successor shall have been duly elected and
qualified.
Meetings of the Board of Directors
In 1995, the Board of Directors of the Company conducted one
meeting. In addition, the Board of Directors transacted business on seven other
occasions by unanimous written consent during 1995.
Committees
During 1995, there were three standing committees of the Board
of Directors: the Committee on Audit and Finance, the Committee on Compensation
and Options and the Executive Committee.
The Committee on Audit and Finance has responsibility for
reviewing the professional services to be provided by the Company's independent
auditors, the scope of the audit by the Company's independent auditors, the
annual financial statements of the Company, the Company's system of internal
accounting controls and such other matters with respect to the accounting,
auditing and financial reporting practices and procedures of the Company as it
may find appropriate or as may be brought to its attention. Alexander Verde and
Austin Iodice were members of the Audit Review Committee during 1995, but the
Committee did not meet in such year. Mr. Verde and Mr. Iodice served as
directors during 1995 until their resignations in December 1995. In January
1996, the name of this Committee was changed to the Audit Committee and Dr.
Miller and Mr. Barber were appointed members of the Committee.
The Compensation Committee has responsibility for reviewing
executive salaries, administering the bonus and incentive compensation of the
Company, and approving the salaries and other benefits of the executive officers
of the Company. Peter R. Harvey and Austin Iodice were members of the
Compensation Committee in 1995, but the Committee did not meet during such year.
Mr. Harvey and Mr. Iodice served as directors during 1995 until their
resignations in December 1995. In January 1996, Mr. Ferrentino and Mr. Goldberg
were appointed members of the Committee.
The Executive Committee's function was to generally supervise
the operations of the Company and develop organizational and managerial
structures for the Company. John Harvey and Peter R. Harvey were members of the
Executive Committee during 1995, but the Executive Committee did not meet in
such year. Mr. John Harvey and Mr. Peter Harvey served as directors during 1995
until their resignations in December 1995. This Committee was terminated in
January 1996.
In addition, in January 1996, a Stock Option Committee was
created to administer the Company's Long-Term Investment Plan. Mr. Goldberg and
Dr. Miller were appointed members of this Committee.
PROPOSAL NO. 2 - RATIFICATION OF THE ISSUANCE OF STOCK TO CERTAIN PERSONS
Description of the Transactions
On June 29, 1995, the Company entered into a letter agreement
with Michael Ferrentino, Christopher P. Franco and James L. Paterek,
subsequently amended as of October 6, 1995 (as amended, the "Letter Agreement"),
pursuant to which Messrs. Ferrentino and Franco agreed to serve as employees of,
and Mr. Paterek agreed to serve as a business consultant to, the Company to
enable the Company to enter into the telecommunications and computer staffing
business. As consideration for agreeing to provide such services to the Company,
the Company agreed to (i) issue to Messrs. Ferrentino, Franco and Paterek and
one other individual who agreed to serve as a Vice President of COMFORCE Global,
Kevin W. Kiernan (collectively, the "Designated Individuals"), such number of
shares of Common Stock 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 fashion jewelry business (the "Jewelry Business"); (iii)
nominate four individuals selected by the Designated Individuals to serve on the
Company's Board of Directors (which was to consist of five directors); (iv)
enter into two-year employment agreements with Messrs. Ferrentino and Franco and
a three-year business consulting agreement with Mr. Paterek; and (v) reserve for
issuance to the Designated Individuals and other employees of the Company
options or warrants to purchase 10% of the Company's 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.
See "Executive Compensation--Employment Agreements" and "Transactions with
Management and Others."
On October 6, 1995, 3,091,302 shares of the Company's Common
Stock were issued to the Designated Individuals. The Designated Individuals are
entitled to receive 796,782 additional shares of the Company's Common Stock
under the anti-dilution provisions of the Letter Agreement. ARTRA GROUP
Incorporated ("ARTRA"), then the majority stockholder of the Company, previously
approved the issuance of such shares. The Company has made loans aggregating
$345,000 to the Designated Individuals to cover their tax liabilities resulting
from these transactions. The obligations are evidenced by notes which bear
interest at the rate of 6% per annum and mature on December 10, 1997.
In addition, under the terms of the Letter Agreement and the
Assumption Agreement described under "Description of Business--Discontinued
Jewelry Business," 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.
The Proposal
The stockholders are to consider ratifying the Company's
issuance of 3,091,302 shares of its Common Stock and its agreement to issue
796,782 additional shares to the Designated Individuals in consideration of
their agreement to act as officers of or consultants to the Company to assist
the Company in developing a technical staffing business.
Ratification of the issuance of these shares is required under
the Listing Standards, Policies and Requirements of the American Stock Exchange.
In the event that stockholder ratification of this proposal is not obtained, the
Company will cease to qualify for listing on the American Stock Exchange, and
trading of the Common Stock might thereafter be conducted in the
over-the-counter market for "pink sheet" companies. In this event, a stockholder
could find it more difficult to dispose of shares and the market price of the
shares could be adversely affected. The Company will not, however, rescind the
transactions if ratification is not obtained. A stockholder's vote in favor of
this proposal will not preclude such stockholder from subsequently challenging
the transactions.
The Designated Individuals have advised the Company that they
intend to vote their shares in favor of the proposal. In addition, ARTRA has
granted to the Designated Individuals its limited proxy to vote ARTRA's shares
in favor of the proposal.
Recommendation
The Board of Directors of the Company believes that the
Designated Individuals have been invaluable to the Company in assisting it in
developing a technical staffing business. The Board believes that it is in the
interests of the Company that the stockholders ratify the agreements entered
into with the Designated Individuals in order that the Company can continue to
satisfy the listing requirements of the American Stock Exchange. Accordingly,
the Board is requesting that the stockholders ratify the agreements entered into
with the Designated Individuals.
The Board of Directors recommends that the stockholders vote
"FOR" the proposal. Proxies solicited by the Board of Directors will be voted in
favor of this proposal unless a contrary vote or abstention is specified.
PROPOSAL NO. 3 -- RATIFICATION OF THE COMFORCE GLOBAL TRANSACTIONS
Background
Due to continuing losses in the Jewelry Business and the
erosion of the markets for its products, in the second quarter of 1995,
management of Lori determined that it could not long continue its operations as
then constituted. Management considered either merging Lori into its parent,
ARTRA, on terms designed to enable ARTRA to use Lori's net operating loss
carryforwards, or acquiring another business if such an acquisition could be
financed. Werner Pleus, acting as a business broker, advised Peter R. Harvey,
then a Director of Lori, of the possibility of acquiring COMFORCE Global. Upon
examination of COMFORCE Global's business and markets, management of Lori
concluded that the area of skilled technical contract labor for the
telecommunications and information technology market sectors represented a
potentially high growth industry.
Management believed that its entry into the technical staffing
business offered greater potential for maximizing stockholder value than could
be realized through a merger of Lori into ARTRA since, in such case, the stock
of Lori would have been valued based on Lori's struggling Jewelry Business and
the $1.56 to $4.75 market value of its Common Stock in the third quarter of
1995. Management did not consider any other investment alternatives. Management
believed that acquiring an existing business with an experienced management team
offered the most attractive vehicle for penetrating the technical staffing
market expeditiously, and, in May 1995, Mr. Harvey initiated discussions with
Michael Ferrentino, Christopher P. Franco and James L. Paterek, then members of
COMFORCE Global's management. Negotiations were successfully concluded on July
4, 1995, when the Company contracted with Messrs. Ferrentino, Franco and Paterek
(pursuant to a letter agreement dated as of June 29, 1995) to direct the
Company's entry into the technical staffing business.
From July 5, 1995 until September 11, 1995, Messrs.
Ferrentino, Franco and Paterek, on behalf of the Company, negotiated price and
other terms of acquisition in a series of meetings with representatives of
COMFORCE Global's parent, Spectrum Information Technologies, Inc. ("Spectrum"),
to acquire COMFORCE Global. COMFORCE Global was one of several wholly-owned
subsidiaries of Spectrum, which then had a Chapter 11 petition pending. COMFORCE
Global was not a party to this proceeding. On September 11, 1995, the parties
executed a definitive purchase agreement, which was then submitted to the
bankruptcy court for approval. Court approval was obtained and, on October 17,
1995, the Company acquired all of the capital stock of COMFORCE Global. In
connection with its new business direction, the Company changed its name to
COMFORCE Corporation.
Description of the Transactions
On October 17, 1995, the Company acquired all of the capital
stock of COMFORCE Global. 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.
The 500,000 shares issued by the Company consisted of (i) 100,000 shares issued
to an unrelated party for guaranteeing the purchase price to the seller, (ii)
100,000 shares issued to ARTRA, then the majority stockholder of the Company, in
consideration of its guaranteeing the purchase price to the seller and agreeing
to enter into the Assumption Agreement, described under "Description of the
Business--Discontinued Jewelry Business," under which ARTRA agreed to pay and
discharge substantially all of the then existing liabilities and obligations of
the Company, (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 $6.4 million purchase price to the seller. See "Description of
the Business--Discontinued Jewelry Business."
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, as described below). At the date of the Company's acquisition of
COMFORCE Global, the closing price of the Company's Common Stock on the American
Stock Exchange was $4.50 per share.
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 conjunction with the COMFORCE Global acquisition, the
Company and ARTRA entered into the Assumption Agreement, dated 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 of the Company's Lawrence Jewelry Corporation 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.
There are no Federal or state regulatory requirements to be
complied with or where approval must be obtained in connection with the
acquisition of the capital stock of COMFORCE Global.
As of September 11, 1995 (the date preceding the public
announcement of the acquisition of the capital stock of COMFORCE Global), both
the high and low sale price of the Company's Common Stock, as listed on the
American Stock Exchange, was $2.
There were no material differences in the rights of the
security holders of the Company as a result of the transactions.
The acquisition by the Company of all of the capital stock of
COMFORCE Global was accounted for under the purchase method of accounting.
Federal Income Tax Consequences
At December 31, 1995, the Company and its subsidiaries had
Federal income tax loss carry forwards of approximately $53,000,000 available to
be applied against future taxable income, if any, expiring principally in 1996 -
2010. Section 382 of the Internal Revenue Code of 1986 limits a corporation's
utilization of its Federal income tax loss carryforwards when certain changes in
the ownership of a corporation's Common Stock occurs. The Company has recently
issued a significant number of shares of its Common Stock in conjunction with
the COMFORCE Global acquisition and certain related transactions. In addition,
as a result of the recent change in the Company's business, the ability to use
these net operating loss carryforwards may be eliminated. Accordingly, the
Company is currently subject to significant limitations regarding the
utilization of its Federal income tax loss carryforwards.
Due to the Company's tax loss carryforwards and the
uncertainty of future taxable income, no income tax benefit was recognized in
connection with the Company's 1995 and 1994 pre-tax losses from continuing
operations.
The Proposal
The Board proposes that the stockholders ratify the Company's
entering into the technical staffing business and exiting the Jewelry Business
and transactions related thereto, including (i) its acquisition of all of the
capital stock of COMFORCE Global, (ii) 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, (iii) its issuance of 100,000 shares and 150,000
shares, respectively, of its Common Stock to ARTRA and Peter R. Harvey, then a
director of the Company, in consideration of their guarantees in connection with
the transactions, (iv) 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 (v) its disposition of its discontinued Jewelry Business.
Ratification of these transactions is required under the
Listing Standards, Policies and Requirements of the American Stock Exchange. In
the event that stockholder ratification of this proposal is not obtained, the
Company will cease to qualify for listing on the American Stock Exchange, and
trading of the Common Stock might thereafter be conducted in the
over-the-counter market for "pink sheet" companies. In this event, a stockholder
could find it more difficult to dispose of shares and the market price of the
shares could be adversely affected. The Company will not, however, rescind the
transactions if ratification is not obtained. A stockholder's vote in favor of
this proposal will not preclude such stockholder from subsequently challenging
the transactions.
The Designated Individuals and ARTRA have advised the Company
that they intend to vote their shares in favor of this proposal. Mr. Harvey has
also advised the Company that he intends to vote his shares in favor of this
proposal.
Reason for the Transactions
At March 31, 1995 and at December 31, 1994, Lori's business
plan had anticipated that the restructuring of its debt, along with a
consolidation and restructuring of its Jewelry Business, would permit it to
obtain a sufficient level of borrowings to fund its capital requirements in 1995
and beyond. However, due to the continued losses from operations and its
inability to obtain conventional bank financing, the Company adopted a plan to
discontinue the Jewelry Business and determined to seek to enter into another
line of business. Management identified the area of skilled technical contract
labor for the telecommunications and information technology market sectors as a
high growth industry. Management believed that acquiring an existing business
with an experienced management team offered the most attractive vehicle for
penetrating the markets expeditiously.
Recommendation
The Board of Directors of the Company believes that it has
been in the best interests of the Company to enter the technical staffing
business in the face of the continuing deterioration of the Jewelry Business.
The Board also believes that payment of the consideration for COMFORCE Global
and the terms of the Assumption Agreement are in the best interests of the
Company. The Board further believes that it is in the best interests of the
Company that the stockholders ratify the transactions in order that the Company
can continue to satisfy the listing requirements of the American Stock Exchange.
Accordingly, the Board is requesting that the stockholders ratify the agreements
entered into with the Designated Individuals.
The Board of Directors recommends that the stockholders vote
"FOR" the proposal. Proxies solicited by the Board of Directors will be voted in
favor of this proposal unless a contrary vote or abstention is specified.
PROPOSAL NO.4 -- AMENDMENTS TO THE COMPANY'S CERTIFICATE OF
INCORPORATION TO INCREASE AUTHORIZED CAPITAL STOCK
Description of the Company's Capital Stock
Generally
As of August 20, 1996, the authorized capital stock of the
Company consisted of (i) 10,000,000 shares of Common Stock having a par value of
$.01 per share, of which 9,632,032 shares have been issued and are outstanding,
and (ii) 1,000,000 shares of Preferred Stock, par value $0.01 per share,
issuable in series with such rights and preferences as determined by the Board
of Directors, of which 15,873 shares of two series of Preferred Stock were
issued and outstanding as of such date. As of such date, there were
approximately 5,600 holders of record of the Company's Common Stock. As
described under "--Proposed Amendment to Certificate of Incorporation," the
Company is asking the stockholders to approve an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
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. The Company's
Common Stock is listed on the American Stock Exchange.
The Common Stock of the Company is not subject to any
conversion or redemption provisions and the holders thereof are not provided any
pre-emptive rights. All outstanding shares of the Common Stock of the Company
are fully-paid and non-assessable. Each share of Common Stock has equal voting
rights and each share shall be entitled to one vote in all matters in which
stockholders shall be entitled to vote.
The Company has not paid any cash dividends on its Common
Stock in recent years and does not anticipate paying any such dividends in the
foreseeable future.
Increase in Number of Authorized Shares
Based on the number of shares currently issued and outstanding
and the shares reserved for issuance upon exercise of outstanding warrants and
options, the Company currently has an insufficient number of authorized shares
to finance its planned expansion. The Board of Directors believes that
additional shares of stock should be available for issuance by the Board of
Directors from time to time for proper corporate purposes.
The newly authorized shares of Common Stock and Preferred
Stock will be issuable from time to time by action of the Board of Directors for
any proper corporate purpose, without stockholder approval unless required by
applicable law or rules of the American Stock Exchange. These purposes could
include financings, payment of stock dividends, subdivision of outstanding
shares through stock splits, employee stock options and bonuses, and corporate
acquisitions. The additional shares also could be issued in a private placement
transaction to a third party favored by the Board of Directors in the event of a
takeover attempt directed at the Company, which could give the favored party an
advantage over a competing party in a contest to acquire control of the Company.
One of the effects of the existence of unissued and unreserved
Common Stock and Preferred Stock may be to enable the Board of Directors to
issue shares to persons friendly to current management, which issuance could
render more difficult or discourage an attempt to obtain control of the Company
by means of a merger, tender offer, proxy contest or otherwise, and thereby
protect the continuity of the Company's management and possibly deprive the
stockholders of opportunities to sell their shares of Common Stock at prices
higher than prevailing market prices. Such additional shares also could be used
to dilute the stock ownership of persons seeking to obtain control of the
Company pursuant to the operation of a stockholders' right plan or otherwise.
Preferred Stock
The Certificate of Incorporation of the Company authorizes its
Board of Directors to establish series or classes of preferred stock and fix the
rights, preferences, privileges and restrictions thereof. The Board is
authorized to issue up to 1,000,000 shares of Preferred Stock (proposed to be
increased to 10,000,000 shares). Delaware law provides that if any proposed
amendment to the certificate of incorporation of a corporation adversely affects
the preferences, limitations or special rights of any class of shares, then the
holders of shares of such class are entitled to vote as a class as to such
amendment. However, since the holders of Common Stock approved an amendment to
the Certificate of Incorporation of the Company which permits the Board of
Directors to authorize the issuance of new series of preferred stock with such
rights (including voting rights) and preferences as fixed by the Board of
Directors, the holders of Common Stock will not have the right to vote, whether
as class or otherwise, to authorize the issuance of new series of Preferred
Stock with preferences as to dividends and distributions on liquidation.
By authorizing and issuing preferred stock with particular
rights, 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 acquirer 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.
On April 26, 1996, the Board authorized the issuance of up to
10,000 shares of a new series of Preferred Stock, par value $0.01 per share,
designated the Series E Convertible Preferred Stock ("Series E Preferred
Stock"). 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 annual meeting).
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 Stock
fails to be converted into Common Stock by September 1, 1996. Except as
otherwise provided by law, holders of Series E Preferred Stock are entitled to
vote, on the basis of 100 votes per share, together with the holders of the
Common Stock, as one class on all matters submitted to a vote of stockholders.
As of August 20, 1996, there were 8,871 shares of Series E Preferred Stock
outstanding.
On May 6, 1996, the Board authorized the issuance of up to
15,000 shares of a new series of Preferred Stock, par value $0.01 per share,
designated the Series D Senior Convertible Preferred Stock ("Series D Preferred
Stock"). The holder of each share of Series D Preferred Stock will have the
right to convert such share into 83.33 fully paid and nonassessable shares of
Common Stock at $12 per share 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 twenty consecutive trading
days, the Company may convert all shares of the Series D Preferred Stock then
outstanding into shares of Common Stock at $12 per share, without prior notice
to the Stockholder. All shares of Series D outstanding on the fifth anniversary
of the date of first issuance of the Series D Stock will automatically be
converted into shares of Common Stock based on the conversion price of $12 per
share. Holders of shares of Series D Preferred Stock are entitled to cumulative
dividends of 6% per annum, payable quarterly in cash on the first day of
February, May, August and November in each year. For the purposes of conversion,
to the extent that the Company does not pay any accrued and unpaid dividends
within fifteen days of the conversion with respect to those shares, such amount
shall be added to the conversion value for those shares. Except as otherwise
provided by law, the holders of Series D Preferred Stock will not be entitled to
vote. As of August 20, 1996, there were 7,002 shares of Series D Preferred Stock
outstanding.
Except for the Series D and Series E Preferred Stock, there
are no other series or classes of Preferred Stock currently authorized. All of
the shares of all other series or classes of Preferred Stock previously
authorized by the Company's Board to date have been repurchased by the Company
or converted to Common Stock and are not subject to reissue.
Delaware General Corporation Law
Pursuant to Section 203 of the Delaware General Corporation
Law ("Section 203"), with certain exceptions, a Delaware corporation may not
engage in any of the broad range of business combinations, such as mergers,
consolidations and sales of assets, with an "interested stockholder" for a
period of three years from the date that such person became an interested
stockholder unless (a) the transaction that results in the person's becoming an
interested stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
stockholder; (b) upon consummation of the transaction which results in the
stockholder becoming an interested stockholder the interested stockholder owns
85% or more of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares owned by persons who are directors and
officers, and shares owned by employee stock plans or (c) on or after the date
the person becomes an interested stockholder, the business combination is
approved by the corporation's board of directors and by holders of at least
two-thirds of the corporations' outstanding voting stock, excluding shares owned
by the interested stockholder, at a meeting of stockholders. Under Section 203,
an "interested stockholder" is defined as any person, other than the corporation
and any direct or indirect majority-owned subsidiaries, that is (a) the owner of
15% or more of the outstanding voting stock of the corporation or (b) an
affiliate or associate of the corporation and the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder or (c) an affiliate or
associate of such person.
Under certain circumstances, Section 203 makes it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three-year period,
although the stockholders may elect to exclude a corporation from the
restrictions imposed thereunder. The Company's Certificate of Incorporation does
not exclude the Company from the restrictions imposed under Section 203. The
provisions of Section 203 may encourage companies interested in acquiring the
Company to negotiate in advance with the Company's Board of Directors, because
the stockholder approval requirement would be avoided if a majority of the
directors then in office approve either the business combination or the
transaction which results in the stockholder becoming an interested stockholder.
Such provisions also may have the effect of preventing changes in the management
of the Company. It is possible that such provisions could make it more difficult
to accomplish transactions which stockholders may otherwise deem to be in their
best interest.
Section 203 excludes from the definition of "interested
stockholder" any stockholder of the Company that owned over 15% of the Company's
stock on December 23, 1987, so long as such holder continues to own over 15% of
the Company. Accordingly, ARTRA is not subject to the restrictions of Section
203.
Proposed Amendment to Certificate of Incorporation
The Board of Directors of the Company has unanimously approved
and recommended the adoption by the stockholders of the following amendment to
the Company's Certificate of Incorporation, which would increase the number of
authorized shares of Common Stock and Preferred Stock:
RESOLVED, that the first grammatical paragraph of Article
FOURTH of the Certificate of Incorporation of the Corporation
be amended and restated to read as follows:
The total number of shares which the Corporation shall have
authority to issue is One Hundred Ten Million (110,000,000) of
which One Hundred Million (100,000,000) shall be Common Stock
with par value of one cent ($0.01) per share and Ten Million
(10,000,000) shall be Preferred Stock with par value of one
cent ($0.01) per share.
Recommendation
The Board of Directors recommends that the stockholders vote
"FOR" the proposal. Proxies solicited by the Board of Directors will be voted in
favor of this proposal unless a contrary vote or abstention is specified.
PROPOSAL NO. 5 -- AMENDMENTS TO THE COMPANY'S CERTIFICATE OF
INCORPORATION TO ELIMINATE CUMULATIVE VOTING
Cumulative Voting
The Company's Certificate of Incorporation provides for
cumulative voting in the election of directors. Therefore, every stockholder
entitled to vote for directors shall have the right, in person or by proxy, to
multiply the number of votes to which he or she may be entitled by the total
number of directors to be elected in the same election, and he or she may cast
the whole number of such votes for one candidate or may distribute them among
any two or more candidates. As described under "--Proposed Amendment to
Certificate of Incorporation," the Company is asking the stockholders to approve
an amendment to the Company's Certificate of Incorporation to eliminate
cumulative voting.
As a consequence of cumulative voting, a stockholder with a
relatively small number of voting shares may be able to elect one or more
directors. For example, if a stockholder were to give the appropriate notice,
and five directors were to be elected at an annual meeting, a stockholder
holding 20% of the voting shares could nominate and elect one director by
cumulating and casting his or her votes for one candidate. This is true even if
stockholders holding 80% of the voting shares are opposed to the election of
that candidate and cast their votes to elect other nominees.
Without cumulative voting, a nominee cannot be elected
without relatively wide support, as stockholders are entitled to only one vote
per share with the nominee receiving the greatest number of votes being elected.
Consequently the holder or holders of a majority of the shares entitled to vote
in an election of directors will be able to elect all directors of the Company,
and holders of a substantial number of the shares may not be able to elect any
directors. As a result, minority stockholders will effectively have less
representation on the Company's Board if cumulative voting is eliminated.
Reasons for Proposed Amendment
The Board believes that the elimination of cumulative voting
is advantageous to the Company and its stockholders because each director of a
publicly-held corporation has a duty to represent the interests of all
stockholders rather than any specific stockholder or group of stockholders. The
presence on the Board of Directors of one or more directors representing the
interests of a minority stockholder or group of shareholders could disrupt the
management of the Company and prevent it from operating in the most effective
manner. Furthermore, the election of directors who view themselves as
representing a particular minority constituency could introduce an element of
discord on the Board of Directors, impair the ability of the directors to work
effectively and discourage qualified independent individuals from serving as
directors. Providing for majority rule voting in the election of directors by
eliminating cumulative voting will help ensure that each director acts in the
best interests of all stockholders.
The proposal to eliminate cumulative voting is not being made
in response to any effort by a minority stockholder or group of stockholders to
attain representation on the Board of Directors or acquire greater influence in
the management of the Company's business, nor is the Company aware of any such
effort. Furthermore, it is not in response to any attempt to acquire control of
the Company, nor is the Company aware of any such attempt.
Proposed Amendment to Certificate of Incorporation
The Board of Directors of the Company has unanimously approved
and recommended the adoption by the stockholders of the following amendment to
the Company's Certificate of Incorporation, which would eliminate cumulative
voting:
RESOLVED, that the third and fourth grammatical paragraphs of
Article FOURTH of the Certificate of Incorporation of the
Corporation be deleted and replaced by a single paragraph to
read as follows:
The holder of each outstanding share of Common Stock shall
have one vote per share with respect to all matters submitted
to a vote of stockholders. There shall be no cumulative voting
in elections for Directors.
Recommendation
The Board of Directors recommends that the stockholders vote
"FOR" the proposal. Proxies solicited by the Board of Directors will be voted in
favor of this proposal unless a contrary vote or abstention is specified.
PROPOSAL NO. 6 -- AMENDMENTS TO STOCK OPTION PLAN
Background Information
On October 12, 1993, the Board of Directors of the Company
approved a proposed Long-Term Stock Investment Plan of the Company (the "Plan"
or the "Stock Option Plan") which authorizes the grant of options to purchase
the Company's common stock to executives, key employees and agents of the
Company and its subsidiaries. At the December 16, 1993 meeting of the
stockholders of the Company, the stockholders approved the Plan.
Proposed Amendments
Generally
The Board has approved amendments to the Plan (i) to increase
the maximum number of shares which may be issued under such Plan from 1,500,000
to 4,000,000 shares, (ii) to provide for the grant of options to non-employee
directors, and (iii) to permit the Plan administrator additional flexibility in
structuring option grants. Copies of the proposed amendments to the Plan and the
complete Plan, as proposed to be amended, are set forth in Annex A to this Proxy
Statement.
Increase in the Number of Shares Issuable under the Plan
The Board believes that the additional shares are needed to
attract and retain talented management personnel. See the "New Plan Benefits
Table," below, for information concerning the proposed issuance of options to
existing management personnel if the stockholders approve the proposed Plan
amendments.
Non-Employee Director Options
The Board further believes that a mechanism needs to be
established, consistent with applicable Federal securities and tax laws, to
enable the Company to grant stock options to non-employee directors which will
enable them to qualify to serve as administrators of the Plan as disinterested
directors or members of the Stock Option Committee without adversely affecting
the tax status of incentive stock options or the treatment of any options under
Section 16(b) of the Securities Exchange Act of 1934. Under the amendments
proposed, each non-employee director who is elected to serve as a director at
the annual meeting of stockholders on September 27, 1996, and annually
thereafter on the date any such non-employee director is elected or re-elected
by the stockholders, is entitled to receive options to purchase 10,000 shares of
the Company s Common Stock, unless the plan is subsequently amended as permitted
therein. The amendment provides that these options will vest one year after the
date of grant and will terminate 10 years from the date of grant.
Other Amendments
The effect of the proposed amendment to Section 2.03 is to
permit the Company to exchange a stock option granted outside of the Plan
("Outside Option") for an option under the Plan in a manner which will allow
preservation of the exercise price of the Outside Option even if it is lower
than the market price of the stock option granted under the Plan on the date of
the exchange. By way of illustration, if this amendment is approved, the Company
could agree to grant Outside Options to the principal of a staffing business
proposed to be acquired by the Company based on the market price of the
Company's stock on the date a letter of intent is entered into for the
acquisition, but before the date such principal would be eligible to participate
in the Plan. If, upon the closing of the acquisition, the principal is retained
as an employee or consultant, his or her Outside Option could be exchanged for
an option under the Plan with the same exercise price as originally fixed under
the Outside Option. This is particularly significant if, as anticipated, the
Company subsequently registers the stock options granted under the Plan and the
shares issuable upon exercise thereof on a Form S-8, which, in certain
circumstances, could permit such shares to be traded freely or subject to only
limited restrictions.
The amendments proposed to Sections 2.04 and 3.04 would permit
the Administrator maximum flexibility in establishing vesting schedules or in
permitting immediate vesting rather than requiring, as the Plan is currently
constituted, that no options granted under the Plan shall be exercisable earlier
than six months after the date of grant. These amendments further provide that
the Administrator can grant options under the Plan that do not terminate, as is
otherwise required under the Plan, upon the death, disability, retirement or
other termination of employment of the Plan participant. These amendments
provide the Company additional latitude in negotiating Outside Options which are
subsequently to be exchanged for options under the Plan.
Participation in the Plan
Set forth below is a table which provides certain information
concerning option awards granted to the executive officers included in the
Summary Compensation Table, all current executive officers as a group, all
non-executive officer directors as a group and all non-executive officer
employees as a group, subject to stockholder approval of the Plan. All of the
options granted under the Plan are exercisable for a period of 10 years, subject
to earlier termination of the right of employees (but not agents who are not
employees) to exercise their options as described below under "Summary of the
Plan--Term of Options," upon death or termination of employment. The options
described in this table are those presently determinable. As more fully
described below under "Summary of the Plan--Administration" and "--Eligibility,"
the Board of Directors (or a committee appointed by the Board) has discretion to
issue such number of options to such of the officers, key employees, agents or
consultants of the Company who occupy responsible managerial or professional
positions or who have the capability of making substantial contributions to the
success of the Company as the Board or the committee determines. Accordingly,
the options shown in the "New Plan Benefits" table should not be regarded by
stockholders as the only options that can or will be issued under the Plan
should it be approved and adopted by the stockholders.
NEW PLAN BENEFITS TABLE
COMFORCE Corporation Long-Term Stock Investment Plan
Number
Names and Position Dollar Values(1) of Units
------------------ ---------------- ---------
Michael Ferrentino, President $3,023,438(2) 281,250
Christopher P. Franco, Executive Vice $1,209,375(3) 112,500
President and Secretary
Andrew Reiben
Principal Accounting Officer $ 210,000(4) 20,000
All Current Executive Officers (as a $4,442,813(4) 413,750
group) (3 persons)
Non-Executive Officer Directors (as a $ 322,500(5) 30,000
group) (3 persons)
Non-Executive Officer Employees (as a $9,557,438(6) 872,250
group)(15 persons)
(1) The Dollar Value of the Options granted is the amount by which the market
price of the Company's Common Stock as reported on the American Stock Exchange
as of August 18, 1996, $17.50, exceeds the exercise price of the options
granted. The Board of Directors originally authorized the issuance of the
options at $6.75 and $7.00 per share exercise prices.
(2) The exercise price of all options granted to Mr. Ferrentino is $6.75 per
share. The shares vest fully on December 15, 1996.
(3) The exercise price of all options granted to Mr. Franco is $6.75 per share.
The shares vest fully on December 15, 1996.
(4) The exercise price of all options granted to Mr. Reiben is $7.00 per share.
The shares vest in 50% increments on February 26, 1997 and February 28, 1998.
(5) The exercise price of 393,750 options granted to the executive officers is
$6.75 per share. These shares vest fully on December 15, 1996. The exercise
price of the remaining 20,000 options is $7.00 per share. These shares vest in
50% increments on February 26, 1997 and February 28, 1998.
(6) The exercise price of 30,000 options granted to non-executive officer
directors is $6.75 per share. All shares vest fully on January 10, 1997, the
first anniversary of the date of grant.
(7) The exercise price of 241,000 options granted to non-executive officer
employees is $6.00. The exercise price of 631,250 options is $6.75 per share
(including 381,250 options granted to two persons serving as consultants to the
Company). The exercise price of the remaining 20,000 options is $7.00 per share.
These options vest at various times.
Summary of the Plan
The following summary of the Plan as proposed to be amended is qualified by
reference to the full text of the Plan, as proposed to be amended, as set forth
in Annex A to this Proxy Statement.
Purposes
The purposes of the Plan are to: (1) closely associate the interests of
the management of the Company with the stockholders by reinforcing the
relationship between participants' rewards and stockholder gains; (2) provide
management with an equity ownership in the Company commensurate with Company
performance, as reflected in increased stockholder value; (3) maintain
competitive compensation levels; and (4) provide an incentive to management for
continuous employment with the Company.
Administration
The Plan will be administered by the Stock Option Committee (the
"Committee"), a Committee of disinterested persons appointed by the Board which
was formed in January 1996. The Committee, which is subject to the supervision
of the Board, will be of such size, will have such authority and will have such
members as the Board determines from time to time, and shall include at least
two members of the Board to the extent two disinterested members are available
and agree to serve on the Committee. Currently, the Committee consists of Dr.
Glen Miller and Keith Goldberg. As used in this Summary, the term
"Administrator" means the Board of Directors or, to the extent authority for any
right or obligation is delegated to the Committee, means the Committee.
Eligibility
Participants in the Plan will be selected by the Administrator from the
executive officers and other key employees of the Company who occupy responsible
managerial or professional positions and who have the capability of making a
substantial contribution to the success of the Company. In addition, key
non-employee consultants and agents who have the capability of making a
substantial contribution to the success of the Company may also be allowed to be
participants in the Plan. In making this selection and in determining the form
and amount of awards, the Administrator will consider any factors deemed
relevant, including the individual's functions, responsibilities, value of
services to the Company and past and potential contributions to the Company's
profitability and sound growth. As proposed to be amended, non-employee
directors will be eligible to participate in the Plan through non-discretionary
annual grants of non-qualified options to purchase 10,000 shares. See "--Summary
of the Plan--Non-Employee Directors." Consequently, references in this summary
to action taken in the discretion of the Administrator do not apply to such
non-discretionary grants to non-employee directors.
Types of Options and Rights
Three types of options or rights are permitted under the Plan: stock
options, incentive stock options, and alternate appreciation rights. A stock
option is an option to purchase the Company's Common Stock that may be granted
to any participant. An incentive stock option is an option that qualifies for
favorable Federal income tax treatment. Incentive stock options may only be
granted to employees. An alternate appreciation right is a right to receive
shares of the Company's Common Stock having a value equal to the amount by which
the market price thereof exceeds the exercise price of options held by the
participant. Alternate appreciation rights may be issued concurrently with or
following the issuance of stock options or incentive stock options.
Exercise Price of Options
Except in the case of Outside Options which are exchanged for stock
options under the Plan, the option price per share of Common Stock deliverable
upon the exercise of an Option is the closing price of the Common Stock as
reported on the American Stock Exchange on the trading day last ended prior to
the time the option is granted, except that option price per share of incentive
stock options granted to an owner of 10% or more of the total combined voting
power of the Company and its subsidiaries will be 110% of such closing price. In
the case of stock options which are issued under the Plan in exchange for
Outside Options, the exercise price may, at the election of the Administrator,
be the same price as that of the Outside Options.
Term of Options
Each stock option is exercisable and/or becomes exercisable according
to such vesting schedule as is determined by the Administrator and provided in
the agreement under which the option is granted. Each option has a term of 10
years, subject to earlier termination as provided in the case of death,
disability, retirement or other termination of employment, unless the agreement
under which the option is granted expressly provides for a different term, not
in excess of 10 years, and/or expressly provides that such provisions will not
apply to cause the option to earlier terminate.
Unless otherwise provided in the agreement under which the option is
granted, upon the death of the participant, any option rights to the extent
exercisable on the date of death may be exercised by the participant's estate
within both the remaining effective term of the option and one year after the
participant's death (except that alternative appreciation rights are not
exercisable after death).
Unless otherwise provided in the agreement under which the option is
granted, upon termination of a participant's employment by reason of retirement
or permanent disability (as each is determined by the Administrator), the
participant may exercise any options to the extent such options remain
exercisable during a 36-month period following termination (six months in the
case of alternative appreciation rights).
Unless otherwise provided in the agreement under which the option is
granted, upon termination of a participant's employment for any other reason,
the participant may exercise any options to the extent such options remain
exercisable during a three-month period following termination (except that
alternative appreciation rights are not exercisable after any such termination).
No awards may be made under the Plan after December 31, 2002.
However, all awards made under the Plan prior to this date will remain
in effect until such awards have been satisfied or terminated in accordance with
the Plan and the terms of such awards. The Plan does not provide for the
termination of options held by agents or consultants upon death or upon
termination of the parties' relationship; rather, the termination of the options
is governed by the contractual relationship between the parties (except that the
options cannot exceed 10 years in duration).
Maximum Amount of Option Grants
Shares of stock which may be issued under the Plan will be authorized
and unissued or treasury shares of Common Stock of the Company. The maximum
number of shares of Common Stock which may be issued under the Plan will be
4,000,000. The aggregate fair market value (determined on the date the option is
granted) of Common Stock subject to incentive stock options in any calendar year
will not exceed $100,000.
Alternative Appreciation Rights
Concurrently with or subsequent to the award of any option, the
Administrator may award to any participant a related alternate appreciation
right, permitting the participant to be paid the appreciation on the option in
lieu of exercising the option. A participant who has been granted alternate
rights may, in lieu of the exercise of an equal number of options, elect to
exercise one or more alternate rights and thereby become entitled to receive
from the Company payment in common stock for the appreciation of his options.
Non-Employee Directors
Under the amendment proposed, each non-employee director will receive
options to purchase 10,000 shares of the Company's Common Stock on the date the
1996 annual meeting is held and annually thereafter on the date any such
non-employee director is elected or re-elected by the Stockholders. Such options
are to vest on the first anniversary of the date of grant, and shall be
exercisable 10 years from the date of grant.
Amendment of the Plan
The Board of Directors of the Company may, without further action by
the stockholders and without receiving further consideration from the
participants, amend the Plan or condition or modify awards under the Plan in
response to changes in securities or other laws or rules. The Board may also at
any time terminate or modify or amend the Plan in any respect, except that
without stockholder approval the Board may not (i) increase the maximum number
of shares of common stock which may be issued under the Plan (other than for
certain adjustments as a result of any change in the outstanding common stock by
reason of a stock dividend or distribution, recapitalization, merger,
consolidation, split-up, combination, exchange of shares or the like), (ii)
extend the period during which any award may be granted or exercised, or (iii)
extend the term of the Plan. As proposed to be amended, the provisions of the
Plan relating to non-employee directors cannot be amended more than once every
six months.
Certain Federal Income Tax Matters
The Committee may grant either incentive stock options under section
422 of the Code or nonqualified stock options which do not qualify for the tax
treatment afforded incentive stock options. Neither the grant of an incentive
stock option nor the grant of a nonqualified stock option will be treated as
compensation to the optionee for federal income tax purposes, and neither will
result in a deduction for tax purposes for the Company. Similarly, the grant of
a stock appreciation right will not result in income to the optionee or a
deduction for tax purposes for the Company at the time of grant.
On exercise of an incentive stock option, the optionee will not
recognize any compensation income, and the Company will not be entitled to a
deduction for tax purposes, although exercise of an incentive stock option may
give rise to liability under the alternative minimum tax provisions of the Code.
Generally, if the optionee disposes of shares acquired upon exercise of an
incentive stock option within two years of the grant or one year of the date of
exercise, the optionee will recognize compensation income, and the Company will
be entitled to a deduction for tax purposes, in the amount of the excess of the
fair market value of the shares of Common Stock on the date of exercise over the
option price (or the gain on sale, if less). Otherwise, the Company will not be
entitled to any deduction for tax purposes upon disposition of such shares and
the entire gain for the optionee will be treated as a capital gain. On exercise
of a nonqualified stock option, the amount by which the fair market value of the
Common Stock on the date of exercise exceeds the option price will generally be
taxable to the optionee as compensation income and deductible for tax purposes
by the Company. Upon exercise of a stock appreciation right, the value of the
stock received will be treated as income to the employee and deductible for tax
purposes by the Company.
Recommendation
The Board of Directors recommends that the stockholders vote "FOR" the
proposal. Proxies solicited by the Board of Directors will be voted in favor of
this proposal unless a contrary vote or abstention is specified.
PROPOSAL NO. 7 -- SELECTION OF AUDITORS
The Proposal
The Board of Directors appointed Coopers & Lybrand L.L.P., independent
public accountants, to audit the financial statements of the Company and its
wholly owned subsidiaries for the fiscal year ending December 31, 1996. This
appointment is being presented to stockholders for ratification. Coopers &
Lybrand L.L.P. audited the Company's financial statements for the year ended
December 31, 1995.
A representative of Coopers & Lybrand is expected to attend the meeting
and will be afforded an opportunity to make a statement if he or she desires to
do so. This representative is also expected to be available to respond to
appropriate questions.
Recommendation
The Board of Directors recommends that the stockholders vote "FOR" the
proposal. Proxies solicited by the Board of Directors will be voted in favor of
this proposal unless a contrary vote or abstention is specified.
DESCRIPTION OF BUSINESS
General
COMFORCE is a provider of technical staffing and consulting services in
the information technology and telecommunications sectors. Its operations are
currently conducted through its operating subsidiary, COMFORCE Global. In May
1996, the Company purchased all of the stock of Project Staffing Suppport Team,
Inc. and substantially all of the assets of RRA, Inc. and Datatech Technical
Services, Inc. (collectively "RRA") through a second operating subsidiary,
COMFORCE Technical Services.
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. COMFORCE Global maintains an extensive data base
of technically skilled telecommunications and computer personnel, classified by
experience and geographic location, for its customers. A majority of COMFORCE
Global's business is derived from contract labor services provided to the
wireless sector.
The acquisition of RRA will allow COMFORCE Technical Services 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. In addition,
COMFORCE Technical Services will provide specialists for mission-critical
projects, principally in the scientific and technical research and development
fields, including the areas of laser and weapons technology, environmental
safety and alternative energy source development.
History
The Company was incorporated in Delaware in 1969. From 1985 until
September 1995, the Company, under the name The Lori Corporation, was engaged in
the Jewelry Business. Prior thereto, under the names APECO Corporation and
American Photocopy Equipment Company, the Company engaged in various business
activities, including the manufacture of photocopy machines.
Due to continuing losses in the Jewelry Business and the erosion of the
markets for its products, in September 1995, the Company adopted a plan to
discontinue the Jewelry Business and determined to seek to enter into another
line of business. See "--Discontinued Jewelry 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 COMFORCE Global. In addition, in connection with its new business
direction, the Company changed its name to COMFORCE Corporation. ARTRA, then the
majority stockholder of the Company, approved these transactions. At the time of
the acquisition, COMFORCE Global 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 Global, which was
not a party to the Chapter 11 proceeding, was approved by the bankruptcy court
in which Spectrum's bankruptcy was pending. Originally founded in 1987, Spectrum
had acquired COMFORCE Global in 1993.
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. The 500,000 shares
issued by the Company consisted of (i) 100,000 shares issued to an unrelated
party for guaranteeing the purchase price to the seller, (ii) 100,000 shares
issued to ARTRA, then the majority stockholder of the Company, in consideration
of its guaranteeing the purchase price to the seller and agreeing to enter into
the Assumption Agreement, described under "--Discontinued Jewelry Business,"
under which ARTRA agreed to pay and discharge substantially all of the then
existing liabilities and obligations of the Company, (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 $6.4 million
purchase price to the seller. See "Discontinued Jewelry Business."
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, as described below).
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 March 1996, the Company acquired all of the assets of Williams
Communication Services, Inc., a provider of telecommunications and technical
staffing services ("Williams"). 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 with Chase Manhattan Bank.
In April 1996, the Company amended the warrants held by two
unaffiliated 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 (in the case of warrants to purchase 241,667 shares not
immediately exercisable) and to provide for the issuance of one supplemental
warrant at an exercise price of $9.00 per share for each warrant exercised on or
before April 12, 1996. Warrants to purchase all 301,667 shares were exercised in
April 1996 for an aggregate exercise price of $943,000. The Company intends to
use the proceeds from the exercise of these warrants for working capital
purposes.
On April 12, 1996, ARTRA sold the business and certain of the assets
related to the Company's discontinued Jewelry Business.
In May 1996, the Company purchased the business and assets of RRA for a
purchase price of $4.75 million, with a three year contingent payout based on
earnings of RRA. The value of the contingent payout will not exceed $1 million,
for a total purchase price not to exceed $5.75 million.
On August 20, 1996, the Company acquired Force 5, Inc. ("Force 5") for
a purchase price of $2 million, with a three year contingent payout based on
earnings of Force 5. The value of the contingent payout will not exceed $2
million, for a total purchase price not to exceed $4 million. Force 5, which is
based in Dallas, Texas, is engaged in the information technology consulting
business.
Strategy
Plan for Growth
The Company's objective is to become the leading provider of
telecommunications and information technology staffing services. 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.
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, its presence in the Northwest, Southwest, South, Northeast, Midwest and
Mid-Atlantic regions and its 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.
Strategic Acquisitions
The Company's growth strategy includes the acquisition of established,
profitable regional staffing companies in business sectors 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 business sector. The Company has currently
targeted the telecommunications, information technology and technical services
business sector for establishment of platform operating businesses. In addition,
the Company has as an objective acquisitions of smaller companies to supplement
the operations within (or "tuck-under") a platform and thereby increase market
share and profits with minimal incremental expense. The Company believes that
its reputation in the industry and management style will facilitate its efforts
to acquire smaller businesses that are seeking alliances with larger staffing
companies to more effectively compete for national contracts. The Company's
senior management team has experience in identifying acquisition targets and
integrating acquired businesses into the Company's existing operations.
COMFORCE Global serves as the Company's telecommunications platform,
with Williams to supplement the operations within (or "tuck-under") that
platform. The acquisition of RRA establishes a technical services platform. The
Company is actively seeking an acquisition of a platform company servicing the
information technology sector. The Company currently conducts its information
technology staffing business through its COMFORCE Global subsidiary.
Internal Growth
The Company believes it can increase revenues through internal growth
due to its presence in the telecommunications and information technology
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.
Entrepreneurial Environment
The Company believes its entrepreneurial business environment rewards
performance. The Company has established guidelines that offer its managers
latitude in operational areas such as hiring, pricing, training, sales and
marketing. In addition, the Company has established profit-based compensation
plans and has implemented a broadly distributed stock option program to provide
further incentive to employees through ownership in the Company.
RightSourcing(TM)
The Company believes that its RightSourcing(TM) services, which include
a vendor-on-premises program, provide an attractive opportunity to grow its
operating revenues and profits. The Company's objective will be to achieve
higher volumes and proportionately lower operating costs which yield attractive
margins. Under these programs, the Company assumes administrative responsibility
for coordinating all temporary personnel services throughout a client's
organization or location. The program provides the Company with an opportunity
to establish long-term relationships with clients and a more stable source of
revenue while providing clients with a dedicated, on-site account manager who
can more effectively meet the client's changing staffing needs.
Market Overview and Industry Demand
The staffing services industry was once used predominantly as a
short-term solution during peak production periods or to temporarily replace
workers due to illness, vacation or abrupt termination. Since the mid-1980s, the
staffing services sector has evolved into a permanent and significant component
of the human resource plans of many corporations. Corporate restructuring,
downsizing, government regulations, 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 employers to risk exposure of wrongful discharge has
led to an increase in companies using services such as the Company's Engagement
Program as a means of evaluating the qualifications of personnel before hiring
them on a full-time basis. Furthermore, many companies are adopting strategies
which focus on their core businesses and, as a result, are using outsourcing
services such as the Company's RightSourcing(TM) program to staff their non-core
businesses. The Company's core and ring approach to staffing is intended to
provide its customers with immediate access to a large pool of expertise while
enabling them to keep their labor costs fixed.
Telecommunications and information technology staffing services have
become the fastest growing segments of the staffing services industry, according
to Staffing Industry Analysts, a leading trade magazine. Demand for technical
project support, wireless development, software development and other computer
and telecommunications-related services has increased significantly during the
last decade, and the recent enactment of The Telecommunications Act of 1996,
which deregulates substantial portions of the telecommunications industry, as
well as the recent auction by the U.S. Government of radio frequency spectrum to
be utilized for personal communication services ("PCS") wireless communications,
are expected to further increase the demand for such services. Many employers
outsource their management information systems and computer departments or have
utilized the employees of staffing firms in an attempt to meet the increased
demand for computer-skilled personnel. According to Staffing Industry Analysts,
the information technology services sector is estimated to have had revenues of
approximately $7.1 billion in 1994, representing a 25% increase over 1993. This
publication estimates 1995 revenues in the information technology services
sector to have been $8.9 billion, again representing a 25% increase over the
prior year.
The Company believes that the staffing services industry is highly
fragmented and is currently experiencing a trend toward consolidation, primarily
due to the increasing demands by large companies for centralized staffing
services, which smaller staffing companies are unable to meet. The growth of
national and regional accounts resulting from the centralization of staffing
decisions by national and larger regional companies has increased the importance
of staffing companies being able to offer services over a broad geographic area.
In addition, many smaller staffing companies are experiencing increased
difficulties due to factors such as significant working capital requirements,
limited management resources and an increasingly competitive environment.
Sales and Marketing
The Company has developed a sales and marketing strategy which targets
accounts at the international, national and local levels. Such accounts are
solicited through personal sales presentations, referrals from clients,
telephone marketing and advertising in a variety of local and national media.
The Company's international and national sales and marketing effort is
and will continue to be coordinated by management at the corporate level, which
enables the Company to develop a consistent, focused strategy to pursue national
account opportunities. This strategy allows the Company to capitalize on the
desire of international and national clients to work with a limited number of
preferred vendors for their staffing requirements.
Customers
The significant customers of the Company vary from time to time and the
Company is not dependent upon any single customer. During the calendar year
ended December 31, 1995, sales to Harris Corporation and Motorola accounted for
approximately 12% and 23%, respectively, of the revenues of the Company (from
its technical staffing business) and of COMFORCE Global (for the period prior to
its acquisition by the Company). In addition, other major customers that
accounted for less than 10% of the business the Company (and COMFORCE Global
prior to its acquisition by the Company) during such period included Alcatel
Network Systems, Hughes Network Systems, Inc., Ericsson Radio Systems, Inc.,
AT&T, Bell Atlantic and Sprint International.
Recruiting of Contract Employees
The Company's COMFORCE Global subsidiary maintains an extensive
database of telecommunications personnel. The Company recruits its contract
employees through an on-going program that primarily utilizes its existing
database of personnel, as well as local and national advertisements, job fairs
and recruiting on the World Wide Web. In addition, the Company has succeeded in
recruiting qualified employees through referrals from its existing labor force.
As a result, the Company has initiated a policy whereby it pays referral fees to
employees responsible for attracting new recruits. The Company believes this
balanced recruiting strategy will continue to provide it with high quality
contract employees to meet its staffing demands.
In the information technology services sector, the demand for software
engineers and technology consultants significantly exceeds supply. In an effort
to attract a wide spectrum of employees, the Company offers diverse employment
options and training programs. The approaches the Company is utilizing to
attract personnel who are in high demand include offering (i) full-time employee
status with an annual salary irrespective of assignment or (ii) hourly
contingent worker status with compensation tied to the duration of the
assignment. The Company intends to tailor its employment practices to attract
personnel in areas of high demand.
Assessment and Training of Employees
To better meet the needs and requirements of its customers and to
enhance the marketability and job satisfaction of its employees, the Company
utilizes a comprehensive system to assess and train its employees. The Company
conducts extensive background, drug and skills screening of potential temporary
employees and contract consultants. The Company also offers these employees
orientation courses that are tailored to the practices and policies of specific
clients.
Competition
The technical staffing sector in which the Company competes is
fragmented and highly competitive, with limited barriers to entry, although it
appears to be experiencing a trend toward consolidation, primarily due to the
increasing demands by large companies for centralized staffing services. With
local markets, smaller firms actively compete with the Company for business, and
in most of these markets, no single company has a dominant share of the market.
Technical services companies have traditionally focused on aerospace and
military contracts; however, since the demilitarization of the U.S. economy,
there has been increased focus by technical services companies on the
telecommunications and information technology market sectors. The Company's
ability to compete is dependent on many factors, including its ability to
attract technical personnel, its ability to offer its services on a cost
efficient basis and its ability to successfully service and support its
customers. The Company also competes with larger full-service and specialized
competitors in international, national, regional and local markets.
Intellectual Property
The Company does not own any patents, registered trademarks or
copyrighted information that is registered. However, the Company considers its
database of personnel to be proprietary.
Employees
As of August 20, 1996, the Company employed approximately 53 full-time
staff employees and 1,100 contract employees (on a full-time equivalency basis)
in its technical staffing business. During 1995, the Company had an average of
approximately 1,100 employees on assignment per week.
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 relating to its temporary employees. The
Company offers health insurance benefits to its temporary employees at their
cost through a national trade association to which the Company belongs.
Centralized Business Operations
The Company provides temporary, contracting, and outsourcing services
for approximately 200 clients from its corporate headquarters located in Lake
Success, New York. COMFORCE Global has offices in New York, Washington D.C. and
Florida and has plans to open offices in Texas, Chicago, California and Georgia
over the next twelve months. With the acquisition of RRA, the Company also has
additional offices in the states of Arizona, New Mexico, California,
Connecticut, Washington, Missouri and South Carolina.
Discontinued Jewelry Business
In September 1995, the Company adopted a plan to discontinue the
Jewelry Business and recorded a provision of $1 million for the estimated costs
to complete the disposal of this business, having earlier recorded a charge
against operations of $12.9 million to write-off the goodwill of the Jewelry
Business at June 30, 1995. In the fourth quarter of 1995, the Company revised
its estimate and provided an additional $600,000 to complete the disposition of
the Jewelry Business.
In conjunction with the COMFORCE Global acquisition, the Company and
ARTRA entered into the Assumption Agreement effective as of October 17, 1995,
under which ARTRA agreed to pay and discharge substantially all of the then
existing liabilities and obligations of the Company, including indebtedness,
corporate guarantees, accounts payable and environmental liabilities. ARTRA also
agreed to assume responsibility for all
liabilities of the Jewelry Business from and after October 17, 1995, and is
entitled to receive the net proceeds, if any, from the sale thereof. On April
12, 1996, ARTRA sold the business and certain of the assets of the Company's
Lawrence subsidiary 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 chemical and paper coating. These
operations were sold or discontinued in the late 1970s and early 1980s. Certain
of these facilities may have used and/or generated hazardous materials and may
have disposed of the hazardous substances, particularly before the enactment of
laws governing the safe disposal of hazardous substances, at an indeterminable
number of sites. Although the controlling stockholders and current management
had no involvement in such prior manufacturing operations, the Company could be
held to be responsible for clean-up costs if any hazardous substances were
deposited at these manufacturing sites, or at off-site waste disposal locations,
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), or under other Federal or state environmental laws now or
hereafter enacted. However, except for the Gary, Indiana site described below,
the Company has not been notified by the Federal Environmental Protection Agency
(the "EPA") that it is a potentially responsible party for, nor is the Company
aware of having disposed of hazardous substances at, any site.
In December 1994, the Company was notified by the EPA that it is a
potentially responsible party under CERCLA for the disposal of hazardous
substances at a site in Gary, Indiana. The alleged disposal occurred in the
mid-1970s at a time when the Company conducted operations as APECO. In this
connection, in December 1994, the Company was named as one of approximately 80
defendants in a case brought in the United States District Court for the
Northern District of Indiana by a group of 14 potentially responsible parties
who agreed in a consent order entered into with the EPA to clean-up this site.
The plaintiffs have estimated 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.
Forward Looking and Other Statements
The statements above and elsewhere in this Proxy Statement that suggest
that the Company will increase revenues and become profitable, achieve
significant growth through strategic acquisitions or other means, realize
operating efficiencies, and like statements as to the Company's objectives and
management's beliefs 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 will 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.
Properties
Technical Staffing Business
The Company and its COMFORCE Global subsidiary maintain their
headquarters in a 2,500 square foot facility in Lake Success, New York under a
lease which expires in 2000. COMFORCE Global maintains offices in New York,
Washington D.C. and Florida in leased facilities of from 750 to 2,000 square
feet. With the acquisition of RRA, the Company also has additional offices in
the states of Arizona, New Mexico, Connecticut, Washington, Missouri and South
Carolina in leased facilities of from 1,000 to 5,000 square feet. The Company
believes that its facilities are adequate for its present and reasonably
anticipated future business requirements.
Discontinued Jewelry Business
ARTRA has assumed the remaining obligations under a lease which expires
in October 1996 for an 86,000 square foot distribution facility in Woonsocket,
Rhode Island formerly used by the Company's discontinued Lawrence subsidiary.
Legal Proceedings
The Company is involved in a proceeding described above under
"Description of Business--Environmental Matters."
The Company is a party to routine contract and employment-related
litigation matters in the ordinary course of its business. No such pending
matters, individually or in the aggregate, if adversely determined, are believed
by management to be material to the business, results of operations or financial
condition of the Company. The Company maintains general liability insurance,
property insurance, automobile insurance, employee benefit liability insurance,
owner's and contractor's protective insurance and exporter's foreign operations
insurance with coverage of $1 million on a per claim basis and $2 million
aggregate (with $3 million umbrella coverage). The Company insures against
workers' compensation in amounts required under applicable state law and in the
amount of $500,000 in the case of foreign workers. The Company also maintains
fidelity insurance in the amount of $25,000 per claim and is presently
soliciting quotations to obtain directors' and officers' liability and errors
and omissions coverage.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
Selected Financial Information
Following is a consolidated summary of selected financial data of the
Company for each of the five years in the period ended December 31, 1995 and for
the six months ended June 30, 1996. Certain selected financial data for each of
the four years in the period ended December 31, 1994 has been reclassified to
reflect the discontinuance of the Company's Jewelry Business effective September
30, 1995. Selected financial data for the year ended December 31, 1995 includes
the operations of COMFORCE Global from the date of its acquisition, completed on
October 17, 1995.
Six Months
ended
June 30, Year ended December 31,
--------- -----------------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(thousands, except per share data)
Revenues (A) $ 13,158 $ 2,387 $ -- $ -- $ -- $ --
Stock compensation charge (B) -- 3,425 -- -- -- --
Earnings (Loss) from continuing 452 (4,332) (2,282) (1,456) (421) (5,129)
operations
Loss from discontinued operations (C) -- (17,211) (16,220) (216) (34,198) (1,970)
Earnings (Loss) before extraordinary 452 (21,543) (18,502) (1,672) (34,619) (7,099)
credits
Extraordinary credits (D) -- 6,657 8,965 22,057 -- --
Net earnings (loss) 452 (14,886) (9,537) 20,385 (34,619) (7,099)
Earnings (loss) per share:
Continuing operations 0.03 (.95) (.72) (.39) (.13) (1.62)
Discontinued operations -- (3.74) (5.08) (.06) (10.86) (.63)
Earnings (Loss) before extraordinary 0.03 (4.69) (5.80) (.45) (10.99) (2.25)
credits
Extraordinary credits -- 1.45 2.81 6.03 -- --
Net earnings (loss) 0.03 (3.24) (2.99) 5.58 (10.99) (2.25)
Total assets (E) 22,124 8,536 18,704 40,174 42,818 66,877
Long-term debt -- -- -- -- 6,105 23,548
Receivable from (payable to) ARTRA(F) -- 1,046 (289) -- (16,025) (15,981)
Liabilities assumed by ARTRA (F) 1,794 4,240 -- -- -- --
Liabilities subject to compromise -- -- -- -- 41,500 --
Debt subsequently discharged -- -- 7,105 -- -- --
Cash dividend -- -- -- -- -- --
______________________________________________________________
<FN>
A. Revenues for the year ended December 31, 1995 represent revenues of COMFORCE
Global from the date of its acquisition, October 17, 1995. Revenues for the six
months ended June 30, 1996 represent revenues of COMFORCE Global, revenues from
Williams from the acquisition date of March 3, 1996 through June 30, 1996 and
revenues from RRA from the acquisition date of May 10, 1996 through June 30,
1996. Selected financial data of the Company's Jewelry Business for the nine
months ended September 30, 1995 and for each of the four years in the period
ended December 31, 1994 has been reclassified to discontinued operations.
B. Represents a non-recurring compensation charge related to the issuance of the
35% common stock interest in the Company pursuant to employment or consulting
agreements with certain individuals to manage the Company's entry into and
development of the telecommunications and computer technical staffing services
business.
C. The loss from discontinued operations for the year ended December 31, 1995
includes a charge to operations of $12,930,000 to write-off the remaining
goodwill of the Company's Jewelry Business effective June 30, 1995 and a
provision of $1,600,000 for loss on disposal of the Company's Jewelry Business.
The loss from discontinued operations for the year ended December 31, 1994
includes a charge to operations of $10,800,000 representing a write-off of New
Dimensions (a subsidiary of the Company) goodwill. The loss from discontinued
operations for the year ended December 31, 1992 includes charges to operations
of $8,664,000 representing an impairment of goodwill at December 31, 1992 and
$8,500,000 representing increased reserves for markdown allowances and inventory
valuation.
D. The 1995 and 1994 extraordinary credits represent gains from net discharge of
indebtedness under terms of the Company's debt settlement agreement with its
bank. The 1993 extraordinary credit represents a gain from a net discharge of
indebtedness due to the reorganization of the Company's New Dimensions
subsidiary. See Note 7 to the Company's Consolidated Financial Statements.
E. As partial consideration for a debt settlement agreement, in December 1994
the Company's bank lender received all of the assets of Lori's former New
Dimensions subsidiary. See Note 7 to the Company's Consolidated Financial
Statements.
F. In conjunction with the COMFORCE Global acquisition, ARTRA agreed to assume
substantially all pre-existing Lori liabilities. During 1995, ARTRA received
$399,000 of advances from the Company. Subsequent to December 31, 1995, ARTRA
repaid the above advances and made net payments of $647,000 to reduce
pre-existing Lori liabilities. Such payments have been included in the Company's
Consolidated Financial Statements at December 31, 1995 as amounts receivable
from ARTRA and as additional paid-in capital. To the extent ARTRA makes
subsequent payments, they will be recorded as additional paid-in capital. In the
fourth quarter of 1995, ARTRA exchanged all of its shares of the Company's
Series C cumulative preferred stock for 100,000 newly issued shares of the
Company's common stock. During 1994, ARTRA made net advances to Lori of
$2,531,000. Effective December 29, 1994, ARTRA exchanged $2,242,000 of its notes
and advances for additional Lori preferred stock. In February 1993, ARTRA
transferred all of its notes to Lori's capital account. See Notes 9 and 15 to
the Company's Consolidated Financial Statements.
</FN>
Pro Forma Financial Information
On October 17, 1995, the Company completed the acquisition of all of
the capital stock of COMFORCE Global, a provider of telecommunications and
computer technical staffing and consulting services. On March 3, 1996, the
Company acquired all of the assets of Williams, a regional provider of
telecommunications and technical staffing services. On May 10, 1996, the Company
completed the acquisition of RRA. RRA is in the business of providing contract
employees to other businesses. 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 year ended December 31, 1995 and the
six months ended June 30, 1996 with prior periods is not meaningful. The
following tables present unaudited pro forma results of continuing operations
for: (i) the six months ended June 30, 1996; (ii) the six months ended June 30,
1995; (iii) the year ended December 31, 1995; and (iv) the year ended December
31, 1994, as if the acquisitions of COMFORCE Global, Williams and RRA had been
consummated as of January 1, 1994.
COMFORCE CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1996
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
======== ====== ====== ====== ======
Income per share from continuing operations $ .03 $ .06
======== ======
Weighted average shares of common stock and
common stock equivalents outstanding (F) 13,819 13,819
======== ======
COMFORCE CORPORATION
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
========== ========
- --------------------------------------------------
(A) The pro forma data presented for COMFORCE Global's, Williams' and RRA's
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 Corp. $206 $ --
Historical Global --- 82
Williams --- ---
RRA --- ---
Proforma Adjustment 154 278
---- ---
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.
COMFORCE CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(in Thousands)
COMFORCE Pro Forma
Historical (A) Global (B) Williams (B) RRA (B) Adjustments Pro Forma
---------- ---------- ------------ ------------ ----------- ---------
Revenues $ 2,387 $ 9,568 $ 4,178 $ 52,011 $ 68,144
---------- ---------- ------------ ------------ ----------- ---------
Operating costs and expenses:
Cost of revenues 1,818 7,178 3,022 47,830 59,848
Stock compensation (C) 3,425 3,425
Other operating costs and expenses 823 1,397 450 2,992 $ 531(D) 6,193
---------- ---------- ------------ ------------ ----------- ---------
6,066 8,575 3,472 50,822 531 69,466
---------- ---------- ------------ ------------ ----------- ---------
Operating earnings (loss) (3,679) 993 706 1,189 (531) (1,322)
---------- ---------- ------------ ------------ ----------- ---------
Spectrum corporate management fees (F) (1,140) (1,140)
Interest and other non-operating expenses (618) 7 (133) 248(E) (496)
---------- ---------- ------------ ------------ ----------- ---------
(618) (1,133) --- (133) 248 (1,636)
---------- ---------- ------------ ------------ ----------- ---------
Earnings (loss) from operations before
income taxes (4,297) (140) 706 1,056 (283) (2,958)
(Provision) credit for income taxes (35) 21 (354) (422) 113 (677)
---------- ---------- ------------ ------------ ----------- ---------
Income (loss) from operations $ (4,332) $ (119) $ 352 $ 634 $ (170) $(3,635)
========== ========== ============ ============ =========== =======
Income (loss) per share from continuing
operations $ (0.95) $ (0.39)
========= ======
Weighted average shares of common
stock and common stock
equivalents outstanding (G) 4,596 9,309
========= ======
See notes following the Pro Forma Statement of Operations for the Year Ended
December 31, 1994.
COMFORCE CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1994
(in Thousands)
COMFORCE Pro Forma
Historical (A) Global (B) Williams (B) RRA (B) Adjustments Pro Forma
---------- ---------- ------------ ------------ ----------- ---------
Revenues $ $ 8,245 $ 2,692 $ 38,559 $ 49,496
Operating costs and expenses:
Cost of revenues 6,417 2,107 35,601 44,125
Other operating costs and expenses 966 1,134 593 2,288 608 5,589
---------- ---------- ------------ ------------ ----------- ---------
966 7,551 2,700 37,889 608 49,714
---------- ---------- ------------ ------------ ----------- ---------
Operating earnings (loss) (966) 694 (8) 670 (608) (217)
---------- ---------- ------------ ------------ ----------- ---------
Spectrum corporate management fees (F) (803) (803)
Other income 25 25
Interest and other non-operating expenses (1,316) 9 (24) (168) (163) (1,662)
---------- ---------- ------------ ------------ ----------- ---------
(1,316) (794) (24) (143) (163) (2,440)
---------- ---------- ------------ ------------ ----------- ---------
Earnings (loss) from operations before
income taxes (2,282) (100) (32) 527 (770) (2,657)
(Provision) credit for income taxes (15) 13 (210) 308 96
---------- ---------- ------------ ------------ ----------- ---------
Income (loss) from operations $ (2,282) $ (115) $ (19) $ 317 $ (462) $ (2,561)
========== ========== ============ ============ =========== =========
Income (loss) per share from continuing
operations $ (.72) $ (0.25)
========== =========
Weighted average shares of
common stock and common stock
equivalents outstanding (G) 3,195 10,196
========== =========
_________________________________________
<FN>
(A) Historical data for the year ended December 31, 1995 includes COMFORCE
Global's operations since its acquisition on October 17, 1995 through
December 31, 1995 and corporate overhead costs for the entire year
ended December 31, 1995. Historical data for the three months ending
March 31, 1996 includes COMFORCE Global's operations since January 1,
1996 and Williams operations since its acquisition on March 3, 1996
through March 31, 1996.
(B) The pro forma data presented for COMFORCE Global's, Williams' and RRA's
operations is for the periods prior to their acquisitions (i.e., in the
case of COMFORCE Global, the period from January 1, 1994 through
December 31, 1994, and January 1, 1995 through October 17, 1995, which
precede the October 17, 1995 acquisition of COMFORCE Global, and, in
the case of Williams and RRA, the periods from January 1, 1994 through
December 31, 1994 and January 1, 1995 through December 31, 1995, which
precede the March 3, 1996 acquisition of Williams and the May 10, 1996
acquisition of RRA).
(C) 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.
(D) Amortization of goodwill arising out of the Global, Williams and RRA
acquisitions. The table below reflects where amortization of goodwill
has been recorded.
December 1995 December 1994
-------------- ----------
Historical Comforce Corp. $ 51 $ --
Historical COMFORCE Global 142 164
Williams -- --
RRA -- --
Proforma Adjustments 530 559
------ ------
Adjusted proforma per
financial statements $ 723 $ 723
====== ======
(E) Reverse interest expense on notes and other liabilities assumed by
ARTRA totaling $410,000 net of interest expense incurred for the
purchase of Williams for the pro forma year ended December 31, 1995.
Interest expense for December 31, 1995 represents interest on the line
of credit assuming all $1,900,000 was outstanding for the year at the
interest rate in effect of 8.5%. The interest expense reversed in 1995
was for interest on notes directly related to Lori Corporation
activities and were incurred in 1995. These liabilities were not
outstanding during 1994 and, accordingly, a similar adjustment is not
required.
(F) Corporate management fees from COMFORCE Global's former parent,
Spectrum. The amount of these management fees may not be representative
of costs incurred by COMFORCE Global on a stand alone basis.
(G) The pro forma weighted average shares and common stock equivalents
outstanding includes shares of the Company's common stock issued and to
be issued in the private placement that funded the COMFORCE Global
transaction, shares issued for fees and costs associated with the
COMFORCE Global transaction including 100,000 shares issued to ARTRA,
150,000 shares issued to Peter Harvey for guaranteeing the COMFORCE
Global transaction, shares issued to certain individuals to manage the
Company's entry into the telecommunications and technical staffing
business, and the private placement of Series E Preferred Stock issued
in conjunction with the RRA acquisition.
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion supplements the information found in the
consolidated financial statements and related notes.
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. As discussed under "--Discontinued
Jewelry Business," 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. The 500,000 shares
issued by the Company consisted of (i) 100,000 shares issued to an unrelated
party for guaranteeing the purchase price to the seller, (ii) 100,000 shares
issued to ARTRA, then the majority stockholder of the Company, in consideration
of its guaranteeing the purchase price to the seller and agreeing to enter into
the Assumption Agreement, (iii) 150,000 issued to two unrelated parties for
advisory services in connection with the acquisition, and (iv) 150,000 shares
issued to Peter R. Harvey, then a Vice President and director of the Company,
for guaranteeing the payment of the $6.4 million purchase price to the seller.
The shares issued to Peter R. Harvey and ARTRA are subject to ratification by
the Company's stockholders. These transactions have been approved by current
management personnel and ARTRA, which together own a majority of the outstanding
shares of the Company's Common Stock and, therefore, such ratification is
expected.
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 The Chase Manhattan Bank ("Chase"). See Note 10 to the
condensed consolidated financial statements for a description of this credit
facility.
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 income 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 Proxy Statement 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.
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 years ended December 31, 1995 and December 31, 1994, for
the years ended December 31, 1994 and December 31, 1993, and 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.
See "Discontinued Jewelry See "Discontinued Jewelry Business" for a discussion
of the discontinued operations.
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 June 30,
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 as 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.
Pro Forma 1995 Compared to Pro Forma 1994
Set forth below is a discussion of the Company's pro forma results of
continuing operations for the years ended December 31, 1995 and December 31,
1994. The Company's pro forma results of continuing operations for the years
ended December 31, 1995 and December 31, 1994 are presented under Selected
Historical & Pro Forma Financial Information as if the acquisitions of COMFORCE
Global, Williams and RRA Inc. had been consummated as of January 1, 1994.
Pro forma revenues of $68,144,000 for the year ended December 31, 1995
were $18,648,000, or 37.0%, higher than pro forma revenues for the year ended
December 31, 1994. The increase in 1995 pro forma revenues is attributable to
the overall growth and expansion of COMFORCE Global's telecommunications and
computer technical staffing services business as well as the increase in revenue
from Williams and RRA Inc. Pro forma cost of revenues of $59,848,000 for the
year ended December 31, 1995 increased $15,723,000 as compared to pro forma cost
of revenues for the year ended December 31, 1994. Pro forma cost of revenues in
the year ended December 31, 1995 was 88% of pro forma revenues compared to a pro
forma cost of revenues percentage of 89% for the year ended December 31, 1994.
The 1995 pro forma cost of revenues increase is principally attributable to the
increase in sales volume as noted above. The 1995 pro forma cost of revenues
percentage decrease of 1.0% is primarily attributable to certain consulting fees
incurred in 1994.
Pro forma operating expenses for the year ended December 31, 1995
increased $4,029,000 as compared to pro forma operating expenses for the year
ended December 31, 1994. The 1995 increase in pro forma operating expenses is
principally attributable to a compensation charge of $3,425,000 related to the
issuance of a 35% interest in the Company as additional compensation for certain
individuals to enter into employment or consulting services agreements to manage
the Company's entry into and development of the telecommunications and computer
technical staffing services business and an increase in RRA Inc. operating costs
for opening three new offices.
Pro forma operating loss in the year ended December 31, 1995 was
$1,322,000 as compared to pro forma operating loss of $217,000 in the year ended
December 31, 1994. The increased 1995 pro forma operating loss is principally
attributable to a compensation charge of $3,425,000 related to the issuance of a
35% interest in the Company as additional compensation for certain individuals
to enter into employment or consulting services agreements to manage the
Company's entry into and development of the telecommunications and computer
technical staffing services business, partially offset by an increased pro forma
gross margin attributable to the overall growth and expansion of COMFORCE
Global's and Williams telecommunications and computer technical staffing
services business, as well as an increase in the RRA technical services
business.
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 expense, principally interest, net for the year ended
December 31, 1995 decreased $1,106,000 as compared to the year ended December
31, 1994. The 1995 decrease is principally due to the 1994 and 1995 discharges
of indebtedness under terms of the bank loan agreements of Lori and its fashion
costume jewelry subsidiaries.
Due to the Company's tax loss carry forwards and the uncertainty of
future taxable income, no income tax benefit was recognized in connection with
the Company's 1995 and 1994 pre-tax losses from continuing operations.
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 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.
Discontinued Jewelry Business
In conjunction with the COMFORCE Global acquisition, the Company and
ARTRA entered into the Assumption Agreement 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 October 17, 1995, and is entitled to receive
the net proceeds, if any, from the sale thereof. On April 12, 1996, ARTRA sold
the business and certain of the assets of the Company's Lawrence subsidiary 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.
At March 31, 1995 and at December 31, 1994, Lori's business plan had
anticipated that the restructuring of its debt, along with a consolidation and
restructuring of its Jewelry Business, would permit it to obtain a sufficient
level of borrowings to fund its capital requirements in 1995 and beyond.
However, due to the continued losses from operations and its inability to obtain
conventional bank financing, management of Lori determined in September 1995 to
discontinue the Jewelry Business. The Company recorded a provision of $1 million
for the estimated costs to complete the disposal of this business, having
earlier recorded a charge against operations of $12.9 million to write-off the
goodwill of the Jewelry Business at June 30, 1995. In the fourth quarter of
1995, the Company revised its estimate and provided an additional $600,000 to
complete the disposition of the Jewelry Business.
Environmental Matters
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 (see
"Description of Business--History"). 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 Assumption
Agreement. lean-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. 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.
See "Description of Business--Environmental Matters."
Net Operating Loss Carry forwards
At December 31, 1995, the Company and its subsidiaries had Federal
income tax loss carry forwards of approximately $53,000,000 available to be
applied against future taxable income, if any, expiring principally in 1996 -
2010. Section 382 of the Internal Revenue Code of 1986 limits a corporation's
utilization of its Federal income tax loss carry forwards when certain changes
in the ownership of a corporation's Common Stock occurs. The Company has
recently issued a significant number of shares of its Common Stock in
conjunction with the COMFORCE Global acquisition and certain related
transactions. In addition, as a result of the recent change in the Company's
business, the ability to use these net operating loss carry forwards may be
eliminated. Accordingly, the Company is currently subject to significant
limitations regarding the utilization of its Federal income tax loss carry
forwards.
Seasonality
The Company's recently acquired technical staffing and consulting
services business is not subject to significant seasonal fluctuations.
Recently Issued Accounting Pronouncements
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges) expected
to result from the use or sale of the asset and its eventual disposition, to the
carrying amount of the asset. This new accounting principle is effective for the
Company's fiscal year ending December 31,1996. The Company believes that
adoption will not have a material impact on its financial statements.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages,
but does not require, companies to recognize compensation expense for grants of
stock, stock options, and other equity instruments to employees based on new
fair value accounting rules. Although expense recognition for employee stock
based compensation is not mandatory, the pronouncement requires companies that
choose not to adopt the new fair value accounting to disclose the pro-forma net
income and earnings per share under the new method. This new accounting
principle is effective for the Company's fiscal year ending December 31, 1996.
The Company believes that adoption will not have a material impact on its
financial statements as the Company will not adopt the new fair value
accounting, but instead comply with the disclosure requirements.
Impact of Inflation and Changing Prices
Inflation has become a less significant factor in the economy; however,
to the extent permitted by competition, the Company generally passes increased
costs to its customers.
INFORMATION REGARDING EXECUTIVE OFFICERS
Michael Ferrentino. See "Proposal No. 1--Information Concerning
Directors and Nominees" for information concerning Mr. Ferrentino.
Christopher P. Franco, age 37. Executive Vice President and Secretary
of the Company since December 1995. From November 1993 to September 1995, Mr.
Franco served as Vice President and General Counsel of Spectrum Information
Technologies, Inc. ("Spectrum") (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). Mr. Franco received his B.S.B.A. in business administration
from Georgetown University and his J.D. from Southern Methodist University
School of Law.
Andrew Reiben, age 31. Chief Accounting Officer of the Company since
February 1996. From June 1993 to February 1996, Mr. Reiben served as Controller
of Daystar Robinson, a C.H. Robinson company (New York). From September 1987 to
June 1993, Mr. Reiben was a Senior Accountant with the accounting firm of
Coopers & Lybrand L.L.P. (New York).
Paul J. Grillo, age 44. Vice President - Finance and Chief Financial
Officer of the Company since July 1996. From July 1991 to July 1996, Mr. Grillo
provided business planning and acquisition advisory services to a number of
industries including telecommunications, contract services, manufacturing,
publishing and real estate management. From April 1980 to June 1991, Mr. Grillo
served as Senior Vice President - Finance, Treasurer and Chief Financial Officer
of Butler Service Group, Inc., an international contract technical services
company. Mr. Grillo received his MBA in corporate finance and BA in business
administration from Rutgers University.
Officers are appointed by the boards of directors of COMFORCE and its
subsidiaries and serve at the pleasure of each respective board. There are no
family relationships among the executive officers and/or directors, nor are
there any arrangements or understandings between any officer and another person
pursuant to which he was appointed to office except as may be hereinafter
described.
EXECUTIVE COMPENSATION
Directors' Compensation
Directors' fees of $1,000 per quarter were earned in 1995 by each
non-employee director of the Company. The former Chairman, John Harvey, earned a
fee of $2,000 per month in 1995. Commencing January 1, 1996, non-employee
directors will receive fees of $1,000 per quarter and $500 per meeting. In
addition, the Company has proposed adopting certain amendments to the Long-Term
Stock Incentive Plan, which, if adopted, will entitle each non-employee director
serving as a director on the date the 1996 annual meeting is held and annually
thereafter on the date any such non-employee director is elected or re-elected
by the stockholders, to receive options to purchase 10,000 shares of the Company
s common stock, unless the plan is subsequently amended as permitted therein.
Executive Officer Compensation
The following table shows all compensation paid by the Company and its
subsidiaries for the fiscal years ended December 31, 1995, 1994 and 1993, to
each person who has served as the chief executive officer of the Company at any
time during any such year and the Company's most highly compensated executive
officers other than the chief executive officer whose income exceeded $100,000
(the "Named Executive Officers"). No other executive officers of the Company
received compensation in excess of $100,000 in 1995.
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards
------------------- ---------------------
Salary Bonus Options/SAR's
Name and Position Year ($) ($) (#)
- ---------------------------------------------------------------------------------------------
Related to Current Operations:
Michael Ferrentino, 1995 $79,703 $174,879(2) -
President 1994 - - -
1993 - - -
Christopher P. Franco 1995 28,846 174,879(2)
Executive Vice 1994 - - -
President and Secretary 1993 - - -
Related to Discontinued Jewelry Business:
Austin A. Iodice, 1995 260,000 - -
formerly Vice Chairman, 1994 260,000 - -
Chief Executive Officer 1993 260,000 - $370,419(1)
and President
<FN>
(1) See the notes under "Principal Stockholder--Securities Ownership of
Certain Beneficial Owners and Management" and "Transactions with Management and
Others--Transactions with Austin A. Iodice Related to Discontinued Jewelry
Business" for a description of the options granted to Mr. Iodice.
(2) This amount represents the value of shares of Common Stock of the
Company issued to Messrs. Ferrentino and Franco in accordance with employment
agreements and as inducement for agreeing to be employed and contractually bound
by the Company for the purpose of developing a technical staffing business. The
amount was calculated at $.22 per share and was based upon an appraisal received
by the Company. This was the value used for tax-computing purposes. However, for
financial reporting purposes, these shares are valued at $.93 per share.
</FN>
Option Values. The following table sets forth information concerning
the aggregate number and values of options held by Named Executives as of
December 31, 1995. None of the Named Executives hold stock appreciation rights
("SARs") and none of the Named Executives exercised any options in 1995.
Number of
Securities
Underlying
Unexercised Value of Unexercised
Options/SARs In-the-Money
at Fiscal Year Options/SARs at
End (#) Fiscal Year End ($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) (#) Unexercisable(1) Unexercisable(2)
- ---------------------------------------------------------------------------------------------------------------
Current Management:
Michael Ferrentino 0 0 0/0 0/0
Christopher P. Franco 0 0 0/0 0/0
Former Management (Discontinued Jewelry Business):
Austin A. Iodice 0 0 370,419/0 $3,009,654/0
<FN>
(1) See the notes under "Principal Stockholders-- Securities Ownership of
Management" for a description of the terms of the options granted to Mr. Iodice,
as well as other options granted to other executive officers of the Company.
(2) The listed options were issued at per share exercise price of $1.125
per share. The market price of the Company's Common Stock as of the close of
trading on December 31, 1995 on the American Stock Exchange was $9.25. The value
shown in this column for in-the-money options is the amount by which the market
price at December 31, 1995 for all of the shares issuable upon Mr. Iodice's
exercise of his option exceeded the exercise price thereof.
</FN>
Employment Agreements
The Company entered into employment agreements in December 1995 with
Michael Ferrentino, the President of the Company, and Christopher P. Franco, the
Executive Vice President and Secretary of the Company. Each agreement is for a
term of two years and is terminable by the Company only for "just cause." "Just
cause" includes the employee's consistent failure to follow written policies or
directions, wrongful conduct which has or is expected to have a material adverse
effect on the Company, material violations of the employment agreement and
disruption of a harmonious work environment, except that, following a change in
control of the Company, the term "just cause" is generally limited in
application to criminal acts. Under these agreements, each of Messrs. Ferrentino
and Franco are entitled to compensation of $150,000 annually plus such bonuses
as are awarded by the Board, and each are entitled to participate in the
Company's normal benefit programs. If the Company terminates either agreement,
the employee shall be entitled to receive full compensation and to continue to
participate in the Company's benefit programs for the greater of one year or the
balance of the term of the agreement, payable in full at the time of
termination. Each agreement contains customary confidentiality, non-disclosure
and employee non-solicitation provisions. See also "Transactions with Management
and Others" for a description of the consulting agreement and management
agreement entered into by the Company with certain companies controlled by James
L. Paterek and Austin A. Iodice, respectively.
Compensation Committee Interlocks and Insider Participation
Current Operations
The 1995 compensation of Michael Ferrentino, the President of the
Company, and Christopher P. Franco, the Executive Vice President and Secretary
of the Company, was fixed pursuant to employment agreements negotiated with
Peter R. Harvey, formerly a Vice President of the Company.
Discontinued Jewelry Business
The decisions concerning the 1995 compensation of all of the executive
officers of the Company involved in the Company's discontinued Jewelry Business
were made by Austin A. Iodice, the Vice Chairman, President and Chief Executive
Officer of the Company until his resignation in December 1995, except with
respect to Mr. Iodice (whose compensation was fixed pursuant to a management
agreement approved by the Board of Directors in 1992). Although the Company had
a Committee on Compensation and Options, this Committee did not meet in 1995.
Relationships
There are no interlocking relationships, as defined in the regulations
of the Securities and Exchange Commission, involving any of these individuals.
See "Transactions with Management and Others" for a description of certain
transactions entered into between the Company and Messrs. Iodice, Ferrentino,
Franco and Harvey.
Report on Executive Compensation
The following report concerns decisions made by the former management
of the Company, principally in connection with the Company's discontinued
Jewelry Business.
Compensation of Executive Officers
The compensation of Michael Ferrentino, the President of the Company,
and Christopher P. Franco, the Executive Vice President and Secretary of the
Company, was fixed pursuant to employment agreements negotiated with and
approved by Peter R. Harvey.
The salaries paid during 1995 to the Company's executive officers were
either approved by Austin A. Iodice, then the Vice Chairman, President and Chief
Executive Officer of the Company, except that Mr. Iodice's compensation was
fixed pursuant to a management agreement approved by the Board in 1992.
The decisions of Mr. Iodice and Mr. Harvey regarding compensation were
based upon various subjective factors such as the executive's responsibilities,
position, qualifications, and years of experience. In no such case did they
undertake a formal survey or analysis of compensation paid by other companies.
The terms of Mr. Iodice's employment were fixed based upon negotiations between
Mr. Iodice and representatives of the Company in 1992. In approving these terms,
the Board considered various subjective factors, but did not undertake a formal
analysis of compensation paid by other companies. See "Executive
Compensation--Employment Agreements" and "Transactions with Management and
Others."
Deductibility of Compensation
Effective January 1, 1994, the Internal Revenue Service under Section
162(m) of the Internal Revenue Code will generally deny the deduction of
compensation paid to certain executives to the extent such compensation exceeds
$1 million, subject to an exception for compensation that meets certain
"performance-based" requirements. Whether the Section 162(m) limitation with
respect to an executive will be exceeded and whether the Company's deductions
for compensation paid in excess of the $1 million cap will be denied will depend
upon the resolution of various factual and legal issues that cannot be resolved
at this time. As to options granted under any stock option plans, the Company
intends to endeavor to comply with the rules governing the Section 162(m)
limitation so that compensation attributable to such options will not be subject
to limitation under such rules. As to other compensation, while it is not
expected that compensation to executives of the Company will exceed the Section
162(m) limitation in the foreseeable future (and no officer of the Company
received compensation in 1994 which resulted under Section 162(m) in the
non-deductibility of such compensation to the Company), various relevant
considerations will be reviewed from time to time, taking into account the
interests of the Company and its stockholders, in determining whether to
endeavor to cause such compensation to be exempt from the Section 162(m)
limitation.
Submission of Report
This report on Executive Compensation is submitted by Austin A. Iodice
and Peter R. Harvey.
Performance Information
Set forth below in tabular form is a comparison of the total
stockholder return (annual change in share price plus dividends paid, assuming
reinvestment of dividends when paid) assuming an investment of $100 on the
starting date for the period shown for the Company, the Dow Jones Equity Market
Index (a broad equity market index which includes the stock of companies traded
on the American Stock Exchange), the Dow Jones Industrial Sector -- Industrial
and Commercial Services Index (an industry index which includes providers of
staffing services) and the Dow Jones Consumer Sector -- Apparel Index (an index
which includes manufacturers of jewelry and apparel) (the "Apparel Index").
Performance information for the Apparel Index is presented (in
accordance with the requirements of the Securities and Exchange Commission)
since the Company was formerly in the Jewelry Business and last compared its
performance with the Apparel Index. The Company discontinued its Jewelry
Business in September 1995 and entered the technical staffing business in the
information technology and telecommunications sectors in October 1995.
No dividends were paid on the Company's Common Stock during the period
shown. The return shown is based on the percentage change from December 31, 1990
through December 31, 1995.
Value of $100 Invested on December 31, 1990
----------------------------------------------------------------------
12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95
-------- -------- -------- -------- -------- --------
COMFORCE common stock $100.00 $88.89 $38.89 $250.00 $127.78 $266.67
Dow Jones Equity Market Index $100.00 $132.44 $143.83 $158.14 $159.36 $220.51
Dow Jones Industrial Sector
Industrial and Commercial Services Index $100.00 $124.77 $142.30 $148.62 $143.59 $183.78
Dow Jones Consumer Sector Apparel Index $100.00 $179.71 $198.27 $147.36 $170.82 $207.78
MARKET PRICE OF THE COMPANY'S COMMON STOCK
The Company's Common Stock, $.01 par value, is traded on the American Stock
Exchange ("AMEX"). The high and low sales prices for the Company's Common Stock,
as reported by the AMEX during the past two years, were as follows:
1996 1995 1994
------------- ------------------ ---------------
High Low High Low High Low
First Quarter $10-3/8 $6 $3-7/8 $1-15/16 $6 $5
Second Quarter 34-1/8 9-3/8 3-1/2 2 7-1/8 3-1/8
Third Quarter 4-3/4 1-9/16 8-1/8 5-1/4
Fourth Quarter 9-1/4 3-1/4 6-3/8 1-7/8
As of August 20, 1996, there were approximately 5,600 shareholders of record.
DIVIDENDS
COMFORCE anticipates that earnings, if any, will be retained for
expansion of its technical staffing and consulting services business at least
through 1996 and, therefore, does not anticipate that dividends on the Common
Stock will be paid in 1996. Lori did not pay dividends in 1995.
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 August 20, 1996 by (i) the only
stockholders known by management of COMFORCE to own 5% or more of COMFORCE's
Common Stock, (ii) each director and executive officer of COMFORCE, (iii) Austin
A. Iodice, formerly Vice Chairman, Chief Executive Officer and President of the
Company, and (iv) all directors, executive officers and other key employees of
COMFORCE as a group (7 persons). Unless stated otherwise, each person so named
exercises sole voting and investment power as to the shares of Common Stock so
indicated. As of such date, there were 9,632,032 shares of common stock issued
and outstanding. Unless specifically noted otherwise in the footnotes, none of
the persons or groups included in the table below own any shares of the
Company's Series D or Series E Preferred Stock.
Number of Percentage of
Name and Address of Shares Shares
Beneficial Owner Beneficially Owned(1) Beneficially Owned
______________________________________________________________________________
Current Management:
Michael Ferrentino(2) 2,221,762 22.0%
2001 Marcus Avenue
Lake Success, New York 11042
Christopher P. Franco(3) 999,794 10.2%
2001 Marcus Avenue
Lake Success, New York 11042
Andrew Reiben -- --
Paul J. Grillo -- --
Dr. Glen Miller -- --
Richard Barber -- --
Keith Goldberg -- --
Directors and officers as a group
((7) persons)(4) 2,221,762 22.0%
Other Significant Stockholders:
James L. Paterek(5) 1,666,322 16.7%
86 South Drive
Plandome, New York 11030
ARTRA GROUP Incorporated 1,880,000 19.6%
500 Central Avenue(6)(7)
Northfield, Illinois 60093
Cypress Partners L.P.(8) 730,000 7.0%
P.O. Box 71289
Atlantic Richfield Plaza Station
Los Angeles, California 90071
Dobbins Partners, L.P.(9) 714,215 7.2%
2651 North Harwood
Suite 500
Dallas, Texas 75201
Marc Werner(10) 1,201,765 12.1%
1359 Virginia Trail
Youngstown, OH 44505
Former Management (Discontinued Jewelry Business):
Austin A. Iodice(11) 370,491 3.7%
__________________________
(1) For purposes of this table, shares are considered "beneficially
owned" if the person directly or indirectly has the sole or shared power to vote
or direct the voting of the securities or the sole or shared power to dispose of
or direct the disposition of the securities. A person is also considered to
beneficially own shares that such person has the right to acquire within 60
days, and options exercisable within such period are referred to herein as
"currently exercisable."
(2) The shares beneficially owned by Mr. Ferrentino, the President and
a Director of the Company, include (i) 794,907 shares currently held of record
by him, (ii) 204,887 additional shares to be issued to him under the
anti-dilution provisions of the Letter Agreement, (iii) 794,907 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 Global,
under which Mr. Ferrentino has voting power (the "Voting Agreement"), (iv)
204,887 additional shares to be issued to Mr. Franco under the anti-dilution
provisions of the Letter Agreement which will also be subject to the Voting
Agreement, (v) 176,644 shares held of record by Mr. Kiernan which are subject to
the Voting Agreement and (vi) 45,530 additional shares to be issued to Mr.
Kiernan under the anti-dilution provisions of the Letter Agreement which will
also be subject to the Voting Agreement. His ownership percentage has been
calculated as if the shares to be issued to them under the anti-dilution
provisions of the Letter Agreement as described above were options which are
currently exercisable.
(3) The shares beneficially owned by Mr. Franco, the Executive Vice
President of the Company, include (i) 794,907 shares currently held of record by
him which are subject to the Voting Agreement and (ii) 204,887 additional shares
to be issued to him under the anti-dilution provisions of the Letter Agreement
which will also be subject to the Voting Agreement. His ownership percentage has
been calculated as if the shares to be issued to him under the anti-dilution
provisions of the Letter Agreement were options which are currently exercisable.
(4) The shares shown to be beneficially owned by the directors and
officers as a group include (i) 1,589,814 shares held of record by them, (ii)
409,774 shares to be issued to them under the anti-dilution provisions of the
Letter Agreement, (iii) 176,644 shares held of record by Mr. Kiernan (under
which Mr. Ferrentino, President of the Company, has voting power) and (iv)
45,530 additional shares to be issued to Mr. Kiernan under the anti-dilution
provisions of the Letter Agreement which will also be subject to the Voting
Agreement. The ownership percentage has been calculated as if the shares to be
issued to him under the anti-dilution provisions of the Letter Agreement were
options which are currently exercisable.
(5) The shares beneficially owned by Mr. Paterek, a consultant to the
Company, include 1,324,844 shares currently held of record by him and 341,478
additional shares to be issued to him under the anti-dilution provisions of the
Letter Agreement. His ownership percentage has been calculated as if the shares
to be issued under the anti-dilution provisions of the Letter Agreement were
options which are currently exercisable.
(6) John Harvey and Peter R. Harvey, each of whom formerly served as an
officer and director of the Company, control the management and operations of
ARTRA, which owns 19.6% of the Company's common stock. Insofar as they are
deemed beneficial owners of the Company's shares owned of record by ARTRA, Peter
R. Harvey owns 2,074,833 shares (21.5%) of the Company's Common Stock and John
Harvey owns 1,955,333 shares (20.2%) of the Company's Common Stock. Each such
person maintains a business address at 500 Central Avenue, Northfield, Illinois
60093.
(7) ARTRA, through a wholly-owned subsidiary, Fill-Mor Holding, Inc.
("Fill-Mor"), a Delaware corporation (hereinafter all holdings of Fill-Mor are
referred to as ARTRA's), presently owns 1,880,000 shares of record (19.6% of the
outstanding Common Stock of COMFORCE). ARTRA agreed in the Letter Agreement to
direct Fill-Mor to vote in favor of current management's nominees for the Board
of Directors. Additionally, ARTRA directed Fill-Mor to execute a limited proxy
to current management of the Company providing that ARTRA and/or Fill-Mor shall
vote its shares in all manners in favor of the conditions of the Letter
Agreement.
(8) The shares beneficially owned by Cypress Partners L.P. consist of
620,000 shares issuable upon conversion of 6,200 shares of Series E Preferred
Stock held by it and 110,000 shares issuable upon conversion of 1,100 shares of
Series E Preferred Stock held by Cypress International Partners Limited, an
affiliate of Cypress Partners L.P.
(9) The shares beneficially owned by Dobbins Partners L.P. consist of
489,215 shares held of record by Dobbins and 225,000 shares issuable upon the
exercise of a warrant held by it.
(10) The shares beneficially owned by Marc Werner consist of (i)
100,000 shares held of record by him, (ii) 816,765 shares held of record by
Manufacturers Indemnity and Insurance Company of America, 5775 Flat Iron
Parkway, No. 205, Boulder, Colorado 80301 ("MIICA"), a corporation controlled by
him, and (iii) 285,000 shares issuable upon the exercise of a warrant held by
MIICA.
(11) The shares beneficially owned by Mr. Iodice consist of 370,419
shares issuable upon the exercise of an option held by Nitsua, Ltd., a
corporation wholly-owned by Mr. Iodice (granted under the Option Plan). See
"Transactions with Management and Others--Transactions with Austin A. Iodice
Related to Discontinued Jewelry Business." Mr. Iodice was chief executive
officer of the Company when the Company was engaged in its discontinued jewelry
business and known as The Lori Corporation.
Compliance with Certain Reporting Requirements
Michael Ferrentino, a director and officer of the Company, Christopher
Franco, an officer of the Company, and James L. Paterek, a beneficial owner of
more than 10% of the Company's Common Stock, failed to timely file Form 3s
(reporting beneficial ownership of the Company's Common Stock) during fiscal
1995. This failure to timely file was inadvertent, information concerning their
acquisition of an interest in the Company had previously been disclosed in other
documents which were filed with the Securities and Exchange Commission, and none
of the these individuals traded any of the securities beneficially owned by them
during the brief period of noncompliance.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Transactions with New Management
On June 29, 1995, the Company entered into a letter agreement with
Michael Ferrentino, the President and a Director of the Company, Christopher P.
Franco, an Executive Vice President of the Company, and James L. Paterek, the
holder of a significant amount of the Company's issued and outstanding Common
Stock, subsequently amended as of October 6, 1995 (as amended, the "Letter
Agreement"), pursuant to which Messrs. Ferrentino and Franco agreed to serve as
employees of, and Mr. Paterek agreed to serve as a business consultant to, the
Company to enable the Company to enter into the telecommunications and computer
staffing business. As consideration for agreeing to provide such services to the
Company, the Company agreed to (i) issue to Messrs. Ferrentino, Franco and
Paterek and one other individual who agreed to serve as a Vice President of
COMFORCE Global, Kevin W. Kiernan (collectively, the "Designated Individuals"),
such number of shares of Common Stock 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 Jewelry Business; (iii) nominate four individuals
selected by the Designated Individuals to serve on the Company's Board of
Directors; (iv) enter into two-year employment agreements with Messrs.
Ferrentino and Franco and a three-year business consulting agreement with Mr.
Paterek; and (v) reserve for issuance to the Designated Individuals and other
employees of the Company options or warrants to purchase 10% of the Company's
then issued and outstanding Common Stock together with additional shares issued
and warrants or options to purchase additional shares granted between October 6,
1995 and December 1, 1995.
On October 6, 1995, 3,091,302 shares of the Company's Common Stock in
the aggregate were issued to the Designated Individuals and 796,782 additional
shares are to be issued under the anti-dilution provisions of the Letter
Agreement, all as follows:
Shares Shares
Issued to be Issued Total Shares
Michael Ferrentino 794,907 204,887 999,794
Christopher P. Franco 794,907 204,887 999,794
James L. Paterek 1,324,844 341,478 1,666,322
Kevin W. Kiernan 176,644 45,530 222,174
------- ------ -------
Total 3,091,302 796,782 3,888,084
ARTRA, then the majority stockholder of the Company, previously
approved the issuance of such shares. The Company has made a loan of $345,000 in
the aggregate to the Designated Individuals to cover their tax liabilities
resulting from these transactions. The obligations are evidenced by notes which
bear interest at the rate of 6% per annum and mature on December 10, 1997.
See "Executive Compensation--Employment Agreements" for a description
of the employment agreements entered into between the Company and each of Messrs
Ferrentino and Franco, which description is incorporated herein by reference.
In October 1995, the Company entered into a consulting agreement with
Tarek Corporation ("Tarek"), which is a corporation wholly-owned by Mr. Paterek.
Mr. Paterek, age 34, was a founder of COMFORCE Global and served as its
President from 1985 to September 1995. Tarek has agreed to engage Mr. Paterek to
perform the services required under the agreement. Under the terms of the
agreement, Tarek has agreed to devote at least 50 hours per month performing
services for the Company. The agreement is for a term of three years and is
terminable by the Company only for "good cause." "Good cause" includes Paterek's
fraud, misappropriation of Company assets, or the commission of a felony during
the term of the agreement which is directly related to the Company and causes it
material harm. Tarek has the right to terminate the agreement upon 30 days
notice or immediately in the event of a change in control. Under this agreement,
the consultant is entitled to compensation of $157,000 annually plus
reimbursement for expenses incurred in performing its duties under the
agreement. In addition, Mr. Paterek is entitled to participate in the Company's
normal benefit programs. If the Company terminates the agreement without good
cause, Tarek shall be entitled to receive full compensation for the balance of
the term of the agreement. The agreement requires Tarek to enter into an
agreement with Mr. Paterek under which he agrees not to compete with the Company
during the term of the agreement and not to disclose confidential information.
Yield Industries, Inc., a corporation wholly-owned by Messrs. Paterek
and Ferrentino earned a delivery fee of $500,000 in connection with the Company
s acquisition of COMFORCE Global, $250,000 of which was paid in 1995, the
balance of which was paid in January 1996. Yield Industries, Inc. was not
affiliated with COMFORCE Global.
Transactions with Peter R. Harvey Related to Current Operations
The purchase price paid by the Company for the COMFORCE Global stock
was approximately $6.4 million, net of cash acquired, consisting of cash of
approximately $5.6 million and 500,000 shares of the Company's Common Stock
issued as consideration for various fees and guarantees associated with the
transaction. The 500,000 shares issued by the Company included 150,000 shares
issued to Peter R. Harvey, then a Vice President and director of the Company,
for guaranteeing certain of the Company's obligations, including guaranteeing to
Spectrum that the COMFORCE Global acquisition would be completed. The dollar
amount of Mr. Harvey's obligation was equal to the $6.4 million purchase price
of COMFORCE Global. The closing price of the Company's Common Stock on the
American Stock Exchange on October 17, 1995, the date of the closing of the
COMFORCE Global acquisition, was $4.50. Based on this price, the shares awarded
to Mr. Harvey had a value of $675,000. See "Proposal No. 3-- Ratification of the
COMFORCE Global Transactions--Description of the Transactions." Peter R. Harvey,
age 61, served the Company as its Director from 1982 to December 1995 and Vice
President from July 1995 to December 1995. He has also served as the President,
Chief Operating Officer and as a Director of ARTRA since 1968 and a Director of
Pure Tech International, Inc. (textiles, hose and tubing) since 1995.
Transactions with ARTRA Related to Current Operations
ARTRA owns approximately 19.6% of the Company's currently issued and
outstanding Common Stock.
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) for 100,000 shares of the Company's Common Stock. The liquidation
value of the Series C Preferred Stock was $19.5 million in the aggregate as of
the effective date of the exchange, December 15, 1995. The closing price of the
Company's Common Stock on the American Stock Exchange on October 17, 1995, the
date of the closing of the COMFORCE Global acquisition, was $4.50. Based on this
price, the shares awarded to ARTRA had a value of $450,000.
In addition, to facilitate this acquisition, on October 17, 1995, in
conjunction with the COMFORCE Global acquisition, the Company and ARTRA entered
into the Assumption Agreement, under which ARTRA agreed to pay and discharge
substantially all of the then existing liabilities and obligations of the
Company, including indebtedness, corporate guarantees, accounts payable and
environmental liabilities. ARTRA also agreed to assume responsibility for all
liabilities of the Jewelry Business from and after October 17, 1995, and is
entitled to receive the net proceeds, if any, from the sale thereof. On April
12, 1996, ARTRA sold the business and certain of the assets of the Company's
Lawrence subsidiary 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. In
addition, in the first quarter of 1996, ARTRA paid $647,000 of the liabilities
assumed under the Assumption Agreement. Liabilities assumed by ARTRA in the
amount of approximately $4.24 million are shown on the Company's balance sheet
at December 31, 1995.
Transactions with ARTRA Related to Discontinued Jewelry Business
ARTRA first acquired an interest in the Company in August 1982. As of
October 6, 1995 (immediately prior to the issuance of stock to the Designated
Individuals), ARTRA held an approximately 63% interest in the Company, and held
9,701 shares of Series C Preferred Stock (representing all of the then issued
and outstanding Preferred Stock of the Company).
The Company made advances to ARTRA of $399,000 in 1995 and $54,000 in
1996. In the first quarter of 1996, ARTRA repaid these advances.
In August 1994, ARTRA entered into a $1,850,000 short-term loan
agreement with a non-affiliated corporation, the proceeds of which were advanced
to the Company and used to fund amounts due the Company's bank. The loan, due
June 30, 1995, was collateralized by 100,000 shares of the Company's common
stock. In August 1995, these shares were transferred to the lender in
consideration of extending the loan, and the carrying value of these 100,000
shares ($700,000) was transferred to ARTRA as reduction of amounts then due to
ARTRA by the Company.
In 1995, ARTRA provided certain financial, accounting and
administrative services for the Company's corporate entity. During 1995, the
fees for these services amounted to $91,000.
Transactions with Austin A. Iodice Related to Discontinued Jewelry Business
In April 1993, the Company entered into a management agreement with
Nitsua, Ltd. ("Nitsua"), a corporation wholly-owned by Austin A. Iodice, then
the Vice Chairman, President and Chief Executive Officer of the Company. This
management agreement was approved and accepted by the Company's New Dimensions,
Rosecraft and Lawrence subsidiaries (the "Jewelry Subsidiaries"). Pursuant to
the terms of this agreement, Mr. Iodice had all of the responsibilities of a
chief executive officer of the Company and the Jewelry Subsidiaries (subject to
the supervision of the boards of directors of the Company and the Jewelry
Subsidiaries). This agreement, which was scheduled to terminate on March 31,
1996, was earlier terminated upon Mr. Iodice's resignation as an officer and
director of the Company in December 1995. As compensation for its services under
the agreement, Nitsua received (i) a management fee of $260,000 per annum, (ii)
reimbursement of all documented expenses reasonably incurred by Nitsua in
connection with the performance of its duties, and (iii) options to purchase
370,419 shares of the Company's Common Stock at an exercise price of $1.125 per
share.
Austin A. Iodice, age 54, served the Company as its Director from 1990
to December 1995, and as its Vice Chairman, President and Chief Executive
Officer from 1992 to December 1995. He has also served as President of Ansa
Company, Inc. (baby bottles and accessories) from 1990 to present. Prior
thereto, Mr. Iodice was associated with Technical Tape Incorporated (pressure
sensitive tape) from 1964 to 1989 in various capacities, including as a director
and most recently as president and chief executive officer from 1980 until 1989.
Transactions with Alex Verde Related to Discontinued Jewelry Business
In 1994, ARTRA and Fill-Mor (a wholly-owned subsidiary of ARTRA)
entered into a settlement agreement with its bank lender, IBJ Schroder Bank &
Trust Company ("Schroder") to discharge the indebtedness of the Company, its
operating subsidiaries and Fill-Mor aggregating approximately $25,000,000. Upon
payment of certain sums and satisfaction of certain conditions, this
indebtedness was reduced to $10,500,000. Under the terms of the amended
settlement agreement with Schroder, this remaining indebtedness was to be
discharged upon payment to Schroder of $750,000 by March 31, 1995 and upon
ARTRA's registration of certain shares of its common stock.
The Company did not have sufficient funds available to repay this indebtedness.
Accordingly, on March 31, 1995, Alex Verde, a director of the Company, entered
into an assignment agreement with Schroder to purchase this indebtedness for
$750,000, and advanced an additional $100,000 to the Company. In this
connection, Mr. Verde and the Company also entered into an agreement whereby he
reduced this indebtedness to $850,000 in consideration of the Company's issuance
to him of 150,000 shares of its common stock valued at $337,500 ($2.25 per
share) based upon closing market value of the shares on March 30, 1995. This
loan, which was originally due July 31, 1995 (subsequently extended to September
15, 1995), was repaid in February 1996 by ARTRA, which had assumed the
obligation to repay the loan under the terms of the Assumption Agreement. As
compensation for agreeing to extend the maturity date of the loan, Mr. Verde
received an additional 50,000 shares of the Company's Common Stock on August 2,
1995 with a market price of $103,125 ($2.0625 per share) based upon the closing
price of the shares on the American Stock Exchange on the date issued.
Alexander Verde, age 62, served as Director from 1990 to December 1995.
He has served on the President of AVS Marketing Specialists Incorporated (sales
and marketing) from 1974 to present.
STOCKHOLDERS' PROPOSALS
To be considered for inclusion in the Company's Proxy Statement for the
1997 Annual Meeting of Stockholders, stockholder proposals must be sent to the
Company (directed to the attention of Office of the Secretary, at 2001 Marcus
Avenue, Lake Success, New York 11042, for receipt not later than February 1,
1997.
GENERAL AND OTHER MATTERS
Management knows of no matters, other than those referred to in this
Proxy Statement, which will be presented to the meeting. However, if any other
matters properly come before the meeting or any adjournment, the persons named
in the accompanying proxy will vote it in accordance with their best judgment on
such matters.
The Company will bear the expense of preparing, printing and mailing
this Proxy Statement, as well as the cost of any required solicitation. In
addition to the solicitation of proxies by use of the mails, the Company may use
regular employees, without additional compensation, to request, by telephone or
otherwise, attendance or proxies previously solicited.
Upon written request to the Company (directed to the attention of the
Office of the Secretary at 2001 Marcus Avenue, Lake Success, New York 11042) by
any stockholder whose proxy is solicited hereby, the Company will furnish a copy
of any exhibits to its Annual Report on Form 10-K for the year ended December
31, 1995 upon a reasonable charge to cover the costs of copying the same.
By the Order of the Board of Directors
Christopher P. Franco
Secretary
Lake Success, New York
August __, 1996
INDEX TO FINANCIAL STATEMENTS
Page
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements as of December 31, 1994
and 1995 and for each of the three years
in the period ended December 31, 1995
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedules
II. Valuation and Qualifying Accounts
Condensed Consolidated Financial Statements as of June 30, 1996
and for the three and six months then ended June 30, 1995 and 1996
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Changes in Shareholders' Equity
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
COMFORCE GLOBAL, INC.
Financial Statements as of September 30, 1995 and for the
nine month period ended September 30, 1995 and
as of December 31, 1994 and
for the year ended December 31, 1994
Report of Independent Accountants
Balance Sheets
Statements of Operations and Retained Earnings (accumulated deficit)
Statements of Cash Flows
Notes to Combined Financial Statements
WILLIAMS COMMUNICATION SERVICES, INC.
Financial Statements as of December 31, 1995 and
for the year ended December 31, 1995
Report of Independent Accountants
Balance Sheet
Statement of Operations and Retained Earnings
Statement of Cash Flows
Notes to Financial Statements
RRA, INC. AND AFFILIATES
Combined Financial Statements as of December 31, 1995 and 1994
and for the years then ended
Report of Independent Accountants
Combined Balance Sheets
Combined Statements of Income
Combined Statements of Changes in Shareholders' Equity
Combined Statements of Cash Flows
Notes to Combined Financial Statements
Combined Financial Statements as of December 31, 1994 and 1993
and for the years then ended
Report of Independent Accountants
Combined Balance Sheets
Combined Statements of Income
Combined Statements of Changes in Shareholders' Equity
Combined Statements of Cash Flows
Notes to Combined Financial Statements
Schedules other than those listed are omitted as they are not applicable or
required or equivalent information has been included in the financial statements
or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
COMFORCE Corporation
We have audited the consolidated financial statements and the financial
statement schedules of COMFORCE Corporation (formerly The Lori Corporation) and
Subsidiaries as listed in the index on page F-1 of this of this Form S-1. These
financial statements and financial statement schedules are the responsibility of
COMFORCE Corporation's management. Our responsibility is to express an opinion
on these financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
COMFORCE Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
April 15, 1996
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, December 31,
1995 1994
-------- --------
ASSETS
Current assets:
Cash and equivalents $649 $783
Restricted cash and equivalents - 550
Receivables, including $56 of amounts
due from related parties and $151 of
unbilled revenue in 1995 and
allowance for doubtful accounts
and markdowns of $1,338 in 1994 1,754 814
Inventories - 2,105
Other 61 260
Receivable from ARTRA GROUP Incorporated 1,046 -
--------- ---------
Total current assets 3,510 4,512
--------- ---------
Property and equipment
Equipment 97 1,376
Leasehold improvements - 187
--------- ---------
97 1,563
Less accumulated depreciation and amortization 7 1,119
--------- ---------
90 444
--------- ---------
Other assets:
Excess of cost over net assets acquired,
net of accumulated amortization of
$51 in 1995 and $3,415 in 1994 4,801 13,140
Other 135 608
--------- ---------
4,936 13,748
--------- ---------
$8,536 $18,704
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, December 31,
1995 1994
-------- --------
LIABILITIES
Current liabilities:
Notes payable $500
Current maturities of long-term debt - $750
Accounts payable, including $289 due to
ARTRA GROUP Incorporated in 1994 75 3,703
Accrued expenses, including $250 due to
a related party in 1995 719 905
Income taxes 214 -
Liabilities to be assumed by
ARTRA GROUP Incorporated,
and net liabilities of
discontinued operations 3,699 -
--------- ---------
Total current liabilities 5,207 5,358
--------- ---------
Debt subsequently discharged - 7,105
--------- ---------
Noncurrent liabilities to be
assumed by ARTRA GROUP Incorporated 541 -
--------- ---------
Obligations expected to be settled by
the issuance of common stock 550 -
--------- ---------
Other noncurrent liabilities - 963
--------- ---------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value,
authorized 1,000 shares,
all series; Series C, issued 10 shares in 1994,
including accrued dividends - 19,515
Common stock, $.01 par value;
authorized 10,000 shares;
issued 9,309 shares in 1995
and 3,265 shares in 1994 92 32
Less restricted common stock (100 shares) - (700)
Additional paid-in capital 95,993 65,392
Accumulated deficit (93,847) (78,961)
--------- ---------
2,238 5,278
--------- ---------
$8,536 $18,704
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
COMFORCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
(In thousands, except per share data)
1995 1994* 1993*
--------- --------- ---------
Revenues $2,387
---------
Costs and expenses:
Cost of revenues 1,818
Stock compensation 3,425
Selling, general and administrative 823 $966 $701
--------- --------- ---------
6,066 966 701
--------- --------- ---------
Operating loss (3,679) (966) (701)
--------- --------- ---------
Other expense:
Interest expense (585) (1,316) (754)
Other expense, net (33) - (1)
--------- --------- ---------
(618) (1,316) (755)
--------- --------- ---------
Loss from continuing operations
before income taxes (4,297) (2,282) (1,456)
Provision for income taxes (35) - -
--------- --------- ---------
Loss from continuing operations (4,332) (2,282) (1,456)
Loss from discontinued operations (17,211) (16,220) (216)
--------- --------- ---------
Loss before extraordinary credits (21,543) (18,502) (1,672)
Extraordinary credits,
net discharge of indebtedness 6,657 8,965 22,057
--------- --------- ---------
Net earnings (loss) ($14,886) ($9,537) $20,385
========= ========= =========
Earnings (loss) per share:
Continuing operations ($0.95) ($0.72) ($0.39)
Discontinued operations (3.74) (5.08) (0.06)
--------- --------- ---------
Loss before extraordinary credits (4.69) (5.80) (0.45)
Extraordinary credits 1.45 2.81 6.03
--------- --------- ---------
Net earnings (loss) ($3.24) ($2.99) $5.58
========= ========= =========
Weighted average number of shares
of common stock and common
stock equivalents outstanding 4,596 3,195 3,656
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
- -----------------------------------------------
* As reclassified for discontinued operations.
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1995, 1994 and 1993
(In thousands, except share data)
Restricted Total
Preferred Stock Common Stock Common Stock Additional Shareholders'
----------------- ------------------- ---------------- Paid-in Accumulated Equity
Shares Dollars Shares Dollars Shares Dollars Capital (Deficit) (Deficit)
------- --------- ---------- ------- -------- ------- --------- ---------- -----------
Balance at December 31, 1992 7,459 $17,273 3,148,526 $31 $44,626 ($89,809) ($27,879)
Net earnings - - - - - 20,385 20,385
Transfer of notes payable
to ARTRA to Lori's
capital account - - - - 15,990 - 15,990
Exercise of stock
options and warrants - - 9,250 - 38 - 38
Common stock issued to
pay liabilities - - 5,532 - 32 - 32
Fractional shares purchased - - (536) - (6) - (6)
------- --------- ---------- ------- -------- ---------- -----------
Balance at December 31, 1993 7,459 17,273 3,162,772 31 60,680 (69,424) 8,560
Net loss - - - - - (9,537) (9,537)
ARTRA capital contributions - - - - 4,000 - 4,000
Lori preferred stock issued
in exchange for ARTRA
notes and advances 2,242 2,242 - - - - 2,242
Common stock issued under terms
of debt settlement agreement - - 100,000 1 699 - 700
Restricted common stock - - - 100,000 ($700) - - (700)
Exercise of stock
options and warrants - - 2,500 - - - 13 - 13
Fractional shares purchased - - (253) - - - - - -
------- --------- ---------- ------- -------- ------- -------- ---------- -----------
Balance at December 31, 1994 9,701 19,515 3,265,019 32 100,000 (700) 65,392 (78,961) 5,278
Net earnings - - - - - - - (14,886) (14,886)
Common stock issued as
consideration for
debt restructuring - - 150,000 2 - - 335 - 337
Common stock issued as
additional consideration for
short-term borrowings - - 141,176 1 - - 229 - 230
Common stock issued
to pay liabilities - - 115,098 1 - - 374 - 375
Common stock sold through
private placements - - 1,946,667 19 - - 5,820 - 5,839
Common stock issued under
compensation agreements with
individuals to manage the
Company's telecommunications
and computer technical
staffing services business - - 3,091,304 31 - - 2,844 - 2,875
Common stock issued as
additionalconsideration for
Global purchase guarantee - - 350,000 3 - - 587 - 590
Common stock issued as
compensation for
Global acquisition fees - - 150,000 2 - - 251 - 253
Common stock issued to ARTRA
in exchange for the Company's
entire preferred stock issue (9,701) (19,515) 100,000 1 - - 19,514 - -
Restricted common stock issued
as additonal consideration
for short-term borrowings - - - - (100,000) 700 - - 700
Liabilities assumed by ARTRA - - - - - - 647 - 647
Fractional shares purchased - - (66) - - - - - -
------- --------- ---------- ------- -------- ------- -------- ---------- -----------
Balance at December 31, 1995 - - 9,309,198 $92 - - $95,993 ($93,847) $2,238
======= ========= ========== ======= ======== ======= ======== ========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
COMFORCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
--------- --------- ---------
Cash flows from operating activities:
Net earnings (loss) ($14,886) ($9,537) $20,385
Adjustments to reconcile net earnings (loss)
to cash flows from operating activities:
Extraordinary gain from net discharge of indebtedness (6,657) (8,965) (22,057)
Provision for disposal of fashion costume jewelry business 1,600 - -
Depreciation of property, plant and equipment 101 438 503
Amortization of excess of cost over net assets acquired 261 1,018 1,018
Impairment of goodwill 12,930 10,800 -
Amortization of other assets 374 648 217
Common stock compensation 3,657 - -
Changes in assets and liabilities, net of the effects of
the acquisition of COMFORCE Global and
the discontinued fashion costume jewelry business:
(Increase) decrease in receivables 857 2,117 (1,503)
Decrease in inventories 2,105 1,098 1,453
Decrease in other current and noncurrent assets 170 153 574
Decrease in payables and accrued expenses (2,127) (513) (616)
Increase (decrease) in other current and noncurrent liabilities (408) (468) (521)
--------- --------- ---------
Net cash flows used by operating activities (2,023) (3,211) (547)
--------- --------- ---------
Cash flows from investing activities:
Acquisition of COMFORCE Global, net of cash acquired (5,580) - -
Additions to property, plant and equipment (25) (32) (108)
Retail fixtures (631) (665) (951)
Payment of liabilities with restricted cash 550 (550) -
--------- --------- ---------
Net cash flows used by investing activities (5,686) (1,247) (1,059)
--------- --------- ---------
Cash flows from financing activities:
Net increase in short-term debt 2,486 (138) (12)
Proceeds from long-term borrowings - 1,241 4,863
Reduction of long-term debt (750) (444) (3,587)
Proceeds from private placement of common stock 5,839 - -
ARTRA capital contribution - 1,500 -
Notes and advances from ARTRA - 2,531 -
Other - 11 49
--------- --------- ---------
Net cash flows from financing activities 7,575 4,701 1,313
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (134) 243 (293)
Cash and equivalents, beginning of year 783 540 833
--------- --------- ---------
Cash and equivalents, end of year $649 $783 $540
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
COMFORCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
--------- --------- ---------
Supplemental cash flow information:
Cash paid during the year for:
Interest $273 $435 $1,421
Income taxes paid (refunded), net 7 24 12
Supplemental schedule of noncash investing and financing activities:
Common stock issued as consideration for
debt restructuring and short-term loans $567 - -
Common stock issued for fees and costs
in conjunction with the acquisition of COMFORCE Global 843 - -
Issue common stock to pay liabilities 374 - -
ARTRA common stock issued to Lori's bank lender
under terms of the debt settlement agreement - $2,500 -
Transfer New Dimensions assets, net of cash of $674,
to Lori's bank lender under terms of the debt settlement agreement - 6,475 -
Lori preferred stock issued in exchange for ARTRA notes and advances - 2,242 -
Notes payable to ARTRA transferred to Lori's capital account - - $15,990
Debt refinanced - - 6,105
The accompanying notes are an integral part of the consolidated financial
statements.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of COMFORCE Corporation
("COMFORCE" or the "Company"), formerly The Lori Corporation ("Lori") are
presented on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company currently operates in one industry segment as a provider of
telecommunications and computer technical staffing and consulting services
worldwide. As discussed in Note 4, in September 1995, the Company adopted a plan
to discontinue its Jewelry Business ("Jewelry Business") conducted by its two
wholly-owned subsidiaries Lawrence Jewelry Corporation ("Lawrence") and
Rosecraft, Inc. ("Rosecraft").
At December 31, 1994, ARTRA GROUP INCORPORATED ("ARTRA"), a public company whose
shares are traded on the New York Stock Exchange, owned, through its
wholly-owned subsidiary Fill-Mor Holding, Inc. ("Fill-Mor"), approximately 62.9%
of the common stock and all of the outstanding preferred stock of the Company.
As discussed in Note 15, at December 31, 1995, ARTRA owned approximately 25% of
the Company's common stock.
As discussed in Note 3, on September 11, 1995, Lori signed a stock purchase
agreement to participate in the acquisition of one hundred percent of the
capital stock of COMFORCE Global Inc. ("COMFORCE Global"), formerly Spectrum
Global Services, Inc. d/b/a YIELD Global, a wholly owned subsidiary of Spectrum
Information Technologies, Inc. COMFORCE Global provides telecommunications and
computer technical staffing and consulting services worldwide to Fortune 500
companies and maintains an extensive, global database of technical specialists,
with an emphasis on wireless communications capability. On October 17, 1995,
Lori completed the acquisition of one hundred percent of the capital stock of
COMFORCE Global. In connection with the re-focus of Lori's business, Lori
changed its name to COMFORCE Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Intercompany accounts and
transactions are eliminated.
B. Cash Equivalents
Short-term investments with an initial maturity of less than ninety days are
considered cash equivalents.
As required under terms of a debt settlement agreement (see Note 7), at December
31, 1994, the Company maintained a deposit in trust of $550,000 to fund the
installment payment due December 31, 1994 for unsecured claims arising from the
May 3, 1993 reorganization of the Company's former New Dimensions Accessories,
Ltd., ("New Dimensions") subsidiary. The installment payment was made in
January, 1995.
C. Accounts Receivable and Unbilled Accounts Receivable
Accounts receivable consists of those amounts due to the Company for staffing
services rendered to various customers. Accrued revenue consists of revenues
earned and recoverable costs for which billings have not yet been presented to
the customers as of the balance sheet date.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
D. Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to operations as incurred and expenditures for major
renovations are capitalized. Depreciation is computed on the basis of estimated
useful lives principally by the straight line method for financial statement
purposes and principally by accelerated methods for tax purposes. Leasehold
improvements are amortized over the shorter of the estimated useful life of the
asset or the period covered by the lease.
The costs of property retired or otherwise disposed of are applied against the
related accumulated depreciation to the extent thereof, and any profit or loss
on the disposition is recognized in earnings.
E. Intangible Assets and Other Assets
The net assets of a purchased business are recorded at their fair value at the
date of acquisition. At December 31, 1995, the excess of purchase price over the
fair value of net assets acquired (goodwill) is reflected as an intangible asset
and amortized on a straight-line basis over a period of 20 years.
The Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through forecasted future operations. Impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges) expected
to result from the use or sale of the asset and its eventual disposition, to the
carrying amount of the asset.
F. Revenue Recognition
Revenue for providing staffing services is recognized at the time such services
are rendered.
G. Income Taxes
Income taxes are accounted for as prescribed in Statement of Financial
Accounting Standards No. 109 - Accounting for Income Taxes. Under the asset and
liability method of Statement No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities, and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years those
temporary differences are expected to recovered or settled.
H. Use of Estimates In Preparation of Financial Statements
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
I. Recently Issued Accounting Pronouncements
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges) expected
to result from the use or sale of the asset and its eventual disposition, to the
carrying amount of the asset. This new accounting principle is effective for the
Company's fiscal year ending December 31, 1996. The Company believes that
adoption will not have a material impact on its financial statements.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does
not require, companies to recognize compensation expense for grants of stock,
stock options, and other equity instruments to employees based on new fair value
accounting rules. Although expense recognition for employee stock based
compensation is not mandatory, the pronouncement requires companies that choose
not to adopt the new fair value accounting, to disclose the pro-forma net income
and earnings per share under the new method. This new accounting principle is
effective for the Company's fiscal year ending December 31, 1996. The Company
believes that adoption will not have a material impact on its financial
statements as the Company will not adopt the new fair value accounting, but
instead comply with the disclosure requirements.
3. COMFORCE GLOBAL ACQUISITION
On September 11, 1995, Lori signed a stock purchase agreement to participate in
the acquisition of one hundred percent of the capital stock of COMFORCE Global,
Inc. ("COMFORCE Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD
Global, a wholly owned subsidiary of Spectrum Information Technologies, Inc.
("Spectrum") for consideration of approximately $6.4 million, net of cash
acquired. This consideration consisted of cash to the seller of approximately
$5.1 million, fees of approximately $700,000, including a fee of $500,000 to a
related party, and 500,000 shares of the Company's Common Stock valued at
$843,000 (at a price per share of $1.68) issued as consideration for various
fees and guarantees associated with the transaction. The 500,000 shares issued
by the Company consisted of (i) 100,000 shares issued to an unrelated party for
guaranteeing the purchase price to the seller, (ii) 100,000 shares issued to
ARTRA, then the majority stockholder of the Company, in consideration of its
guaranteeing the purchase price to the seller and agreeing to enter into the
Assumption Agreement, (iii) 150,000 issued to two unrelated parties for advisory
services in connection with the acquisition, and (iv) 150,000 shares issued to
Peter R. Harvey, then a Vice President and director of the Company, for
guaranteeing the payment of the purchase price to the seller and other
guarantees to facilitate the transaction. The shares issued to Peter R. Harvey
and ARTRA are subject to ratification by the Company's stockholders. Such shares
have the same rights and privileges as other common stock shareholders. While
the shareholders of these new shares will vote on this issue, the vote is a
ratification of the transaction. Failure to ratify this transaction would have
no impact on the outcome of the transaction as ratification is being performed
to meet American Stock Exchange listing requirements. These transactions have
been approved by current management personnel and ARTRA, which together own a
majority of the outstanding shares of the Company's Common Stock and, therefore,
such ratification is expected. Additionally, in conjunction with the COMFORCE
Global acquisition, ARTRA has agreed to pay and discharge substantially all
pre-existing Lori liabilities and indemnify COMFORCE in the event any future
liabilities arise concerning pre-existing environmental matters and business
related litigation.
COMFORCE Global provides telecommunications and computer technical staffing
services worldwide to Fortune 500 companies and maintains an extensive, global
database of technical specialists, with an emphasis on wireless communications
capability. The acquisition of COMFORCE Global, completed on October 17, 1995,
was accounted for by the purchase method and, accordingly, the assets and
liabilities of COMFORCE Global were included in the Company's financial
statements at their estimated fair market value at the date of acquisition and
of COMFORCE Global's operations are included in the Company's statement of
operations from the date of acquisition. The excess of purchase price over the
fair value of COMFORCE Global's net assets acquired (goodwill) of $4,852,000 is
being amortized on a straight-line basis over twenty years. In connection with
the re-focus of the Company's business, Lori changed its name to COMFORCE
Corporation.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The acquisition of COMFORCE Global was funded principally by private placements
of approximately 1,950,000 shares of the Company's common stock at $3.00 per
share (total proceeds of approximately $5,800,000) plus detachable warrants to
purchase approximately 970,000 shares of the Company's common stock at $3.375
per share. The warrants expire five years from the date of issue.
The following unaudited pro forma condensed consolidated statements of
operations for the years ended December 31, 1995 and 1994, present the Company's
results of operations as if the acquisition of COMFORCE Global and the related
private placement of the Company's common stock had been consummated as of
January 1, 1994.
COMFORCE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1995
(In thousands)
COMFORCE Pro Forma
Historical Global (A) Adjustments Pro Forma
---------- ---------- ----------- -----------
Revenues $ 2,387 $ 9,568 $ 11,955
---------- ---------- ----------
Operating costs and expenses:
Stock compensation (E) 3,425 3,425
Other operating costs and expenses 2,641 8,575 $ 50 (B) 11,266
---------- ---------- ------ ----------
6,066 8,575 50 14,691
---------- ---------- ------ ----------
Operating earnings (loss) (3,679) 993 (50) (2,736)
---------- ---------- ------ ----------
Spectrum corporate management fees (D) (1,140) (1,140)
Interest and other non-operating expenses (618) 7 410 (C) (201)
---------- ---------- ------ ----------
(618) (1,133) 410 (1,341)
---------- ---------- ------ ----------
Earnings (loss) from continuing operations
before income taxes (4,297) (140) 360 (4,077)
(Provision) credit for income taxes (35) 21 (14)
---------- ---------- ------ ----------
Loss from continuing operations $ (4,332) $ (119) $ 360 $ (4,091)
========== ========== ====== ==========
Loss per share from continuing operations $ (.95) $ (.44)
========== ==========
Weighted average shares outstanding (F) 4,596 9,309
========== ==========
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
COMFORCE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1994
(In thousands)
COMFORCE Pro Forma
Historical Global (A) Adjustments Pro Forma
---------- ---------- ----------- -----------
Revenues $ 8,245 $ 8,245
Operating costs and expenses $ 966 7,551 $ 68(B) 8,585
---------- ---------- ------ ----------
Operating earnings (loss) (966) 694 (68) (340)
---------- ---------- ------ ----------
Spectrum corporate management fees (D) (803) (803)
Interest and other non-operating expenses (1,316) 9 (1,307)
---------- ---------- ----------
(1,316) (794) (2,110)
---------- ---------- ------ ----------
Loss from continuing operations before income taxes (2,282) (100) (68) (2,450)
Provision for income taxes (15) (15)
---------- ---------- ------ ----------
Loss from continuing operations $ (2,282) $ (115) $ (68) $ (2,465)
========== ========== ====== ==========
Loss per share from continuing operations $ (.72) $ (.28)
========== ==========
Weighted average shares outstanding (F) 3,195 8,833
========== ==========
Pro forma adjustments to the unaudited condensed consolidated statement of
operations:
(A) The pro forma data presented for COMFORCE Global's operations is
for the periods prior to its acquisition on October 17, 1995, or
January 1, 1995 through October 16, 1995 and January 1, 1994
through December 31, 1994, respectively.
(B) Amortization of goodwill arising from the COMFORCE Global
Acquisition. The table below reflects where amortization of
goodwill has been recorded.
1995 1994
-------- --------
Historical Lori (Comforce Corp.) $ 51,000 $ -
Historical Global` 142,000 175,000
Proforma Adjustments 50,000 68,000
-------- --------
Adjusted proforma per financial
statements $243,000 $243,000
======== ========
(C) Reverse interest expense on notes and other liabilities to be
assumed by ARTRA. The interest adjustment in 1995 was for
interest on notes directly related to Lori Corporation activities
and were incurred in 1995. These liabilities were not outstanding
during 1994 and, accordingly, a similar interest adjustment is
not required.
(D) Corporate management fees from COMFORCE Global's former parent,
Spectrum Information Technologies,Inc. The amount of these
management fees may not be representative of costs incurred by
COMFORCE Global on a stand alone basis.
(E) Represents a non-recurring compensation charge related to the
issuance of the 35% common stock interest in the Company to
certain individuals to manage the Company's entry into and
development of the telecommunications and computer technical
staffing business.
(F) Pro forma weighted average shares outstanding includes shares of
the Company's common stock issued in the private placement that
funded the COMFORCE Global transaction, including 100,000 shares
issued to a non-related party, and 150,000 shares issued to Peter
R. Harvey, then a Vice President of the Company, for guaranteeing
the payment of the purchase price to the seller and other
guarantees associated with the COMFORCE Global acquisition and
shares issued certain individuals to manage the Company's entry
into and development of the telecommunications and computer
technical staffing business.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. DISCONTINUED OPERATIONS
In September 1995, the Company adopted a plan to discontinue its Jewelry
Business. A provision of $1,000,000 was recorded in September 1995 and an
additional provision of $600,000 was recorded during the fourth quarter of 1995
for the estimated costs to complete the disposal of the Jewelry Business.
The Company's consolidated financial statements have been reclassified to report
separately results of operations of the discontinued Jewelry Business.
Additionally, in conjunction with the COMFORCE Global acquisition (see Note 3),
ARTRA has agreed to assume sustantially all pre-existing liabilities of the
Company and its discontinued Jewelry Business and indemnify COMFORCE in the
event any future liabilities arise concerning pre-existing environmental matters
and business related litigation. Accordingly at December 31, 1995, the Company's
consolidated balance sheet has been reclassified to report separately the net
liabilities to be assumed by ARTRA, including net liabilities of the
discontinued Jewelry Business (see Note 9). The December 31, 1994 consolidated
balance has not been reclassified.
The operating results of the discontinued Jewelry Business for the nine months
ended September 30, 1995 and the years ended December 31, 1994 and 1993 (in
thousands) consists of:
1995 1994 1993
---------- ---------- ----------
Net sales $ 10,588 $ 34,431 $ 46,054
========== ========== ==========
Loss from operations before
income taxes $ (15,606) $ (16,210) $ (183)
Provision for income taxes (5) (10) (33)
---------- ---------- ----------
Loss from operations (15,611) (16,220) (216)
---------- ---------- ----------
Provision for disposal
of business (1,600) - -
Provision for income taxes - - -
---------- ---------- ----------
Loss on disposal of business (1,600) - -
---------- ---------- ----------
Loss from discontinued operations $ (17,211) $ (16,620) $ (216)
========== ========== ==========
In April 1996, ARTRA sold the business and certain assets of the Jewelry
Business. As discussed above, ARTRA has agreed to assume any liabilities of the
discontinued Jewelry Business and will be entitled to the net proceeds, if any
from its disposition.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. INVENTORIES
At December 31, 1994 inventories of the Company's discontinued Jewelry Business
(in thousands) consisted of:
Raw materials and supplies $ 115
Work in process 19
Finished goods 1,971
-------
$ 2,105
=======
Inventories were stated at the lower of cost or market, with cost determined by
the first-in, first-out (FIFO) method.
6. CONCENTRATION OF RISK
The accounts receivable of the Company's COMFORCE Global subsidiary at December
31, 1995 consist primarily of amounts due from telecommunication companies. As a
result, the collectibility of these receivables is dependent, to an extent, upon
the economic condition of the telecommunications industry. At December 31, 1995,
COMFORCE Global had 9 customers with accounts receivable balances that
aggregated 67% of the Company's total trade accounts receivable. Percentages of
total revenues from significant customers from the date of COMFORCE Global's
acquisition (October 17, 1995) through December 31, 1995 are summarized as
follows:
Customer 1 17.3%
Customer 2 12.6%
Customer 3 10.1%
The Company's COMFORCE Global subsidiary maintains cash in bank accounts which
at times may exceed federally insured limits. COMFORCE Global has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on its cash balances. Management believes it mitigates
such risk by investing its cash through major financial institutions.
7. EXTRAORDINARY GAINS RELATED TO DISCONTINUED OPERATIONS
Per terms of a debt settlement agreement, borrowings due a bank under the loan
agreements of Lori and its fashion costume jewelry subsidiaries and Fill-Mor
(approximately $25,000,000 as of December 23, 1994), plus amounts due the bank
for accrued interest and fees were reduced to $10,500,000 (of which $7,855,000
pertained to Lori's obligation to the bank and $2,645,000 pertained to
Fill-Mor's obligation to the bank). Upon the satisfaction of certain conditions
of the Amended Settlement Agreement in March 1995, as discussed below, the
balance of this indebtedness was discharged.
In conjunction with the debt settlement agreement, ARTRA entered into a
$1,850,000 short-term loan agreement with a non-affiliated corporation, the
proceeds of which were advanced to Lori and used to fund amounts due the bank as
discussed below. The loan, due June 30, 1995, with interest payable monthly at
10%, was collateralized by 100,000 shares of the
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Company's common stock. The 100,000 shares of the Company's common stock,
originally issued to the bank under terms of a debt settlement agreement, were
carried in the Company's consolidated balance sheet at December 31, 1994 as
restricted common stock. In August, 1995 the loan was extended until September
15, 1995 and the lender received the above mentioned 100,000 shares of the
Company's common stock as consideration for the loan extension. The loan was
repaid by ARTRA in February, 1996.
The Company recognized an extraordinary gain of $8,965,000 ($2.81 per share) in
December 1994 as a result of the reduction of amounts due the bank under the
loan agreements of Lori and its operating subsidiaries and Fill-Mor to
$10,500,000 (of which $7,855,000 pertained to Lori's obligation to the bank and
$2,645,000 pertained to Fill-Mor's obligation to the bank) as of December 23,
1994. The 400,000 shares of ARTRA common stock issued as consideration for the
debt settlement agreement (with a fair market value of $2,500,000 based upon the
closing market price on the date of issue) were contributed by ARTRA to Lori's
capital account. The extraordinary gain was calculated (in thousands) as
follows:
Amounts due the bank under loan agreements of Lori
and its fashion costume jewelry subsidiaries $ 22,749
Less amounts due the bank at December 29, 1994 (7,855)
--------
Bank debt discharged 14,894
Accrued interest and fees discharged 3,635
Other liabilities discharged 1,985
Less consideration to the bank per terms of the
amended settlement agreement
Cash (1,900)
ARTRA common stock (400,000 shares) (2,500)
New Dimensions assets assigned to the
bank at estimated fair value (7,149)
--------
Net extraordinary gain $ 8,965
========
On March 31, 1995 the $750,000 note due the bank was paid and the remaining
indebtedness of Lori and Fill-Mor was discharged, resulting in an additional
extraordinary gain to the Company of $6,657,000 ($1.45 per share) in the first
quarter of 1995. The $750,000 note payment was funded with the proceeds of a
$850,000 short-term loan from a former director of the Company. As consideration
for assisting in the debt restructuring, the former director received 150,000
shares of the Company's common stock valued at $337,500 ($2.25 per share) based
upon the Company's closing market value on March 30, 1995. The first quarter
1995 extraordinary gain was calculated (in thousands) as follows:
Amounts due the bank under loan agreements
of Lori and its operating subsidiaries $ 7,855
Less amounts due the bank applicable to Lori (561)
--------
Bank debt discharged 7,294
Less fair market value of the Company's
common stock issued as consideration
for the debt restructuring (337)
Other fees and expenses (300)
--------
Net extraordinary gain $ 6,657
========
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The reorganization of Lori's former New Dimensions subsidiary resulted in a 1993
extraordinary gain of $22,057,000 ($6.03 per share) from a net discharge of
indebtedness calculated (in thousands) as follows:
Amount due on New Dimensions' 12.75% Senior Notes,
including accrued interest $ 22,822
Trade liabilities and accrued expenses 3,231
--------
Total unsecured claims 26,053
Less present value of payments
due to unsecured creditors (2,725)
Less present value of bank
restructuring loan fee (1,271)
--------
Net extraordinary gain $ 22,057
========
8. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt (in thousands) consists of:
December 31, December 31,
1995 1994
------ ------
Notes payable
Amount due to a former related party,
interest at the prime rate plus 1% $ 750
Accounts receivable credit facility,
discontinued operations 1,535
Other, interest principally at 15% 1,736
4,021
Less:
Liabilities to be assumed by ARTRA (1,986)
Liabilities included with
discontinued operations (1,535)
------
$ 500
======
Long-term debt
Amounts due a bank term under terms of
a debt settlement agreement $ 7,855
Current scheduled maturities (750)
Debt subsequently discharged (7,105)
------
$ -
======
In October 1995, COMFORCE Global entered into an agreement with a bank that
provides for a revolving line of credt with interest at the prime rate plus
1/2%. Borrowings, collateralized by the assets of COMFORCE Global and an
unlimited guarantee of COMFORCE, are limited to a a borrowing base, as defined
in the agreement, up to a maximum of $800,000. As of December 31, 1995, COMFORCE
Global had not yet utilized any funds available under the revolving credit loan.
The fair value of the Company's notes payable is estimated based on the quoted
market prices of the same or similar issues or on the current rates offered to
the Company for notes of the same remaining maturity.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As discussed in Note 7, ARTRA, Fill-Mor, Lori and Lori's fashion costume jewelry
subsidiaries entered into an agreement with Lori's bank lender to settle
obligations due the bank. As partial consideration for the debt settlement
agreement the bank received a $750,000 Lori note payable due March 31, 1995.
The $750,000 note due the bank was paid and the remaining indebtedness of Lori
and Fill-Mor was discharged, resulting in an additional extraordinary gain to
Lori of $6,657,000 in 1995. The $750,000 note payment was funded with the
proceeds of a $850,000 short-term loan from a former director of the Company.
The loan provided for interest at the prime rate plus 1%. As consideration for
assisting with the debt restructuring, the former director received 150,000
shares of the Company's common stock valued at $337,500 ($2.25 per share) based
upon the closing market value on March 30, 1995. The $337,500 represented
additional compensation for debt restructuring and as such was charged against
the extraordinary gain from debt restructuring in 1995. The principal amount of
the loan was reduced $750,000 at July 31, 1995. The remaining loan principle was
not repaid on its scheduled to maturity date of July 31, 1995. Per terms of the
loan agreement, the former director received an additional 50,000 of the
Company's common stock as compensation for the non-payment of the loan at its
originally scheduled maturity. The additional 50,000 shares at a value of
approximately $82,000 has been charged to interest expense in 1995. At December
31, 1995, the $750,000 note was classified in the Company's consolidated balance
sheet as liabilities to be assumed by ARTRA. The loan was paid in full in March
1996 by ARTRA pursuant to the assumption agreement as discussed in Note 9.
During the second and third quarters of 1995, Lori entered into a series of
agreements with certain unaffiliated lenders that provided for short-term loans
with interest at 15%. As additional compensation certain lenders received an
aggregate of 91,176 shares of the Company's common stock valued at approximately
$149,000 (which amount was included in interest expense in 1995) and certain
lenders received warrants to purchase an aggregate of 195,000 shares of the
Company's common stock at prices ranging from $2.00 per share to $2.50 per
share, the fair market value at the dates of grant. The warrants expire five
years from the date of issue. The proceeds from these loans were used to fund
the September $500,000 down payment on the COMFORCE Global acquisition, with the
remainder used to fund working capital requirements of the Company's
discontinued Jewelry Business. At December 31, 1995, short-term loans with an
aggregate principal balance of $1,236,000 were classified in the Company's
consolidated balance sheet as liabilities to be assumed by ARTRA.
In August, 1995 Lori obtained a credit facility for the factoring of the
accounts receivable of its discontinued Jewelry Business. The credit facility
provides for advances of 80% of receivables assigned, less allowances for
markdowns and other merchandise credits. The factoring charge, a minimum of
1.75% of the receivables assigned, increases on a sliding scale if the
receivables assigned are not collected within 45 days. Borrowings under the
credit facility are collateralized by the accounts receivable, inventory and
equipment of Lori's discontinued fashion costume jewelry subsidiaries and
guaranteed by Lori. At December 31, 1995 outstanding borrowings under this
credit facility of $1,535,000, along with other net liabilities of the
discontinued Jewelry Business, were classified in the Company's consolidated
balance sheet as liabilities to be assumed by ARTRA and net liabilities of the
discontinued Jewelry Business.
9. LIABILITIES TO BE ASSUMED BY ARTRA GROUP INCORPORATED AND NET
LIABILITIES OF DISCONTINUED OPERATIONS
In conjunction with the COMFORCE Global acquisition (see Note 3), ARTRA 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.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, 1995 liabilities to be assumed by ARTRA GROUP Incorporated and
net liabilities of the discontinued Jewelry Business (in thousands) consist of:
Current:
Liabilities to be assumed by ARTRA
Notes payable $1,986
Court ordered payments 990
Accrued expenses 349
------
3,325
Net liabilities of the discontinued
Jewelry Business 374
------
$3,699
======
Noncurrent:
Liabilities to be assumed by ARTRA
Court ordered payments $ 541
======
As noted in the table above, as of December 31, 1995, ARTRA has agreed to assume
$3,866,000 of pre-existing Lori liabilities. Subsequent to December 31, 1995
ARTRA made net payments of $647,000 to reduce pre-existing Lori liabilities.
Such payments have been included in the Company's consolidated financial
statements at December 31, 1995 as amounts receivable from ARTRA and as
additional paid-in capital. To the extent ARTRA is able to make subsequent
payments, they will be recorded as additional paid-in capital. The ability of
ARTRA to satisfy these obligations is uncertain. The financial statements of
ARTRA include an explanatory paragraph indicating substantial doubt about the
ability of ARTRA to continue as a going concern. The amounts receivable from
ARTRA, exclusive of subsequent payments have not been reflected in the Company's
financial statements at December 31, 1995. No collateral has been provided in
support of these obligations.
At December 31, 1995, liabilities to be assumed by ARTRA included $1,531,000 of
court ordered payments arising from the May 3, 1993 reorganization of New
Dimensions. As of April 15, 1996, the $541,000 installment payment due December
31, 1995 has not been paid.
10. PREFERRED STOCK
The Company's Series C cumulative preferred stock, owned in its entirety by
ARTRA, accrued dividends at the rate of 13% per annum on its liquidation value.
Book value and accumulated dividendsof $7,011,000 on this stock aggregated
$19,515,000 at December 31, 1994. In the fourth quarter of 1995, ARTRA exchanged
its Series C cumulative preferred stock for 100,000 newly issued shares of the
Company's common stock. The issuance of these shares of the Company's common
stock to ARTRA are subject to ratification by the Company's shareholders.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. STOCK OPTIONS AND WARRANTS
Long-Term Stock Investment Plan
On December 16, 1993 Lori's stockholders approved the Long-Term Stock Investment
Plan (the "1993 Plan"), effective January 1, 1993, which authorizes the grant of
options to purchase the Company's common stock to executives, key employees and
non-employee consultants and agents of the Company and its subsidiaries. The
1993 Plan authorizes the awarding of Stock Options, Incentive Stock Options and
Alternative Appreciation Rights. The 1993 Plan reserved 1,500,000 shares of the
Company's common stock for grant on or before December 31, 2002.
As of March 16, 1993, the Company's Board of Directors approved the issuance of
non-qualified options to purchase an aggregate of 555,628 shares of the
Company's common stock at an exercise price of $1.125 per share (the closing
price of Lori common stock on March 15, 1993) to a corporation controlled by the
former vice chairman , president and director of the Company and to an agent of
the Company. The options were granted in connection with management agreements
entered into with them pursuant to which they agreed to provide managerial and
supervisory services to the Company and its discontinued fashion costume jewelry
subsidiaries. Additionally, as of March 16, 1993, the Company's Board of
Directors approved the issuance of options to purchase an aggregate of 370,000
shares of the Company's common stock at an exercise price of $1.125 per share
(the closing price of the Company's common stock on March 15, 1993) to then
certain executives, key employees, agents and a director of the Company. The
options were granted under the Company's 1982 Stock Option Plan (the "1982
Plan"), subject to stockholder approval of the amendment of the 1982 Plan.
Subsequent thereto, counsel to the Company advised the Board that the 1982 Plan,
which had expired, could not be amended and extended.
Accordingly, on October 12, 1993, the Board of Directors of the Company approved
a proposed Long-Term Stock Investment Plan of the Company (the "Plan" or the
"Option Plan") which authorizes the grant of options to purchase the Company's
common stock to executives, key employees and agents of the Company and its
subsidiaries. In connection with this approval, the Board approved the issuance
under the Plan (subject to the approval and adoption of the Plan by the
stockholders) of options on the same terms as the original March 16, 1993
options which it had previously authorized under the 1982 Plan. The Plan was
approved by the stockholders at the December 16, 1993 annual meeting, effective
as of January 1, 1993.
Incentive Stock Option Plan
Options to purchase common shares of the Company have been granted to certain
officers and key employees under the 1982 Incentive Stock Option Plan ("the
plan"), which initially reserved 250,000 shares of the Company's common stock.
On December 19, 1990, the Company's stockholders approved an increase in the
number of shares available for grant under the plan to 500,000. The plan expired
in 1992. At December 31, 1995, options to purchase 4,500 shares of the Company's
common stock at $5.00 per share were outstanding. The options expire June 9,
1998.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summary of Options
A summary of stock option transactions for the years ended December 31
is as follows:
1995 1994 1993
--------- --------- ---------
Outstanding at January 1:
Shares 959,378 1,098,544 19,416
$ 1.125 $ 1.125 $ 5.00
Prices to to to
$ 5.00 $ 12.19 $ 12.19
Options granted:
Shares - - 1,079,628
$ 1.125
Prices - - to
$ 3.125
Options exercised:
Shares - (2,500) (500)
Price - $ 5.00 $ 5.00
Options canceled:
Shares (19,250) (136,666) -
$ 3.125 $ 3.125
Prices to to -
$ 5.00 $ 12.19
Outstanding at December 31:
Shares 940,128 959,378 1,098,544
========= ======== =========
$ 1.125 $ 1.125 $ 1.125
Prices to to to
$ 5.00 $ 5.00 $ 12.19
Options exercisable at December 31 940,128 940,710 18,916
========= ======== =========
Options available for future grant
at December 31 564,372 546,372 420,372
========= ======== =========
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Warrants
At December 31, 1995, warrants were outstanding to purchase a total of 1,184,583
of the Company's common shares at prices ranging from $2.00 per share to $4.00
per share. The warrants expire five years from the date of issue at various
dates through 2000.
The acquisition of COMFORCE Global was funded principally by private placements
of approximately 1,950,000 of the Company's common shares at $3.00 per share
(total proceeds of approximately $5,800,000) plus detachable warrants to
purchase 973,333 Lori common shares at $3.375 per share. The warrants expire
five years from the date of issue.
Principally during the second and third quarters of 1995, Lori entered into a
series of agreements with certain unaffiliated investors that provided for
$1,800,000 of short-term loans that provide for interest at 15%. As additional
compensation certain lenders received an aggregate of 91,176 Lori common shares
and certain lenders received warrants to an aggregate of 195,000 shares of the
Company's common stock at prices ranging from $2.00 per share to $2.50 per
share, the fair market value at the dates of grant. The warrants expire five
years from the date of issue.
On November 23, 1988, Lori issued warrants to purchase 25,000 of its common
shares, at $4.00 per share, to an investment banker as additional compensation
for certain financial and advisory services. During 1993, the warrant holder
exercised warrants to purchase 8,750 shares of the Company's common stock. At
December 31, 1995, warrants to purchase 16,250 shares of the Company's common
stock at $4.00 per share remained outstanding.
12. COMMITMENTS AND CONTINGENCIES
The Company's COMFORCE Global subsidiary leases certain office space and
equipment used in its telecommunications and computer technical staffing
services business. At December 31, 1995, future minimum lease payments under
operating leases that have an initial or remaining noncancellable term of more
than one year (in thousands) are:
Year
1996 $ 62
1997 64
1998 65
1999 63
2000 38
-------
$ 292
=======
Rental expense from continuing operations was $17,000 in 1995.
The aggregate commitment for future salaries at December 31, 1995, excluding
bonuses, during the remaining term of all management and employment agreements
is approximately $700,000.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. INCOME TAXES
A summary of the provision (credit) for income taxes relating to operations is
as follows:
1995 1994 1993
-------- -------- -------
(in thousands)
Continuing operations:
State $ 35 $ 10 $ 33
======== ======== ========
The 1995 and 1994 extraordinary credits represent net gains from discharge of
bank indebtedness under the loan agreements of Lori and its discontinued fashion
costume jewelry subsidiaries. The 1993 extraordinary credit represents a gain
from a net discharge of indebtedness at the Company's former New Dimensions
subsidiary. No income tax expense is reflected in the Company's financial
statements resulting from the extraordinary credits due to the utilization of
tax loss carryforwards.
The difference between the statutory Federal income tax rate and the effective
income tax rate is reconciled as follows:
% of Earnings (Loss)
Before Income Taxes
----------------------------
1995 1994 1993
------ ------ ------
Statutory Federal tax rate
Provision (Benefit) (34.0) (34.0) 35.0
State and local taxes,
net of Federal benefit .3 .1 .2
Current year tax loss not utilized 4.7 - -
Amortization of goodwill .6 3.6 .8
Impairment of goodwill 30.0 38.6 -
Previously unrecognized benefit from
utilizing tax loss carryforwards - (8.2) (35.8)
----- ----- -----
1.6 .1 .2
===== ===== =====
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. INCOME TAXES, Continued
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the deferred
tax liabilities and deferred tax assets at December 31, 1995 and 1994 and their
approximate tax effects (in thousands) are as follows:
1995 1994
------------------------ ---------------------------
Temporary Tax Temporary Tax
Difference Difference Difference Difference
---------- ---------- ---------- ----------
Trade accounts receivable $ 500 $ 200 $ 1,300 $ 500
Inventories
700 300 300 100
Accrued other
900 300 400 200
Net operating loss 42,000 16,400 54,000 21,100
-------- ---------
Total deferred tax asset 17,200 21,900
-------- ---------
Machinery and equipment (200) (100) (400) (200)
-------- --------
Total deferred tax liability
(100) (200)
-------- --------
Valuation allowance (17,100) (21,700)
-------- --------
Net deferred tax asset $ - $ -
======== ========
The Company has recorded a valuation allowance with respect to the future tax
benefits and the net operating loss reflected in deferred tax assets as a result
of the uncertainty of their ultimate realization.
At December 31, 1995, the Company and its subsidiaries had Federal income tax
loss carryforwards of approximately $42,000,000 available to be applied against
future taxable income, if any, expiring principally in 1996 - 2010. Section 382
of the Internal Revenue Code of 1986 limits a corporation's utilization of its
Federal income tax loss carryforwards when certain changes in the ownership of a
corporation's common stock occurs. The Company has recently issued a significant
number of shares of its common stock in conjunction with the COMFORCE Global
acquisition and certain related transactions. Accordingly, the Company is
currently subject to significant limitations regarding the utilization of its
Federal income tax loss carryforwards.
14. EARNINGS PER SHARE
Earnings (loss) per share is computed by dividing net earnings (loss) by the
weighted average number of shares of common stock and common stock equivalents
(options and warrants), unless anti-dilutive, outstanding during the year. Fully
diluted earnings per share is not presented since the result is equivalent to
primary earnings per share.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. RELATED PARTY TRANSACTIONS
Effective July 4, 1995, Lori's management agreed to issue up to a 35% common
stock interest in the Company to certain individuals to manage the Company's
entry into the telecommunications and computer technical staffing business
(approximatley 3,700,000 shares after ceratain anti-dilutive provisions). In
October 1996, the Company issued approximately 3,100,000 shares of its common
stock to the above individuals. The remaining common shares due the above
individuals will be issued in 1996 after shareholder approval of an increase in
Company's authorized common shares. The Company recognized a non-recurring
charge of $3,425,000 related to this stock since these stock awards were 100%
vested when issued, and were neither conditioned upon these individuals' service
to the Company as employees nor the consumation of the COMFORCE Global
acquisition. Accordingly, this compensation charge was fully recognized in 1995.
The cost of the remaining common shares to be issued in 1996 ($550,000) is
classified in the Company's consolidated balance sheet at December 31, 1995 as
obligations expected to be settled by the issuance of common stock. The shares
of the Company's common stock issued and to be issued in accordance with the
above agreements were valued at $.93 per share based upon the Company's average
closing market price on the American Stock Exchange for the period beginning 5
business days prior to and ending 5 business days after the acceptance of the
employment or consulting services agreements (July 4, 1995), as discounted for
dilution, blockage and restricted marketability. After the issuance of these
common shares, plus the effects of the issuance of common shares sold by private
placements and other common shares issued in conjunction with the COMFORCE
Global acquisition, ARTRA's common stock ownership interest in the Company was
reduced to approximately 25% at December 31, 1995.
In December 1995 the Company made loans totaling $56,000 to the above named
individuals to cover income tax liabilities relating to the issuances of shares
of the Company's common stock. Subsequent to December 31, 1995, the Company made
additional loans to these individuals totaling $289,000. All loans are evidenced
by notes which bear interest at 6% per annum and mature December 10, 1997.
In connection with the COMFORCE Global acquisition, a $500,000 fee was earned by
the above mentioned consultant, of which $250,000 was paid in 1995.
In conjunction with an agreement (see Note 7) to settle borrowings due a bank
under the loan agreements of Lori and its fashion costume jewelry subsidiaries
and Fill-Mor, ARTRA entered into a $1,850,000 short-term loan agreement with a
non-affiliated corporation, the proceeds of which were advanced to Lori and used
to fund amounts due Lori's bank. The loan, due June 30, 1995, was collateralized
by 100,000 shares of Lori common stock. These 100,000 Lori common shares,
originally issued to the bank under terms of the August 18, 1994 Settlement
Agreement, were carried in the Company's consolidated balance sheet at December
31, 1994 as restricted common stock. In August, 1995 the loan was extended until
September 15, 1995 and the lender received the above mentioned 100,000 Lori
common shares as consideration for the loan extension. The loan was repaid by
ARTRA in February, 1996. Accordingly, the carrying value of these 100,000 Lori
common shares was transferred to ARTRA as reduction of amounts due to ARTRA.
In the fourth quarter of 1995, ARTRA exchanged its interest in the entire issue
of the Company's Series C cumulative preferred stock for 100,000 newly issued
shares of the Company's common stock. The issuance of these shares of the
Company's common stock to ARTRA are subject to ratification by the Company's
shareholders. During 1995, ARTRA received $399,000 of advances from the Company.
In 1996, the Company advanced ARTRA an additional $54,000. ARTRA repaid the
above advances and paid down $647,000 of the pre-existing Lori liabilities it
assumed in conjunction with the COMFORCE Global acquisition as discussed in Note
9. The $399,000 advance to ARTRA and the $647,000 payment on pre-existing Lori
liabilities made by ARTRA have been classified in the Company's consolidated
financial statements at December 31, 1995 as amounts receivable from ARTRA.
During 1994, ARTRA made net advances to Lori of $2,531,000. The advances
consisted of a $1,850,000 short-term note with interest at 10%, the proceeds of
which were used to fund the $1,900,000 cash payment to the bank in conjunction
with the Amended Settlement Agreement with Lori's bank lender, and certain
non-interest bearing advances used to fund Lori working capital requirements.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Effective December 29, 1994 ARTRA exchanged $2,242,000 of its notes and advances
for additional Lori Series C preferred stock. Additionally, the August 18, 1994
Settlement Agreement required ARTRA to contribute cash of $1,500,000 and ARTRA
common stock with a fair market value of $2,500,000 to Lori's capital account.
In February, 1993, ARTRA transferred all of its notes (with a principal value of
$15,990,000) to Lori's capital account.
Through 1995, ARTRA had provided certain financial, accounting and
administrative services for the Company's corporate entity. Additionally, the
Company's corporate entity had leased its administrative office space from
ARTRA. During 1995, 1994 and 1993 fees for these services amounted to $91,000,
$151,000 and $115,000, respectively.
16. LITIGATION
Prior to its entry into the Jewelry Business in 1985, the Company operated in
excess of 20 manufacturing facilities for the production of, inter alia,
photocopy machines, photographic chemical and paper coating. These operations
were sold or discontinued in the late 1970s and early 1980s. Certain of these
facilities may have used and/or generated hazardous materials and may have
disposed of the hazardous substances, particularly before the enactment of laws
governing the safe disposal of hazardous substances, at an indeterminable number
of sites. Although the controlling stockholders and current management had no
involvement in such prior manufacturing operations, the Company could be held to
be responsible for clean-up costs if any hazardous substances were deposited at
these manufacturing sites, or at off-site waste disposal locations, under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), or under other Federal or state environmental laws now or hereafter
enacted. However, except for the Gary, Indiana site described below, the Company
has not been notified by the Federal Environmental Protection Agency (the "EPA")
that it is a potentially responsible party for, nor is the Company aware of
having disposed of hazardous substances at, any site.
In December 1994, the Company was notified by the EPA that it is a potentially
responsible party under CERCLA for the disposal of hazardous substances at a
site in Gary, Indiana. The alleged disposal occurred in the mid-1970s at a time
when the Company conducted operations as APECO. In this connection, in December
1994, the Company was named as one of approximately 80 defendants in a case
brought in the United States District Court for the Northern District of Indiana
by a group of 14 potentially responsible parties who agreed in a consent order
entered into with the EPA to clean-up this site. The plaintiffs have estimated
the cost of cleaning up this site to be $45 million, and have offered to settle
the case with the Company for $991,445. This amount represents the plaintiffs'
estimate of the Company's pro rata share of the clean-up costs. The Company
declined to accept this settlement proposal, which was subsequently withdrawn.
The plaintiffs have produced only limited testamentary evidence, and no
documentary evidence, linking the Company to this site, and the Company has
neither discovered any records which indicate, nor located any current or former
employees who have advised, that the Company deposited hazardous substances at
the site. Based on the foregoing, management of the Company does not believe
that it is probable that the Company will have any liability for the costs of
the clean-up of this site. The Company intends to vigorously defend itself in
this case.
Under the terms of the Assumption Agreement, ARTRA 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.
17. SUBSEQUENT EVENTS
On March 1, 1996, COMFORCE Global, Inc., a wholly-owned subsidiary of COMFORCE
acquired substantially all of the assets of Williams Communication Services
("Williams"), a privately owned company engaged in the technical staffing,
consulting and outsourcing business for consideration consisting of cash of
$2,000,000 and contingent rights to future payments based on earnings over a
four year period. The acquisition of Williams, funded principally by a $2.25
million revolving credit facility with a bank, will be accounted for by the
purchase method.
The Company has entered into an agreement to acquire the assets and business of
RRA Inc. ("RRA"), a provider of technical staffing services in the electronics,
telecommunications and information technology business sectors. The completion
of the acquisition of RRA is subject to certain contingencies which include the
completion of and satisfaction with due diligence, as well as satisfactory
financing to complete the acquisition.
COMFORCE CORPORATION AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1995, 1994 and 1993
(in thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
----------------------
(1) (2)
Balance at Charged to Charged to
Beginning of Costs and Other Deductions Balance at
Description Period Expenses Accounts (Describe) End of Period
------------------- --------- ---------- ----------- ---------- -------------
For the year ended December 31, 1995:
Deducted from assets to which they apply:
Allowance for inventory valuation $ 207 $ 25 $ 232 $ -
======== ========= ======= ========
Allowance for markdowns $ 835 $ 291 $ 1,126 (A) $ -
Allowance for doubtful accounts 503 424 927 (A) -
-------- --------- ------- --------
$ 1,338 $ 715 $ 2,053 $ -
======== ========= ======= ========
For the year ended December 31, 1994:
Deducted from assets to which they apply:
Allowance for inventory valuation $ 4,150 $ 218 $ 4,161 (B) $ 207
======== ========= ======= ========
Allowance for markdowns $ 2,499 $ 4,799 $ 6,463 (C) $ 835
Allowance for doubtful accounts 432 269 198 (D) 503
-------- --------- ------- --------
$ 2,931 $ 5,068 $ 6,661 $ 1,338
======== ========= ======= ========
For the year ended December 31, 1993:
Deducted from assets to which they apply:
Allowance for inventory valuation $ 4,900 $ 172 $ 922 (B) $ 4,150
======== ========= ======= ========
Allowance for markdowns $ 5,280 $ 5,722 $ 8,503 (C) $ 2,499
Allowance for doubtful accounts 557 335 460 (D) 432
-------- --------- ------- --------
$ 5,837 $ 6,057 $ 8,963 $ 2,931
======== ========= ======= ========
(A) Principally amounts reclassified to discontinued operations.
(B) Principally inventory written off, net of recoveries.
(C) Principally markdowns taken.
(D) Principally uncollectible accounts written off, net of recoveries.
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1996
(Unaudited in thousands)
ASSETS
Current assets:
Cash and equivalents $2,228
Restricted cash and equivalents 50
Receivables including $487 of unbilled revenue 6,709
Prepaid expenses 119
Officer loans 331
Other 218
----------
Total current assets 9,655
----------
Property, plant and equipment 420
Less accumulated depreciation and amortization 68
----------
352
----------
Other assets:
Excess of cost over net assets acquired,
net of accumulated amortization of $251 12,051
Other 66
----------
12,117
----------
$22,124
==========
The accompanying notes are an integral part of the condensed consolidated
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1996
(Unaudited in thousands)
LIABILITIES
Current liabilities:
Borrowings under revolving line of credit $1,500
Accounts payable 566
Accrued expenses 1,145
Income taxes 265
Liabilities to be assumed by ARTRA GROUP Incorporated
and net of liabilities of discontinued operations 1,794
----------
Total current liabilities 5,270
----------
Obligations expected to be settled by the
issuance of common stock 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 96
Additional paid-in capital 15,754
Accumulated deficit -
Retained earnings since January 1, 1996 452
----------
16,304
----------
$22,124
==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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) --
-------- -------- -------- --------
Earnings (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 extraordinary credit 0.03 (4.56) 0.03 (4.64)
Extraordinary 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 liabilities 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 liabilities 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 Global 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 Assumption 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.
Report of Independent Accountants
To the Board of Directors of Comforce Global, Inc.:
We have audited the accompanying balance sheets of Comforce Global, Inc.
(formerly Spectrum Global Services, Inc., the "Company") as of September 30,
1995 and December 31, 1994, and the related statements of operations and
retained earnings (accumulated deficit) and cash flows for the nine month period
ended September 30, 1995 and the year ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Comforce Global, Inc. as of
September 30, 1995 and December 31, 1994, and the results of its operations and
its cash flows for the nine month period ended September 30, 1995 and the year
ended December 31, 1994, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Melville, New York
December 1, 1995
Comforce Global, Inc.
Balance Sheets
as of September 30, 1995 and December 31, 1994
September 30, December 31,
ASSETS: 1995 1994
------------ ------------
Current assets:
Cash and cash equivalents $ 1,186,868 $ 426,334
Accounts receivable 1,602,659 1,456,583
Unbilled accounts receivable 279,626 158,793
Prepaid expenses and other assets 23,173 32,664
------------ ------------
Total current assets 3,092,326 2,074,374
Property and equipment, net 93,708 55,877
Intangible assets 2,149,661 2,272,890
Other assets 14,491 25,477
------------ ------------
Total assets $ 5,350,186 $ 4,428,618
============ ============
LIABILITIES AND STOCKHOLDERS'EQUITY(DEFICIENCY):
Current liabilities (deficiency):
Accounts payable $ 42,792 $ 27,714
Accrued liabilities 423,580 229,703
Income taxes payable 24,453
Accounts payable - parent 978,855 178,106
Accounts payable - affiliates 30,980 30,086
------------ ------------
Total current liabilities 1,476,207 490,062
------------ ------------
Stockholders' equity (deficiency):
Capital stock 1 1
Additional paid-in capital 3,919,999 3,919,999
Retained earnings (accumulated deficit (46,021) 18,556
------------ ------------
Total stockholders' equity 3,873,979 3,938,556
------------ ------------
Total liabilities and
stockholders' equity (deficiency) $ 5,350,186 $ 4,428,618
============ ============
The accompanying notes are an integral part of the financial statements.
Comforce Global, Inc.
Statements of Operations and Retained Earnings (Accumulated Deficit)
Nine month
period ended Year ended
September 30, December 31,
1995 1994
------------ ------------
Sales $ 9,007,461 $ 8,244,721
------------ ------------
Direct costs and expenses:
Cost of sales 6,764,942 6,417,395
General and administrative expenses 1,159,168 1,133,298
Overhead charges from parent (Note 9) 1,139,560 803,280
------------ ------------
Total costs and expenses 9,063,670 8,353,973
------------ ------------
(56,209) (109,252)
Interest income 6,632 8,975
------------ ------------
Loss before provision for income taxes (49,577) (100,277)
Income tax provision 15,000 14,740
------------ ------------
Net loss (64,577) (115,017)
Retained earnings, beginning of year 18,556 133,573
------------ ------------
Retained earnings(accumulated deficit),
end of period $ (46,021) $ 18,556
============ ============
The accompanying notes are an integral part of the financial statements.
Comforce Global, Inc.
Statements of Cash Flows
Nine month
period ended Year ended
September 30, December 31,
1995 1994
------------ ------------
Cash flows from operating activities:
Net (loss) income $ (64,577) $ (115,017)
Adjustments to reconcile net income to cash
flows provided by operating activities:
Depreciation 18,836 10,173
Amortization 123,229 164,305
Changes in operating assets and liabilities:
Accounts receivable (146,076) (256,348)
Unbilled accounts receivable (120,833) (158,793)
Prepaid expenses 9,491 (9,186)
Deposits 10,986 (24,360)
Accounts payable 15,078 22,645
Accrued liabilities 193,877 139,216
Accounts payable - parent 800,749 178,106
Income taxes payable (24,453) (18,657)
Accounts payable - affiliate 894 30,086
------------ ------------
Net cash provided by (used in)
operating activities 817,201 (37,830)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (56,667) (54,318)
------------ ------------
Net cash used in investing activities (56,667) (54,318)
------------ ------------
Net increase (decrease) in cash
and cash equivalents 760,534 (92,148)
------------ ------------
Cash and cash equivalents, beginning of year 426,334 518,482
------------ ------------
Cash and cash equivalents, end of period $ 1,186,868 $ 426,334
============ ============
Cash paid for:
Income taxes $ 35,371 $ 51,884
============ ============
The accompanying notes are an integral part of the financial statements.
Comforce Global, Inc.
Notes to Combined Financial Statements
1. Description of Business:
Comforce Global, Inc. (formerly Spectrum Global Services, Inc., the "Company"),
a Delaware Corporation, became a wholly owned subsidiary of Spectrum Information
Technologies, Inc. through an acquisition of the Company's assets on October 31,
1993. On October 17, 1995, 100% of the stock of Spectrum Global Services, Inc.
was sold to Lori Corporation, at which time the Company changed its name to
Comforce Global, Inc.. The Company provides telecommunications and computing
staffing and consulting services worldwide.
2. Summary of Significant Accounting Policies:
Revenue Recognition
Revenue for providing staffing services is recognized at the time such services
are rendered.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid short-term investments with an
original maturity of three months or less. Cash equivalents consists primarily
of money market funds.
Accounts Receivable and Unbilled Accounts Receivable
Accounts receivable consists of those amounts due to the Company for staffing
services rendered to various customers. Accrued revenue consists of revenues
earned and recoverable costs for which billings have not yet been presented to
the customers as of the balance sheet dates.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to operations as incurred. Expenditures for betterments and
major renewals are capitalized. The cost of assets sold or retired and the
related amounts of accumulated depreciation are eliminated from the accounts in
the year of disposal, with any resulting profit or loss included in income.
Depreciation and amortization of assets are provided using the straight-line
method over the estimated useful life of the asset.
Intangibles
Goodwill is amortized over 15 years on a straight line basis.
Notes to Combined Financial Statements, Continued
Income Taxes
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse. A
valuation allowance is recorded to reduce deferred tax assets to their expected
realizable value. The cumulative effect of implementing SFAS No.
109 as of January 1, 1994 was not significant.
3. Purchase of Assets:
On October 31, 1993, Spectrum Information Technologies, Inc. purchased the
assets and assumed the liabilities of Yield Industries, Inc. ("Yield") and
Wintec Corporation ("Wintec"). Subsequent to this, the name was changed to
Spectrum Global Services, Inc. The acquisition has been accounted for as a
purchase. The fair value of the assets acquired, including goodwill, was
$4,120,000 and liabilities assumed totaled $199,000. Goodwill of approximately
$2,465,000 is being amortized over 15 years on a straight-line basis.
4. Property and Equipment:
Property and equipment are summarized as follows:
Life of
equipment 1995 1994
--------- --------- ---------
Office equipment 3-5 years $ 61,311 $ 37,211
Furniture and fixtures 5-years 65,144 32,577
--------- ---------
126,455 69,788
Less, accumulated depreciation 32,747 13,911
--------- ---------
$ 93,708 $ 55,877
========= =========
Notes to Combined Financial Statements, Continued
5. Income Taxes:
The provision for income taxes of $15,000 for the nine months ended September
30, 1995 and $14,740 for the year ended December 31, 1994 reflects minimum state
and local income taxes as the Company has state net operating losses on separate
Company returns. The Company files its federal income tax return as part of its
parent's consolidated return. Due to significant losses of the parent, the
Company has provided a full valuation on the potential future benefit from its
federal net operating losses. Net losses for financial reporting purposes do not
differ significantly from net losses for income tax purposes.
6. Concentration of Credit Risk:
The Company's accounts receivable as of September 30, 1995 and December 31, 1994
consist primarily of amounts due from telecommunication companies. As a result,
the collectibility of these receivables is dependent, to an extent, upon the
economic condition of the telecommunications industry. At September 30, 1995 and
December 31, 1994, the Company had four customers with accounts receivable
balances that aggregated 48% and 46%, respectively, of the Company's total
accounts receivable. Percentages of total revenues from significant customers
for the nine month period ended September 30, 1995 and the year ended December
31, 1994 are summarized as follows:
September 30, December 31,
1995 1994
------------ ------------
Customer 1 19.2% 19.9%
Customer 2 12.9% 12.8%
Customer 3 10.5% 9.9%
The Company maintains cash in bank accounts which at times may exceed federally
insured limits. The Company has not experienced any losses in such accounts and
believes they are not exposed to any significant credit risk on their cash
balances. The Company believes it mitigates such risk by investing its cash
through major financial institutions.
7. Accrued Expenses:
Accrued expenses consist of the following:
1995 1994
------------ ------------
Payroll and payroll taxes $ 274,864 $ 143,449
Workers' compensation 70,000 70,000
Professional fees 42,408 7,531
Vacation 27,595 8,723
Other 8,713
------------ ------------
$ 423,580 $ 229,703
============ ============
Notes to Combined Financial Statements, Continued
8. Commitments and Contingencies:
Leases
At September 30, 1995, future minimum annual rental commitments under
noncancelable operating leases are as follows:
1996 $ 57,388
1997 58,583
1998 60,703
1999 62,913
2000 54,111
----------
$ 293,698
==========
Total rent expense for the nine month period ended September 30, 1995 and the
year ended December 31, 1994 was $25,627 and $46,498, respectively.
9. Charges From Parent:
For the nine months ended September 30, 1995 and the year ended December 31,
1994, approximately $1,139,560 and $803,280, respectively, was charged to the
Company by its parent, Spectrum Information Technologies, Inc. as a management
charge which reflects an allocation of corporate overhead. Management expects
that such charges will no longer continue as a result of the sale of the Company
to Lori Corporation. Such charges may not represent expenses that would have
been incurred had the Company operated as a stand-alone entity. In addition, the
Company is charged by its parent company for insurance, rent, payroll,
professional fees, and other miscellaneous office expenses. Such charges
amounted to $236,808 and $506,113 for the nine month period ended September 30,
1995 and for the year ended December 31, 1994, respectively, and are included in
general and administrative expenses. The Company purchased furniture and
equipment and was charged miscellaneous office expenses from its affiliates.
Such charges amount to $1,014 and $29,967 in 1995 and 1994, respectively.
10. Other Matters:
On January 26, 1995, Spectrum Information Technologies, Inc., filed petition for
relief under Chapter 11 of the Bankruptcy Code (Spectrum Global Services, Inc.,
was not included in such filing). The sale of the stock of Spectrum Global
Services, Inc. to Lori Corporation on October 17, 1995 was formally approved by
the bankruptcy court.
Report of Independent Accountants
To the Shareholder
Williams Communication Services, Inc.
Englewood, Florida
We have audited the accompanying balance sheet of Williams Communication
Services, Inc. as of December 31, 1995 and the related statements of operations
and retained earnings and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Williams Communication
Services, Inc. as of December 31, 1995 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Fort Myers, Florida
May 6, 1996
Williams Communication Services, Inc.
Balance Sheet
December 31, 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 0
Accounts receivable 599,607
Unbilled accounts receivable 173,904
----------
Total current assets 773,511
PROPERTY AND EQUIPMENT, net 25,329
----------
Total assets $ 798,840
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,500
Accrued liabilities 14,486
Bank overdraft 49,313
Income tax payable 326,475
---------
Total current liabilities 391,774
---------
STOCKHOLDERS' EQUITY
Common stock, 1,000 shares,
issued and outstanding, $1 par value 1,000
Retained earnings 406,066
---------
Total stockholders' equity 407,066
---------
Total liabilities and stockholders' equity $ 798,840
=========
The accompanying notes are an integral part of these financial statements.
Williams Communication Services, Inc.
Statement of Operations and Retained Earnings
year ended December 31, 1995
Sales $ 4,177,871
-----------
Direct costs and expenses:
Cost of sales 3,021,251
General and administrative expenses 450,225
-----------
Total direct costs and expenses 3,471,476
-----------
Income before provision for income taxes 706,395
Income tax provision 354,056
-----------
Net income 352,339
Retained earnings, beginning of year 53,727
-----------
Retained earnings, end of year $ 406,066
===========
The accompanying notes are an integral part of these financial statements.
Williams Communication Services, Inc.
Statement of Cash Flows
year ended December 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 352,339
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 723
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable (293,361)
Unbilled accounts receivable (68,761)
Deposits 3,000
Other assets 240
Increase (decrease) in:
Accounts payable (256)
Accrued liabilities 290,692
Bank overdraft payable 49,313
----------
Net cash provided by operating activities 333,929
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (25,299)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of stockholder loan (309,500)
----------
Net decrease in cash and cash equivalents (870)
Cash and cash equivalents at beginning of year 870
----------
Cash and cash equivalents at end of year $ 0
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,586
==========
Cash paid during the year for income taxes $ 27,580
==========
The accompanying notes are an integral part of these financial statements.
Williams Communication Services, Inc.
Notes to Financial Statements
1. Description of Business:
Williams Communications Services, Inc. (the Company), a Florida
corporation, provides a wide range of technical and consulting services
to communication clients through the use of personnel who are designers,
drafters, engineers, programmers and other types of technicians. The
personnel are utilized by the clients on a temporary, project, or
peak-period basis.
2. Summary of Significant Accounting Policies:
Revenue Recognition: Revenue is recognized at the time such services are
rendered to the client.
Accounts Receivable and Unbilled Accounts Receivable: Accounts receivable
consists of those amounts due to the Company for services rendered to
various customers.
Unbilled accounts receivable consists of revenues earned and recoverable
costs for which billings have not yet been presented to the customers as
of the balance sheet date.
Property and Equipment: Property and equipment is recorded at cost.
Expenditures for maintenance and repairs are charged to operations as
incurred. Expenditures for betterments and major renewals are
capitalized. The cost of assets sold or retired and the related amounts
of accumulated depreciation are eliminated from the accounts in the year
of disposal, with any resulting profit or loss included in income.
Depreciation of assets have been computed using the straight-line method
over the estimated useful lives of the assets.
Income Taxes: The Company accounts for income taxes under the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS No. 109). Under the asset and liability method of
SFAS No. 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109,
the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
As of December 31, 1995, deferred tax assets and liabilities are
immaterial in amount, and management has elected not to record them in
the financial statements.
The provision for income taxes does not bear the normal relationship to
net income due to the deductibility of only a portion of the amount of
meals reimbursed to employees.
Notes to Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued
Management's Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
3. Property and Equipment:
Property and equipment consisted of the following at December 31, 1995:
Office equipment $ 15,000
Furniture and fixtures 3,342
Vehicle 25,300
----------
43,642
Less accumulated depreciation (18,313)
----------
$ 25,329
==========
4. Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
During the normal course of business, the Company extends credit to
customers located throughout the United States. At December 31, 1995, the
Company had approximately 90% or $699,000 of its billed and unbilled
accounts receivable due from two customers. The payment history of each
customer has been considered in determining the need for an allowance for
doubtful accounts. Sales to these customers aggregated approximately
$3,062,000, which represented approximately 74% of total sales for the
year ended December 31, 1995. The Company maintains substantially all of
its cash investments with what it believes to be high quality financial
institutions. The Company's investment policy is to limit concentrations
of credit risk.
5. Income Taxes:
For the year ended December 31, 1995, the provision for income taxes
represents current income taxes. The components of the Company's
provision for income taxes are as follows:
Federal $ 302,556
State 51,500
---------
$ 354,056
=========
6. Subsequent Event:
On February 29, 1996, all of the equipment and intangible assets used in
the operation of the Company's business were acquired by Comforce Global,
Inc.
To The Shareholders
RRA, Inc., Datatech Technical Services, Inc.
and Project Staffing Support Team, Inc.
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying combined balance sheets of RRA, Inc., Datatech
Technical Services, Inc., and Project Staffing Support Team, Inc. as of December
31, 1995 and 1994, and the related combined statements of income, changes in
shareholder's equity, and cash flows for the years then ended. These combined
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RRA, Inc., Datatech Technical
Services, Inc., and Project Staffing Support Team, Inc. as of December 31, 1995
and 1994, and the results of their operations and cash flows for the years then
ended in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic combined
financial statements taken as a whole. The information included in the
accompanying schedules is presented for purposes of additional analysis and is
not a required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
ALEXANDER & DEVOLEY, P.C.
Phoenix, Arizona
February 1, 1996
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED BALANCE SHEET
For the Years Ended December 31, 1995 and 1994
ASSETS
1995 1994
---------- ----------
CURRENT ASSETS:
Cash ...................................... $ 53,662 $ 426,312
Accounts receivable - trade ............... 5,292,779 3,434,704
Other accounts receivable ................. 4,810 10,411
Note receivable - employee, current
portion (Note 2) ........................ 9,440 1,810
Note receivable - related parties,
current portion (Note 2) ................ 237,114 148,050
Prepaid expenses .......................... 49,616 27,284
Investments ............................... 4,925 --
---------- ----------
Total current assets .......................... 5,652,346 4,048,571
---------- ----------
PROPERTY AND EQUIPMENT (NOTE 1):
Office furniture and equipment ............ 438,607 346,395
Leasehold improvements .................... 131,325 114,435
Vehicles .................................. 23,912 215,330
---------- ----------
593,844 676,160
Less accumulated depreciation and
amortization ............................ 329,890 321,003
---------- ----------
263,954 355,157
---------- ----------
OTHER ASSETS:
Refundable deposits ....................... 9,666 50,396
Note receivable - employee, long-
term portion (Note 2) ................... 8,829 7,412
Note receivable - related parties,
long-term portion (Note 2) .............. 216,000 216,000
Deferred loan fee, less amortization
of $3,333 in 1995 and $5,312 in 1994 .... 1,667 2,188
Organizational costs, less accumulated
amortization of $13,121 in 1995 and
$9,841 in 1994 (Note 1) ................. 3,280 6,560
Client lists, less amortization of
$14,625 in 1995 and $8,125 in 1994
(Note 1) ................................ 4,875 11,375
---------- ----------
244,317 293,931
---------- ----------
$6,160,617 $4,697,659
========== ==========
See accompanying notes to financial statements.
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED BALANCE SHEET
For the Years Ended December 31, 1995 and 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
1995 1994
---------- ----------
CURRENT LIABILITIES:
Bank overdraft ............................ $ 496,879 $ 148,474
Accounts payable .......................... 49,058 42,572
Notes payable (Note 4) .................... 38,183 59,823
Note payable - bank (Note 3) .............. 1,220,000 1,200,000
Note payable - shareholder; due
on demand at 9.5% ....................... 100,000 --
Current portion of long-term debt ......... 6,657 62,978
Accrued expenses:
Wages, vacation, and holiday ............ 756,096 817,041
Payroll taxes and withholdings .......... 182,469 170,283
Gross receipts tax ...................... 78,141 64,565
Self insurance claims (Note 1) .......... 140,000 120,000
Interest ................................ 9,483 10,999
Pension plan contributions (Note 8) ..... 720,000 285,287
---------- ----------
Total current liabilities ................. 3,796,966 2,982,022
---------- ----------
LONG-TERM DEBT (NOTE 5): ........................... -- 73,185
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock (Note 7) ..................... 19,560 19,560
Additional paid-in capital ................ 415,631 387,863
Retained earnings ......................... 1,928,460 1,235,029
---------- ----------
2,363,651 1,642,452
---------- ----------
$6,160,617 $4,697,659
========== ==========
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED STATEMENT OF INCOME
For the Years Ended December 31, 1995 and 1994
1995 1994
------------ ------------
REVENUE .................................... $ 52,011,107 $ 38,559,163
COST OF REVENUE ............................ 47,830,459 35,601,360
------------ ------------
GROSS PROFIT ............................... 4,180,648 2,957,803
GENERAL AND ADMINISTRATIVE EXPENSES ........ 2,991,540 2,287,394
------------ ------------
INCOME FROM OPERATIONS ..................... 1,189,108 670,409
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense ........................ (175,338) (167,780)
Interest income ......................... 37,044 24,993
Gain (Loss) on abandonment and
sale of fixed assets .................. 5,385 (2,067)
------------ ------------
(132,909) (144,854)
------------ ------------
NET INCOME ................................. $ 1,056,199 $ 525,555
============ ============
See accompanying notes to financial statements.
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1995 and 1994
Additional
Common Paid-in Retained
Stock Capital Earnings Total
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1993 ...................... $ 19,559 $ 325,264 $ 761,374 $ 1,106,197
ISSUANCE OF 100 SHARES OF
COMMON STOCK (NOTE 7) ..................... 1 -- -- 1
CONTRIBUTIONS TO CAPITAL ........................ -- 62,599 -- 62,599
DISTRIBUTIONS TO SHAREHOLDERS ................... -- -- (51,900) (51,900)
NET INCOME - 1994 ............................... -- -- 525,555 525,555
BALANCE, DECEMBER 31, 1994 ...................... 19,560 387,863 1,235,029 1,642,452
REDEMPTION OF STOCK AND
CAPITAL (NOTE 7) ................................ -- (25,000) -- (25,000)
CONTRIBUTIONS TO CAPITAL (NOTE 7) ............... -- 52,768 -- 52,768
DISTRIBUTIONS TO SHAREHOLDERS ................... -- -- (362,768) (362,768)
NET INCOME - 1995 ............................... -- -- 1,056,199 1,056,199
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 ...................... $ 19,560 $ 415,631 $ 1,928,460 $ 2,363,651
=========== =========== =========== ===========
See accompanying notes to financial statements.
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1995 and 1994
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers ............. $ 50,152,358 $ 37,544,620
Cash paid to suppliers and employees ..... (50,220,197) (36,842,673)
Interest paid ............................ (176,854) (98,437)
Interest received ........................ 674 3,544
------------ ------------
NET CASH (USED IN) PROVIDED FROM OPERATING
ACTIVITIES ............................... (244,019) 607,054
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ..................... (109,101) (321,652)
Net receipts (advances) on related
party loans ............................... 17,765 (17,845)
Net receipts (advances) on employee loans 2,953 (9,222)
Purchase of investment stock ............. (4,925) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES .......... (93,308) (348,719)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft ........................... 348,405 148,474
Net borrowings (payments) under line of
credit agreements ........................ 20,000 (41,660)
Principal payments on notes payable-
other .................................. (21,640) (117,649)
Proceeds from stock issuance or
capital contributions .................. 27,768 62,600
Distributions to shareholders ............ (362,768) (51,900)
Proceeds from long-term debt ............. -- 190,285
Proceeds from sale of fixed assets ....... 87,418
Payments on long-term debt ............... (129,506) (54,122)
Payment of deferred loan fee ............. (5,000) (7,500)
------------ ------------
NET CASH (USED IN) PROVIDED FROM
FINANCING ACTIVITIES ..................... (35,323) 128,528
------------ ------------
NET (DECREASE) INCREASE IN CASH ................ (372,650) 386,863
CASH AT BEGINNING OF YEAR ...................... 426,312 39,449
------------ ------------
CASH AT END OF YEAR ............................ $ 53,662 $ 426,312
============ ============
See accompanying notes to financial statements.
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995 and 1994
1995 1994
------------ ------------
RECONCILIATION OF NET INCOME TO NET
CASH (USED BY) PROVIDED FROM
OPERATING ACTIVITIES:
NET INCOME ....................................... $ 1,056,199 $ 525,555
----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH (USED BY) PROVIDED FROM OPERATING
ACTIVITIES:
Depreciation and amortization ................ 114,743 133,454
(Gain) Loss on abandonment and sale of
fixed assets .......................... (5,385) 2,067
Increase in accounts receivable .............. (1,858,075) (1,010,999)
Decrease in other receivables ................ 5,601 6,883
Decrease (Increase) in prepaid
expenses and deposits ................. 18,398 (19,887)
(Decrease) Increase in accounts
payable ............................... (3,014) 23,764
Increase in accrued expenses ................. 427,514 946,217
----------- -----------
Total adjustments ....................... (1,300,218) 81,499
----------- -----------
NET CASH (USED BY) PROVIDED FROM OPERATING
ACTIVITIES ................................. $ (244,019) $ 607,054
=========== ===========
See accompanying notes to financial statements.
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1995 and 1994
(1) SIGNIFICANT ACCOUNTING POLICIES:
Business organization
RRA, Inc. (RRA) was incorporated in 1964 under the laws of the
State of New York. Datatech Technical Services, Inc. (DTS) was
incorporated in 1991 under the laws of the State of Arizona and
commenced operations in 1992. Effective January 1, 1992, certain
customer accounts and property and equipment of RRA were transferred to
DTS in exchange for a down payment of $25,000 and a note for $150,000.
The terms of the note call for 10 equal annual payments to RRA from DTS
of $22,354, which includes principal and interest at 8%. The note
receivable and note payable have been eliminated in combination. DTS
charged RRA $225,350 in 1994 for a management fee. Any income or
expense related to these transactions have been eliminated in
combination. The Companies remain under common management and control.
Ray Rashkin owns 100% of RRA. Stanley Rashkin owns 100% of DTS.
Project Staffing support Team, Inc. (PSST) was incorporated under
the laws of the State of Arizona and commenced operations in 1994. At
inception, PSST was owned in equal shares by Ray Rashkin and Stanley
Rashkin. PSST had no revenue in 1994, and absorbed $41,327 in costs.
In 1995, RRA charged PSST $208,607 for a management fee. Ray
Rashkin redeemed his shares during the year, leaving Stanley Rashkin as
the sole shareholder of PSST (see note 7).
Principles of combination
These combined financial statements include the accounts of RRA,
DTS, and PSST. All significant intercompany transactions and balances
have been eliminated in combination.
Nature of business
The Companies provide highly trained individuals primarily to
large corporate customers that contract with various governmental
entities throughout the United States. The employees are provided on a
temporary or semi-permanent basis. The individuals are employees of the
Companies. The Companies maintain offices in Arizona, New York,
Connecticut, New Mexico, Missouri, Washington, South Carolina, and
California.
The companies have two major contracts that are renewable. One of
the contracts started early in 1994. Management is confident these
contracts will continue. The largest of the two renewed for five years,
and the other contract was extended for the second option year to
January 1997.
Property and equipment
Property and equipment are stated at cost. Depreciation is
provided using accelerated methods over the estimated useful lives of
the assets. Amortization of leasehold improvements is provided using
the straight-line method over the lesser of the lease term or the
estimated useful lives of the assets. Depreciation expense was $99,442
and $118,362 in 1995 and 1994, respectively.
Organizational costs, client lists and deferred loan fees
Organizational costs for DTS are being amortized on a
straight-line basis over five years. Client lists purchased for $19,500
are being amortized over three years. Deferred loan fees are being
amortized over the term of the revolving line of credit agreement.
Concentration of risks
Periodically during the year, the Companies maintain cash in
financial institutions in excess of the amounts insured by the Federal
government.
Income taxes
The Companies have elected under applicable sections of the
Internal Revenue Code to be treated as "S" Corporations for income tax
purposes. Therefore, any income, loss and tax credits are reportable by
the shareholders on their individual income tax returns. In 1995, the
owners drew approximately $335,000 to pay estimated taxes on the
earnings from these entities, with an additional $70,000 drawn in
January 1996. Certain states in which the Companies do business do not
recognize the "S" Corporation status or they impose minimum taxes.
State income taxes are more of a license cost. They are included in
administrative expenses in the accompanying combined statement of
income. DTS reports to the Internal Revenue Service using the cash
basis of accounting.
Employee benefit plan
The Companies maintain 401(k) plans and Section 125 cafeteria
plans for the benefit of their employees. Employees elect to withhold
specified amounts from their wages to contribute to the plans. The
Companies have a fiduciary responsibility with respect to the plans.
Estimated health self-insurance claims
The Companies maintain a self-insurance plan for those employees
who elect to participate. Under this plan, the Company is responsible
for paying claims up to $40,000 annually per individual. There are
provisions for reinsurance in the plan. The financial statements
include an estimate for claims to be paid under this policy.
(2) NOTES RECEIVABLE:
Notes receivable - related parties consists of the following:
1995 1994
-------- --------
Note receivable - shareholder,
is an informal, unsecured
agreement due on demand with
interest at 8% ................ $ 6,830 $ 57,604
Note receivable - shareholder,
is an informal, unsecured
agreement due on demand with
interest at 8% ................ 213,737 81,705
Accrued interest on the above . 16,547 8,741
-------- --------
Total shown as a current asset $237,114 $148,050
======== ========
Note receivable - shareholder,
is an unsecured note which
requires monthly interest only
payments at prime plus 1.5%
through 2005 when all principal
and interest is due; 1995 and
1994 include $16,000 in accrued
interest receivable ........... $216,000 $216,000
======== ========
Note receivable - employee consists of the following:
Promissory note from one employee;
payable weekly with interest at
8%; note matures in July 1999;
Upon termination, the note is
immediatly due and payable. $ 7,374 $ 9,222
Promissory note from one employee;
payable weekly with interest at
9.5%; note matures in June 2000;
secured by automobile. 10,895 -
-------- --------
18,269 9,222
Less current portion 9,440 1,810
-------- --------
$ 8,829 $ 7,412
======== ========
(3) NOTE PAYABLE - BANK:
Note payable - bank, consists of a revolving line of credit
agreement which provides for borrowings up to the lesser of $4,000,000
or 80% of acceptable receivables as defined, payable in full May 1,
1996 with interest at prime plus .5%. The interest rate as of December
31, 1995 was 8.75%. The note is collateralized by accounts receivable,
property and fixtures, and inventory, and is personally guaranteed by
the shareholders. The line of credit agreement contains certain
restrictive covenants regarding the financial position of the
Companies. The Companies were in compliance with respect to the
restrictive covenants as of December 31, 1995 and 1994.
(4) NOTES PAYABLE - OTHER:
Notes payable - other consists of the following:
1995 1994
-------- --------
Unsecured note payable to an
individual, due on demand with
interest payable monthly at
prime plus 1.5%. $ - $ 3,346
Unsecured note payable to an
individual, due on demand with
interest payable monthly at
prime plus 1.5%. - 56,477
-------- --------
$ - $ 59,823
======== ========
A new agreement was entered at the end of 1995 with the party of
the first note mentioned above . The note is due on demand with
interest payable monthly at 11%. The balance on December 31, 1995 was
$38,183.
(5) LONG-TERM DEBT:
1995 1994
-------- --------
6.75% notes payable to Toyota Motor
Credit Corp; aggregate monthly payments
of $5,854, including interest;
original amount of $190,285 beginning
in January 1994; matures in January 1997;
secured by vehicles. $ 6,657 $ 136,163
Less current portion 6,657 62,978
-------- --------
$ - $ 73,185
======== ========
Eleven 1994 Toyota trucks were purchased in 1994 and were leased
individually to a large customer for $550 per month. In 1995, ten of
the vehicles were sold and the notes were paid off. The remaining note
was paid off in January 1996.
(6) COMMITMENTS:
As of December 31, 1995, the Companies have the following
commitments for operating facilities, which are accounted for as
operating leases:
Approximate
Expiration base monthly
of lease rent
-------------- -----------
Plainview, New York Month-to-month $ 1,000
Tempe, Arizona January, 2000 4,380
Albuquerque, New Mexico October, 1996 1,185
Stamford, Connecticut Month-to-month 145
Greenville, S. Carolina June, 1996 419
Kennewick, Washington October, 1996 705
St. Louis, Missouri December, 1996 554
Carlsbad, New Mexico December, 1996 450
The Companies are responsible for property taxes, insurance and
maintenance on certain leases.
The Companies currently lease their office facilities in Tempe,
Arizona from one of the shareholders. The lease contains a five-year
renewal option. The rent on this office totalled $54,932 in 1995 and
$47,938 in 1994.
The following is a schedule by years of approximate future minimum
rental payments on operating leases. The leases in New York,
Connecticut, and Arizona are included through 2000:
Year ended
December 31,
------------
1996 $ 99,762
1997 66,300
1998 66,300
1999 66,300
2000 66,300
-------
$364,962
=======
Total rent expense was $98,822 for the year ended December 31,
1995, and $94,653 for 1994.
(7) COMMON STOCK:
Common stock consists of the following:
1995 1994
------- -------
Common stock, RRA, no par;
authorized 200 shares;
issued and outstanding
100 shares ............. $19,558 $19,558
Common stock, DTS, $.01 par;
authorized 100 shares;
issued and outstanding
100 shares ............. 1 1
Common stock, PSST, $.01 par;
authorized 100 shares;
issued and outstanding
100 shares (see below) . 1 1
------- -------
$19,560 $19,560
======= =======
In July 1995, PSST redeemed Ray Rashkin's fifty shares upon his
resignation as president of the corporation. The shares were retired by
the corporation at fifty-percent of the net equity of the corporation
as of June 30, 1995.
This transaction had the effect of lowering the issued and
outstanding shares to fifty. Paid in capital of PSST was reduced by
$25,000. Ray Rashkin used the proceeds from the redemption as
additional paid in capital of RRA, Inc.
(8) MONEY PURCHASE PENSION PLAN:
On June 1, 1993, the Company adopted a pension plan that
contributes 10% to covered employees. This covered initially the
Phoenix based administrative group. In December, 1993, the plan was
amended to include employees at Lawrence Livermore National Laboratory
effective January 1, 1994. In 1995, the administrative group was
removed from the plan on January 1, and employees at Los Alamos were
included as of May 1. The accrual as of December 31, 1995 and 1994 was
$720,000 and $2855,287, respectively. Expense for 1995 and 1994 was
$911,339 and $269,913, respectively.
(9) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
For purposes of the Statement of Cash Flows, management considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Bank overdrafts are included as a financing activity because of
their direct relation to line of credit funding.
Cash paid during the years ended
December 31, 1995 and 1994 was as follows:
1995 1994
---------- ----------
Interest $ 176,854 $ 163,210
========== ==========
Noncash investing and financing activities
During 1994, the Washington and Texas offices were closed. Assets
with a book value of $2,067 were written off.
A financing arrangement for the purchase of trucks was
entered in 1994. Assets were capitalized and loans were obtained
totalling $190,285 in connection with this transaction.
Common stock and paid in capital for PSST were made in 1994
through adjustments to retained earnings and notes receivable from
related parties. In relation to this, the redemption of stock in 1995
for $25,000 was an adjustment to paid in capital and notes receivable
(see note 7).
In 1995, a truck owned by the company was purchased by an employee
for a note for $12,000. A truck was purchased by a shareholder as a
note receivable for $6829.
(10) LITIGATION, CLAIMS, AND ASSESSMENTS:
DTS complied with a client request to place a former client
employee on the DTS payroll for the purpose of providing payrolling
services. The individual was involved in an accident during his
employment which resulted in the death of the individual, reported
injuries to another individual, and damage to the client's property. A
claim has been made against DTS on the theory that the company is
vicariously liable for the individual's alleged negligence in the
accident.
The injured individual has filed a personal injury lawsuit against
DTS and the client. A recent settlement demand was made for $1.2
million. In addition, the client has informally requested that DTS
settle with it for the property damage that they approximate to be
$1.58 million.
DTS will vigorously defend the current lawsuit and any other legal
action that is taken against it in relation to this occurence.
Due to the facts described above, the amount of possible loss to
DTS cannot be reasonably estimated , although it is possible that a
loss may occur as a result of this legal action. Any potential loss has
not been recorded on the accompanying financial statements.
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED COST OF REVENUE
For the Years Ended December 31, 1995 and 1994
1995 1994
----------- -----------
Salaries ....................... $38,288,202 $28,451,365
Payroll Taxes .................. 3,335,931 2,493,840
Per Diem ....................... 1,524,415 714,387
Healthcare Benefits ............ 1,173,836 986,378
Other .......................... 57,894 199,329
Subcontractors ................. -- 19,975
Vacation and Holiday Pay ....... 2,276,145 2,231,270
Workman's Compensation Insurance 262,697 234,903
Pension Plan ................... 911,339 269,913
----------- -----------
$47,830,459 $35,601,360
=========== ===========
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED GENERAL AND ADMINISTRATIVE EXPENSES
For the Years Ended December 31, 1995 and 1994
1995 1994
---------- ----------
Salaries:
Officers .................... $ 462,217 $ 326,333
Office ...................... 897,526 619,640
Payroll Taxes .................... 97,141 72,113
Accounting ....................... 23,221 10,850
Advertising ...................... 85,984 37,844
Business Developments ............ 66,241 5,587
Commissions ...................... 85,279 42,150
Depreciation and Amortization .... 114,743 133,454
Insurance ........................ 129,973 105,860
Legal Fees ....................... 82,644 89,082
Licenses and Fees ................ 12,873 3,150
Miscellaneous .................... 59,997 124,164
Office Expense ................... 165,433 117,798
Outside Services ................. 159,348 147,220
Property Taxes ................... 11,221 2,430
Rent ............................. 104,968 96,010
Repairs and Maintenance .......... 25,242 9,821
Telephone ........................ 104,230 90,802
Travel and Subsistence ........... 287,473 237,242
Utilities ........................ 15,786 15,844
---------- ----------
$2,991,540 $2,287,394
========== ==========
To The Shareholders
RRA, Inc., Datatech Technical Services, Inc.
and Project Staffing Support Team, Inc.
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying combined balance sheets of RRA, Inc., Datatech
Technical Services, Inc., and Project Staffing Support Team, Inc. as of December
31, 1994 and 1993, and the related combined statements of income, changes in
shareholder's equity, and cash flows for the years then ended. These combined
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RRA, Inc., Datatech Technical
Services, Inc., and Project Staffing Support Team, Inc. as of December 31, 1994
and 1993, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic combined
financial statements taken as a whole. The information included in the
accompanying schedules is presented for purposes of additional analysis and is
not a required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
ALEXANDER & DEVOLEY, P.C.
Phoenix, Arizona
February 1, 1995
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED BALANCE SHEET
For the Years Ended December 31, 1994 and 1993
Assets
1994 1993
--------- ---------
CURRENT ASSETS:
Cash ...................................... $ 426,312 $ 39,449
Accounts receivable -
Trade, less allowance for doubtful
accounts of $10,000 in 1993 (Note 3) .... 3,434,704 2,423,705
Other accounts receivable ................. 10,411 17,294
Note receivable - employee, current
portion (Note 2) ........................ 1,810 --
Note receivable - related parties,
current portion (Note 2) ................ 148,050 130,205
Prepaid expenses .......................... 27,284 32,724
---------- ----------
Total current assets .................... 4,048,571 2,643,377
---------- ----------
PROPERTY AND EQUIPMENT (NOTE 1):
Office furniture and equipment ............ 346,395 283,571
Leasehold improvements .................... 114,435 92,552
Vehicles .................................. 215,330 2,300
---------- ----------
676,160 378,423
Less accumulated depreciation and
amortization ............................ 321,003 224,490
---------- ----------
355,157 153,933
---------- ----------
OTHER ASSETS:
Refundable deposits ....................... 50,396 25,069
Note receivable - employee, long-
term portion (Note 2) ................... 7,412 --
Note receivable - related parties,
long-term portion (Note 2) .............. 216,000 216,000
Deferred loan fee, less amortization
of $5,312 (Note 1) ...................... 2,188 --
Organizational costs, less accumulated
amortization of $9,841 in 1994 and
$6,560 in 1993 (Note 1) ................. 6,560 9,841
Client lists, less amortization of
$8,125 in 1994 and $1,623 in 1993
(Note 1) ................................ 11,375 17,877
---------- ----------
293,931 268,787
---------- ----------
$4,697,659 $3,066,097
========== ==========
See accompanying notes to financial statements.
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED BALANCE SHEET
For the Years Ended December 31, 1994 and 1993
LIABILITIES
1994 1993
--------- ---------
CURRENT LIABILITIES:
Bank overdraft ............................ $ 148,474 $ --
Accounts payable .......................... 42,572 18,808
Notes payable (Note 4) .................... 59,823 177,472
Note payable - bank (Note 3) .............. 1,200,000 1,241,660
Current portion of long-term debt ......... 62,978 --
Accrued expenses:
Wages, vacation, and holiday ............ 817,041 213,770
Payroll taxes and withholdings .......... 170,283 205,544
Gross receipts tax ...................... 64,565 57,128
Self insurance claims (Note 1) .......... 120,000 30,000
Interest ................................ 10,999 6,429
Pension plan contributions (Note 8) ..... 285,287 9,089
---------- ----------
Total current liabilities ................. 2,982,022 1,959,900
---------- ----------
LONG-TERM DEBT (NOTE 5): ........................... 73,185 --
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock (Note 7) ..................... 19,560 19,559
Additional paid-in capital ................ 387,863 325,264
Retained earnings ......................... 1,235,029 761,374
---------- ----------
1,642,452 1,106,197
---------- ----------
$4,697,659 $3,066,097
========== ==========
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED STATEMENT OF INCOME
For the Years Ended December 31, 1994 and 1993
1994 1993
------------ ------------
REVENUE .................................... $ 38,559,163 $ 25,016,730
COST OF REVENUE ............................ 35,601,360 23,313,171
------------ ------------
GROSS PROFIT ............................... 2,957,803 1,703,559
GENERAL AND ADMINISTRATIVE EXPENSES ........ 2,287,394 1,487,757
------------ ------------
INCOME FROM OPERATIONS ..................... 670,409 215,802
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense .................. (167,780) (133,311)
Interest income ................... 24,993 23,540
Loss on abandonment and
sale of fixed assets .......... (2,067) --
------------ ------------
(144,854) (109,771)
------------ ------------
NET INCOME ................................. $ 525,555 $ 106,031
============ ============
See accompanying notes to financial statements.
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1994 and 1993
Additional
Common Paid-in Retained
Stock Capital Earnings Total
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1992 .. $ 19,559 $ 240,264 $ 662,843 $ 922,666
CONTRIBUTION TO CAPITAL ..... -- 85,000 -- 85,000
DISTRIBUTION TO SHAREHOLDER . -- -- (7,500) (7,500)
NET INCOME - 1993 ........... -- -- 106,031 106,031
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1993 .. 19,559 325,264 761,374 1,106,197
ISSUANCE OF 100 SHARES OF
COMMON STOCK (NOTE 7) . 1 -- -- 1
CONTRIBUTIONS TO CAPITAL .... -- 62,599 -- 62,599
DISTRIBUTIONS TO SHAREHOLDERS -- -- (51,900) (51,900)
NET INCOME - 1994 ........... -- -- 525,555 525,555
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 .. $ 19,560 $ 387,863 $ 1,235,029 $ 1,642,452
=========== =========== =========== ===========
See accompanying notes to financial statements.
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1994 and 1993
1994 1993
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers ....... $ 37,544,620 $ 25,179,069
Cash paid to suppliers and employees (36,842,673) (24,664,840)
Interest paid ...................... (98,437) (137,683)
Interest received .................. 3,544 51
------------ ------------
NET CASH PROVIDED FROM OPERATING
ACTIVITIES ......................... 607,054 376,597
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............... (321,652) (55,553)
Net advances on related party loans (17,845) (115,820)
Net advances on employee loan ...... (9,222) --
Business list purchase ............. -- (19,500)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES .... (348,719) (190,873)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft ..................... 148,474 --
Net payments under line of credit
agreements ....................... (41,660) (169,856)
Principal payments on notes payable-
other ............................ (117,649) (69,251)
Proceeds from stock issuance or
capital contributions ............ 62,600 85,000
Distributions to shareholders ...... (51,900) (7,500)
Proceeds from long-term debt ....... 190,285 --
Payments on long-term debt ......... (54,122) --
Payment of deferred loan fee ....... (7,500) --
------------ ------------
NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES ............... 128,528 (161,607)
------------ ------------
NET INCREASE IN CASH ..................... 386,863 24,117
CASH AT BEGINNING OF YEAR ................ 39,449 15,332
------------ ------------
CASH AT END OF YEAR ...................... $ 426,312 $ 39,449
============ ============
See accompanying notes to financial statements.
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994 and 1993
1994 1993
------------ ------------
RECONCILIATION OF NET INCOME TO NET
CASH USED IN OPERATING ACTIVITIES:
NET INCOME .............................. $ 525,555 $ 106,031
----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED FROM OPERATING
ACTIVITIES:
Depreciation and amortization .. 128,142 57,819
Amortization of loan fee ....... 5,312 --
Loss on abandonment and sale of
fixed assets ................. 2,067 --
(Increase) decrease in accounts
receivable ................... (1,010,999) 162,339
Decrease in other receivables .. 6,883 7,220
(Increase) decrease in prepaid
expenses and deposits ........ (19,887) 72
(Increase) decrease in accounts
payable ...................... 23,764 (5,801)
Increase in accrued expenses ... 946,217 48,917
----------- -----------
Total adjustments .............. 81,499 270,566
----------- -----------
NET CASH PROVIDED FROM OPERATING
ACTIVITIES ........................ $ 607,054 $ 376,597
=========== ===========
See accompanying notes to financial statements.
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1994 and 1993
(1) SIGNIFICANT ACCOUNTING POLICIES:
Business organization
RRA, Inc. (RRA) was incorporated in 1964 under the laws of the
State of New York. Datatech Technical Services, Inc. (DTS) was
incorporated in 1991 under the laws of the State of Arizona and
commenced operations in 1992. Effective January 1, 1992, certain
customer accounts and property and equipment of RRA were transferred to
DTS in exchange for a down payment of $25,000 and a note for $150,000.
The terms of the note call for 10 equal annual payments to RRA from DTS
of $22,354 which includes principal and interest at 8%. The note
receivable and note payable have been eliminated in combination. DTS
charged RRA $225,350 in 1994 and $150,000 in 1993 for a management fee.
Any income or expense related to these transactions have been
eliminated in combination. The Companies remain under common management
and control. Ray Rashkin owns 100% of RRA. Stanley Rashkin owns 100% of
DTS.
Project Staffing support Team, Inc. (PSST) was incorporated under
the laws of the State of Arizona and commenced operations in 1994. PSST
is owned in equal shares by Ray Rashkin and Stanley Rashkin. PSST had
no revenue in 1994, and absorbed $41,327 in costs.
Principles of combination
These combined financial statements include the accounts of RRA,
DTS, and PSST. All significant intercompany transactions and balances
have been eliminated in combination.
Nature of business
The Companies provide highly trained individuals primarily to
large corporate customers that contract with various governmental
entities throughout the United States. The employees are provided on a
temporary or semi-permanent basis. The individuals are employees of the
Companies. The Companies maintain offices in Arizona, New York,
Connecticut and New Mexico.
The companies have two major contracts that are renewable. One of
the contracts started early in 1994. Management is confident these
contracts will continue. The largest of the two renewed for five years,
and the other contract was extended for the first option year to
January 1996.
Property and equipment
Property and equipment are stated at cost. Depreciation is
provided using accelerated methods over the estimated useful lives of
the assets. Amortization of leasehold improvements is provided using
the straight-line method over the lesser of the lease term or the
estimated useful lives of the assets. Depreciation and amortization
expense was $118,362 and $52,914 in 1994 and 1993, respectively.
Organizational costs, client lists and deferred loan fees
Organizational costs for DTS are being amortized on a
straight-line basis over five years. Client lists purchased for $19,500
are being amortized over three years. Deferred loan fees are being
amortized over the term of the revolving line of credit agreement.
Concentration of risks
Periodically during the year, the Companies maintain cash in
financial institutions in excess of the amounts insured by the Federal
government.
Income taxes
The Companies have elected under applicable sections of the
Internal Revenue Code to be treated as "S" Corporations for income tax
purposes. Therefore, any income, loss and tax credits are reportable by
the shareholders on their individual income tax returns. In 1995, the
owners drew approximately $134,500 to pay the balance of estimated
taxes on the earnings from these entities. Certain states in which the
Companies do business do not recognize the "S" Corporation status or
they impose minimum taxes. State income taxes are more of a license
cost. They are included in administrative expenses in the accompanying
combined statement of income. DTS reports to the Internal Revenue
Service using the cash basis of accounting.
Employee benefit plan
The Companies maintain 401(k) plans and Section 125 cafeteria
plans for the benefit of their employees. Employees elect to withhold
specified amounts from their wages to contribute to the plans. The
Companies have a fiduciary responsibility with respect to the plans.
Estimated health self-insurance claims
The Companies maintain a self-insurance plan for those employees
who elect to participate. Under this plan, the Company is responsible
for paying claims up to $30,000 annually per individual and
approximately $300,000 in claims and premiums on a combined
company-wide basis. There are provisions for reinsurance in the plan.
The financial statements include an estimate for claims to be paid
under this policy.
(2) NOTES RECEIVABLE:
Notes receivable - related parties consists of the following:
1994 1993
--------- ---------
Note receivable - shareholder,
is an informal, unsecured
agreement due on demand with
interest at 8% $ 57,604 $ 69,685
Note receivable - shareholder,
is an informal, unsecured
agreement due on demand with
interest at 8% 81,705 53,031
Accrued interest on the above 8,741 7,489
--------- ---------
Total shown as a current asset $ 148,050 $ 130,205
========= =========
Note receivable - shareholder,
is an unsecured note which requires
monthly interest only payments at
prime plus 1.5% through 2005 when
all principal and interest is due;
1994 and 1993 include $16,000 in
accrued interest receivable. $ 216,000 $ 216,000
========= =========
Note receivable - employee consists of the following:
1994 1993
--------- ---------
Promissory note from one employee;
payable weekly with interest at
8%; note matures in July 1999. $ 9,222 $ -
Less current portion 1,810 -
--------- ---------
$ 7,412 $ -
========= =========
(3) NOTE PAYABLE - BANK:
Note payable - bank, consists of a revolving line of credit
agreement which provides for borrowings up to the lesser of $3,000,000
or 80% of acceptable receivables as defined, payable in full May 1,
1995 with interest at prime plus .75%. The interest rate as of December
31, 1994 was 8.0%. The note is collateralized by accounts receivable,
property and fixtures, and inventory, and is personally guaranteed by
the shareholders. The line of credit agreement contains certain
restrictive covenants regarding the financial position of the
Companies. The Companies were in compliance with respect to the
restrictive covenants as of December 31, 1994.
The agreement above replaced a similar agreement with another bank
that matured in April 1994. This agreement, which was in effect at
December 31, 1993, provided borrowings up to $2,000,000 with interest
at prime plus 2%. Collateral, guarantees, and covenants were virtually
the same as mentioned above.
(4) NOTES PAYABLE - OTHER:
Notes payable - other consists of the following:
1994 1993
--------- ---------
Unsecured note payable to an
individual, due on demand with
interest payable monthly at
prime plus 1.5%. $ 3,346 $ 49,995
Unsecured note payable to an
individual, due on demand with
interest payable monthly at
prime plus 1.5%. 56,477 127,477
--------- ---------
$ 59,823 $ 177,472
========= =========
(5) LONG-TERM DEBT:
1994 1993
--------- ---------
6.75% notes payable to Toyota Motor
Credit Corp; aggregate monthly
payments of $5,854, including interest;
original amount of $190,285 beginning
in January 1994; matures in January
1997; secured by vehicles. $ 136,163 $ -
Less current portion 62,978 -
--------- ---------
$ 73,185 $ -
========= =========
Principal maturities are as follows:
1995 $ 67,364
1996 5,821
1997 -
----------
$ 73,185
==========
Eleven 1994 Toyota trucks were purchased and have been leased
individually to a large customer for $550 per month.
(6) COMMITMENTS:
As of December 31, 1994, the Companies have the following
commitments for operating facilities, which are accounted for as
operating leases:
Approximate
Expiration base monthly
of lease rent
-------------- ------------
Farmingdale, New York Month-to-month $ 1,700
Tempe, Arizona January, 1995 3,572
Albuquerque, New Mexico October, 1996 1,185
Stamford, Connecticut Month-to-month 320
The Companies are responsible for property taxes, insurance and
maintenance on certain leases.
The Companies currently lease their office facilities in Tempe,
Arizona from one of the shareholders. The lease contains two five-year
renewal options which the Company intends to execute. The rent on this
office totalled $47,938 in 1994 and $42,864 in 1993.
The following is a schedule by years of approximate future minimum
rental payments on operating leases. The leases in New York,
Connecticut, and Arizona are included through 1999:
Year ended
December 31,
------------
1995 $ 93,492
1996 91,122
1997 79,272
1998 79,272
1999 79,272
-------
$422,430
=======
Total rent expense was $89,059 for the year ended December 31,
1993, and $94,653 for 1994.
(7) COMMON STOCK:
Common stock consists of the following:
1994 1993
-------- --------
Common stock, RRA, no par;
authorized 200 shares;
issued and outstanding
100 shares $ 19,558 $ 19,558
Common stock, DTS, $.01 par;
authorized 100 shares;
issued and outstanding
100 shares 1 1
Common stock, PSST, $.01 par;
authorized 100 shares;
issued and outstanding
100 shares 1 -
-------- --------
$ 19,560 $ 19,559
======== ========
(8) MONEY PURCHASE PENSION PLAN:
On June 1, 1993, the Company adopted a pension plan that
contributes 10% to covered employees. This covered initially the
Phoenix based administrative group. The accrual for 1993 was
approximately $9,000. In December, 1993, the plan was amended to
include employees at Lawrence Livermore National Laboratory effective
January 1, 1994. The Lawrence Livermore contract started on January 1,
1994. The accrual for 1994 was approximately $285,000. Expense for 1994
and 1993 was $269,913 and $9,089, respectively.
(9) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
For purposes of the Statement of Cash Flows, management considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Cash paid during the years ended
December 31, 1994 and 1993 was as follows:
1994 1993
---------- ----------
Interest $ 98,437 $ 137,683
========== ==========
Noncash investing and financing activities
During 1994, the Washington and Texas offices were closed. Assets
with a book value of $2,067 were written off.
A financing arrangement for the purchase of trucks was
entered in 1994. Assets were capitalized and loans were obtained
totalling $190,285 in connection with this transaction.
Common stock and paid in capital for PSST were made in 1994
through adjustments to retained earnings and notes receivable from
related parties.
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED COST OF REVENUE
For the Years Ended December 31, 1994 and 1993
1994 1993
----------- -----------
Salaries ................................... $28,451,365 $18,864,072
Payroll Taxes .............................. 2,493,840 1,642,875
Per Diem ................................... 714,387 878,097
Healthcare Benefits ........................ 986,378 348,047
Other ...................................... 199,329 197,129
Subcontractors ............................. 19,975 2,275
Vacation and Holiday Pay ................... 2,231,270 1,216,704
Workman's Compensation Insurance ........... 234,903 154,883
Pension Plan ............................... 269,913 9,089
----------- -----------
$35,601,360 $23,313,171
=========== ===========
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED GENERAL AND ADMINISTRATIVE EXPENSES
For the Years Ended December 31, 1994 and 1993
1994 1993
----------- -----------
Salaries:
Officers .............................. $ 326,333 $ 179,148
Office ................................ 619,640 468,159
Payroll Taxes .............................. 72,113 54,095
Accounting ................................. 10,850 26,991
Advertising ................................ 37,844 19,738
Business Developments ...................... 5,587 6,608
Commissions ................................ 42,150 27,763
Depreciation and Amortization .............. 128,142 57,819
Insurance .................................. 105,860 65,248
Legal Fees ................................. 89,082 45,291
Licenses and Fees .......................... 8,462 5,182
Miscellaneous .............................. 124,164 57,037
Office Expense ............................. 117,798 73,279
Outside Services ........................... 147,220 81,054
Property Taxes ............................. 2,430 1,855
Rent ....................................... 96,010 89,059
Repairs and Maintenance .................... 9,821 9,321
Telephone .................................. 90,802 82,997
Travel and Subsistence ..................... 237,242 124,032
Utilities .................................. 15,844 13,081
---------- ----------
$2,287,394 $1,487,757
========== ==========
ANNEX A
Included in this Annex A are (i) a description of the amendments
proposed to be made to the Company's Long-Term Stock Investment Plan (the
"Plan") and (ii) a copy the Plan, as proposed to be amended.
PROPOSED AMENDMENTS TO LONG-TERM STOCK INVESTMENT PLAN
At Section 1.01, change "The Lori Corporation" to "COMFORCE Corporation
(formerly The Lori Corporation)."
At Section 1.03, add the following between the second and third sentences:
Non-employee directors, however, shall only be eligible for formula
awards under Article 6.
At Section 1.05(a), change "1,500,000" in the second sentence to "4,000,000."
At Section 2.03, add the following at the beginning of the first sentence:
Except as otherwise provided herein in the case of an exchange,
At Section 2.03, add the following at the end of this section:
Notwithstanding the foregoing, if a Stock Option is granted under this
Plan in exchange for a stock option granted outside this Plan, the per
share exercise price of the Stock Option issued under this Plan may, at
the election of the Administrator, be the same price as that of the
stock option granted outside this Plan which is being exchanged.
At Section 2.04, add the following in lieu of the first sentence:
Each Stock Option shall first be exercisable and/or become exercisable
according to such vesting schedule as is determined by the
Administrator and provided in the Stock Option Agreement. Each Stock
Option shall be for a term of 10 years, subject to earlier termination
as provided in Section 2.07, 2.08 or 2.09, unless the Stock Option
Agreement expressly provides for a different term, not in excess of 10
years, and/or expressly provides that the provisions of any or all of
Section 2.07, 2.08 or 2.09 shall not apply to cause the Stock Option to
earlier terminate.
At Section 3.04, add the following in lieu of the first sentence:
Each Incentive Stock Option shall first be exercisable and/or become
exercisable according to such vesting schedule as is determined by the
Administrator and provided in the Incentive Stock Option Agreement.
Each Incentive Stock Option shall be for a term of 10 years, subject to
earlier termination as provided in Section 3.07, 3.08 or 3.09, unless
the Incentive Stock Option Agreement expressly provides for a different
term, not in excess of 10 years, and/or expressly provides that the
provisions of any or all of Section 3.07, 3.08 or 3.09 shall not apply
to cause the Incentive Stock Option to earlier terminate, so long as
such modifications shall not cause the Incentive Stock Option granted
thereby to cease to qualify as an "incentive stock option" under
Section 422 of the Internal Revenue Code.
At Section 5.10(b), add the following at the end of this section:
No amendment which affects one or more provisions of the Plan which are
required under Rule 16b-3 under the Securities Exchange Act of 1934, as
amended, for qualification of Article 6 as a formula plan, including
the designation of the persons entitled to receive a grant of a Stock
Option, the Stock Option price, the number of shares that are granted
under a Stock Option, and the timing of the grant or exercise of Stock
Options, (or otherwise would cause Rule 16b-3 to become inapplicable)
may be made within six (6) months of a prior amendment which also
affects one of those provisions.
Add new Article 6 as follows:
ARTICLE 6
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN PROVISIONS
6.01. Purpose.
The purpose of this Article 6 is to provide a means whereby the Company
may, through the grant of Options pursuant to a formula to non-employee
directors of the Company, attract and retain persons of ability as directors
(including directors who are also officers, but excluding directors who are also
employees) and motivate those directors to exert their best efforts on behalf of
the Company. In addition, the formula limitation established under this Article
6 for Stock Option awards to non-employee directors is to maintain the
disinterested status of the recipients.
6.02. Number of Shares Available.
Subject to the aggregate number of shares of Common Stock provided for
under the Plan, Stock Options shall be granted by the Company from time to time
to non-employee directors of the Company as provided in this Article 6.
6.03. Terms and Conditions.
All options granted under this Article 6 shall constitute Stock Options
and not Incentive Stock Options. Each Stock Option granted under this
Article 6 shall be evidenced by an agreement, in form approved by the
Committee, which
shall be subject to the following expressed terms and conditions and to other
terms and conditions as the Committee may deem appropriate, including those
imposed by Section 5.10 following amendment of the Plan requiring stockholder
approval.
(a) Grant of Stock Option. Subject to the limitations provided under
this paragraph (a) of Section 6.03, Stock Options shall be granted to each
non-employee director as follows: (i) a Stock Option for 10,000 shares of Common
Stock, following the non-employee director's initial election to the Board of
Directors of the Company (or the effective date of this Article 6, if later) and
(ii) a Stock Option for 10,000 shares of Common Stock for each year thereafter
during which the non-employee director is either reelected as a non-employee
director or maintains that status. Each stock option granted shall become fully
vested and exercisable on the first anniversary of the date of grant. On the
date this Plan is amended to include this Article 6, subject to restrictions
provided at Section 5.10, each current non-employee director shall be granted a
Stock Option for shares of Common Stock in an amount to be determined using the
same formula as is provided for under the preceding sentence but based upon all
election and re-elections of that non-employee to the Board of Directors of the
Company (and for years for which the non-employee director maintained membership
on the Board) which occurred prior to the inclusion of this Article 6. After the
initial grants, future grants shall be made annually on the same date as the
annual meeting of the stockholders of the Company. The maximum aggregate number
of shares of Common Stock which shall be granted under all Stock Options granted
under this Article 6 to any individual non-employee director is 50,000.
(b) Stock Option Price. The Stock Option price per share of Common
Stock shall be, as provided under Section 2.03, the fair market value of a share
of Common Stock on the date the Stock Option is granted (but in no event less
than the par value if any).
(c) Exercise in the Event of Death or Termination of Non-Employee
Director Status. (1) If any participant shall die (i) while a non-employee
director of the Company (ii) within three (3) months of ceasing to be a member
of the Board of Directors of the Company other than for cause, or (iii) within
three (3) months after the participant's resignation or removal as a
non-employee director of the Company because the participant is permanently and
totally disabled (as determined by the Administrator) the participant's Stock
Options may be exercised by the person or persons to whom the participant's
rights under the Stock Options pass by will or applicable law or if no person
has that right, by the participant's executors or administrators, at any time,
or from time to time (50 share increments), within one (1) year of the date of
the participant's death if (c)(1)(i) of this Section 6.03 is applicable and
within one (1) year of the date of the participant's resignation or removal if
(c)(1)(ii) or (iii) of this Section 6.03 is applicable, but in no event later
than the expiration date specified in Section 2.04. (2) If a participant (i)
resigns or is removed by the Company because of disability, or (ii) resigns
because of retirement (s determined by the Administrator), the participant may
exercise the participant's Stock Options at any time, or from time to time (50
share increments), within one (1) year of the date of the participant's
resignation or removal, but in no event later than the expiration date specified
in Section 2.04. Except as provided by (1) and (2) of this paragraph (c) of
Section 6.03, if a participant voluntarily resigns without cause or is
involuntary removed without cause, the participant may exercise the
participant's Stock Options at any time, or from time to time (50 share
increments), within three (3) months of the date of the participant's
resignation or removal, but in no event later than the expiration date specified
in other portions of this Plan. (4) If a participant voluntarily resigns for
cause or is involuntary removed for cause, the participant's Stock Options shall
terminate immediately.
(d) No Additional Rights. The Plan and any Stock Option granted under
the Plan shall not confer upon any participant any right with respect to
continued membership on the Board of Directors of the Company, nor any other
position with the Company.
(e) Other Terms. Except as modified under this Article 6, Stock Options
granted to non-employee directors of the Company shall be subject to the
provisions generally applicable to Stock Options under Article 2.
6.04. Effective Date.
The effective date of this Article 6 shall be January 1, 1996.
6.05. Name.
This Article of the Plan shall be known as the "Long-Term Stock
Investment Plan for Non-Employee Directors."
COMFORCE CORPORATION
LONG-TERM STOCK INVESTMENT PLAN
ARTICLE 1
GENERAL
1.01. Purpose.
The purposes of this Long-Term Stock Investment Plan (the "Plan") are
to: (1) closely associate the interests of the management of COMFORCE
Corporation (formerly The Lori Corporation) and its subsidiaries and affiliates
(collectively referred to as the "Company) with the stockholders by reinforcing
the relationship between participants' rewards and stockholder gains; (2)
provide management with an equity ownership in the Company commensurate with
Company performance, as reflected in increased stockholder value; (3) maintain
competitive compensation levels; and (4) provide an incentive to management for
continuous employment with the Company.
1.02. Administration.
(a) The Plan shall be administered by the Board of Directors of the
Company or, if directed by the Board, a Committee of disinterested persons
appointed by the Board (the "Committee"). The Committee, which shall be subject
to the supervision of the Board, will be of such size, will have such authority
and will have such members as the Board determines from time to time, and shall
include at least two members of the Board to the extent two disinterested
members are available and agree to serve on the Committee. During the one year
prior to commencement of service on the Committee, the Committee members will
not have participated in, and while serving and for one year after serving on
the Committee, such members shall not be eligible for selection as persons to
whom stock may be allocated or to whom stock options or stock appreciation
rights may be granted under the Plan or any other discretionary plan of the
Company under which participants are entitled to acquire stock, stock options or
stock appreciation rights of the Company. As used herein, the term
"Administrator" shall mean the Board of Directors or, to the extent authority
for any right, duty, power, or other obligation referred to herein has been
conferred by the Board upon the Committee, shall mean the Committee.
(b) The Administrator shall have the authority, in its sole
discretion and from time to time to:
(i) designate the employees or classes of employees, as well as
non-employees, eligible to participate in the Plan;
(ii) grant awards provided in the Plan in such form and amount as the
Administrator shall determine;
(iii)impose such limitations, restrictions and conditions upon any
such award as the Administrator shall deem appropriate; and
(iv) interpret the Plan, adopt, amend and rescind rules and
regulations relating to the Plan, and make all other
determinations and take all other action necessary or advisable
for the implementation and administration of the Plan.
(c) Decisions and determinations of the Administrator on all matters
relating to the Plan shall be in its sole discretion and shall be
conclusive. No member of the Board or the Committee, as
applicable, shall be liable for any action taken or decision made
in good faith relating to the Plan or any award thereunder.
1.03. Eligibility for Participation.
Participants in the Plan shall be selected by the Administrator from
the executive officers and other key employees of the Company who occupy
responsible managerial or professional positions and who have the capability of
making a substantial contribution to the success of the Company. In addition,
key non-employee consultants and agents who have the capability of making a
substantial contribution to the success of the Company may also be allowed to be
participants in the Plan. Non-employee directors, however, shall only be
eligible for formula awards under Article 6. In making this selection and in
determining the form and amount of awards, the Administrator shall consider any
factors deemed relevant, including the individual's functions, responsibilities,
value of services to the Company and past and potential contributions to the
Company's profitability and sound growth.
1.04. Types of Awards Under Plan.
Awards under the Plan may be in the form of any one or more of the
following:
(i) Stock Options, as described in Article 2;
(ii) Incentive Stock Options, as described in Article 3; or
(iv) Alternate Appreciation Rights, as described in Article 4.
1.05. Aggregate Limitation on Awards.
(a) Shares of stock which may be issued under the Plan shall be
authorized and unissued or treasury shares of Common Stock of the Company
("Common Stock"). The maximum number of shares of Common Stock which may be
issued under the Plan shall be 4,000,000.
(b) For purposes of calculating the maximum number of shares of
Common Stock which may be issued under the Plan:
(i) all the shares issued (including the shares, if any, withheld
for tax withholding requirements) shall be counted when cash
is used as full payment for shares issued upon exercise of a
Stock Option or Incentive Stock Option;
(ii) only the shares issued (including the shares, if any, withheld
for tax withholding requirements) as a result of an exercise
of Alternate Appreciation Rights shall be counted; and
(iii) only the net shares issued (including the shares, if any,
withheld for tax withholding requirements) shall be counted
when shares of Common Stock are used as full or partial
payment for shares issued upon exercise of a Stock Option or
Incentive Stock Option.
(c) Shares tendered by a participant as payment for shares issued upon
exercise of a Stock Option or Incentive Stock Option shall be available for
issuance under the Plan. Any shares of Common Stock subject to a Stock Option or
Incentive Stock Option which for any reason is terminated unexercised, or
expires, shall again be available for issuance under the Plan.
1.06. Effective Date and Term of Plan.
(a) The Plan shall become effective as of January 1, 1993 so long as
the Plan is approved and adopted by the holders of a majority of the shares of
Common Stock present in person or by proxy and entitled to vote at the 1993
Annual Meeting of Shareholders of the Company.
(b) No awards shall be made under the Plan after December 31, 2002;
provided, however, that the Plan and all awards made under the Plan prior to
such date shall remain in effect until such awards have been satisfied or
terminated in accordance with the Plan and the terms of such awards.
ARTICLE 2
STOCK OPTIONS
2.01. Award of Stock Options.
The Administrator may from time to time, and subject to the provisions
of the Plan and such other terms and conditions as the Administrator may
prescribe, grant to any participant in the Plan one or more options to purchase
for cash or shares the number of shares of Common Stock ("Stock Options")
allotted by the Administrator. The date a Stock Option is granted shall mean the
date selected by the Administrator as of which the Administrator allots a
specific number of shares to a participant pursuant to the Plan.
2.02. Stock Option Agreements.
The grant of a Stock Option shall be evidenced by a written Stock
Option Agreement, executed by the Company and the holder of a Stock Option,
stating the number of shares of Common Stock subject to the Stock Option
evidenced thereby, and in such form as the Administrator may from time to time
determine.
2.03. Stock Option Price.
Except as otherwise provided herein in the case of an exchange, the
option price per share of Common Stock deliverable upon the exercise of a Stock
Option shall be 100% of the fair market value of a share of Common Stock on the
date the Stock Option is granted. As used in this Plan, the "fair market value
of a share of Common Stock on the date the Option is granted" shall mean the
closing price of the Common Stock as reported on the American Stock Exchange on
the trading day last ended prior to the time the Stock Option is granted, or if
the Common Stock ceases to be traded on the American Stock Exchange, the last
determinable market price or value as reasonably determined by the Administrator
in accordance with customarily accepted practices for determining the price or
value of stock traded in a like manner as the Common Stock is then traded.
Notwithstanding the foregoing, if a Stock Option is granted under this Plan in
exchange for a stock option granted outside this Plan, the per share exercise
price of the Stock Option issued under this Plan may, at the election of the
Administrator, be the same price as that of the stock option granted outside
this Plan which is being exchanged.
2.04. Term and Exercise.
Each Stock Option shall first be exercisable and/or become exercisable
according to such vesting schedule as is determined by the Administrator and
provided in the Stock Option Agreement. Each Stock Option shall be for a term of
10 years, subject to earlier termination as provided in Section 2.07, 2.08 or
2.09, unless the Stock Option Agreement expressly provides for a different term,
not in excess of 10 years, and/or expressly provides that the provisions of any
or all of Section 2.07, 2.08 or 2.09 shall not apply to cause the Stock Option
to earlier terminate.
No Stock Option shall be exercisable after the expiration of its option term.
2.05. Manner of Payment.
Each Stock Option Agreement shall set forth the procedure governing the
exercise of the Stock Option granted thereunder, and shall provide that, upon
such exercise in respect of any shares of Common Stock subject thereto, the
optionee shall pay to the Company, in full, the option price for such shares
with cash or with previously owned Common Stock.
2.06. Certificates.
As soon as practicable after receipt of payment for shares of Common
Stock purchased upon the exercise of a Stock Option or Options. the Company
shall deliver to the optionee a certificate or certificates for such shares of
Common Stock. The optionee shall become a stockholder of the Company with
respect to Common Stock represented by share certificates so issued and as such
shall be fully entitled to receive dividends, to vote and to exercise all other
rights of a stockholder.
2.07. Death of Optionee.
(a) Upon the death of the optionee, any rights to the extent
exercisable on the date of death may be exercised by the optionee's estate, or
by a person who acquires the right to exercise such Stock Option by bequest or
inheritance or by reason of the death of the optionee, provided that such
exercise occurs within both the remaining effective term of the Stock Option and
one year after the optionee's death.
(b) The provisions of this Section shall apply notwithstanding the fact
that the optionee's employment may have terminated prior to death, but only to
the extent of any rights exercisable on the date of death.
2.08. Retirement or Disability.
Upon termination of the optionee's employment by reason of retirement
or permanent disability (as each is determined by the Administrator), the
optionee may, within 36 months from the date of termination, exercise any Stock
Options to the extent such options are exercisable during such 36-month period.
2.09. Termination for Other Reasons.
Except as provided in Sections 2.07 and 2.08, or except as otherwise
determined by the Administrator, all Stock Options shall terminate three months
after the termination of the optionee's employment.
2.10. Effect of Exercise.
The exercise of any Stock Option shall cancel that number of related
Alternate Appreciation Rights, if any, which is equal to the number of shares of
Common Stock purchased pursuant to said option.
ARTICLE 3
INCENTIVE STOCK OPTIONS
3.01. Award of Incentive Stock Options.
The Administrator may, from time to time and subject to the provisions
of the Plan and such other terms and conditions as the Administrator may
prescribe, grant to any participant in the Plan who is an employeee of the
Company or any of its subsidiaries one or more "incentive stock options"
(intended to qualify as such under the provisions of Section 422 of the Internal
Revenue Code of 1986, as amended) ("Incentive Stock Options") to purchase for
cash or shares the number of shares of Common Stock allotted by the
Administrator. The date an Incentive Stock Option is granted shall mean the date
selected by the Administrator as of which the Administrator allots a specific
number of shares to a participant pursuant to the Plan. Notwithstanding the
foregoing, Incentive Stock Options shall not be granted to any owner of 10% or
more of the total combined voting power of the Company and its parent or
subsidiaries unless the option price per share complies with the requirements
set forth in 3.03.
3.02. Incentive Stock Option Agreements.
The grant of an Incentive Stock Option shall be evidenced by a written
Incentive Stock Option Agreement, executed by the Company and the holder of an
Incentive Stock Option, stating the number of shares of Common Stock
subject to the Incentive Stock Option evidenced thereby, and in such form as the
Administrator may from time to time determine.
3.03. Incentive Stock Option Price.
The option price per share of Common Stock deliverable upon the
exercise of an Incentive Stock Option shall be 100% of the fair market value of
a share of Common Stock on the date the Incentive Stock Option is granted,
unless such option has been granted to an owner of 10% or more of the total
combined voting power of the Company and its subsidiaries. In such a case, the
option price shall be 110% of the fair market value of a share of Common Stock
on the date the Incentive Stock Option is granted.
3.04. Term and Exercise.
Each Incentive Stock Option shall first be exercisable and/or become
exercisable according to such vesting schedule as is determined by the
Administrator and provided in the Incentive Stock Option Agreement. Each
Incentive Stock Option shall be for a term of 10 years, subject to earlier
termination as provided in Section 3.07, 3.08 or 3.09, unless the Incentive
Stock Option Agreement expressly provides for a different term, not in excess of
10 years, and/or expressly provides that the provisions of any or all of Section
3.07, 3.08 or 3.09 shall not apply to cause the Incentive Stock Option to
earlier terminate, so long as such modifications shall not cause the Incentive
Stock Option granted thereby to cease to qualify as an "incentive stock option"
under Section 422 of the Internal Revenue Code. No Incentive Stock Option shall
be exercisable after the expiration of its option term.
3.05. Maximum Amount of Incentive Stock Option Grant.
The aggregate fair market value (determined on the date the option is
granted) of Common Stock subject to an Incentive Stock Option granted to an
optionee by the Administrator in any calendar year shall not exceed $100,000.
3.06. Death of Optionee.
(a) Upon the death of the optionee, any Incentive Stock Option
exercisable on the date of death may be exercised by the optionee's estate or by
a person who acquires the right to exercise such Incentive Stock Option by
bequest or inheritance or by reason of the death of the optionee, provided that
such exercise occurs within both the remaining option term of the Incentive
Stock Option and one year after the optionee's death.
(b) The provisions of this Section shall apply notwithstanding the fact
that the optionee's employment may have terminated prior to death, but only to
the extent of any Incentive Stock Options exercisable on the date of death.
3.07. Retirement or Disability.
,,
Upon the termination of the optionee's employment by reason of
permanent disability or retirement (as each is determined by the Administrator),
the optionee may, within 36 months from the date of such termination of
employment, exercise any Incentive Stock Options to the extent such Incentive
Stock Options were exercisable at the date of such termination of employment.
Notwithstanding the foregoing, the tax treatment available pursuant to Section
422 of the Internal Revenue Code of 1986 upon the exercise of an Incentive Stock
Option will not be available to an optionee who exercises any Incentive Stock
Options more than (i) 12 months after the date of termination of employment due
to permanent disability or (it) three months after the date of termination of
employment due to retirement.
3.08 Termination for Other Reasons.
Except as provided in Sections 3.06 and 3.07 or except as otherwise
determined by the Administrator, all Incentive Stock Options shall terminate
three months after the termination of the optionee's employment.
3.09. Applicability of Stock Options Sections.
Sections 2.05. 2.06 and 2.10 hereof shall apply equally to Incentive
Stock Options. Said Sections are incorporated by reference in this Article 3 as
though fully set forth herein.
ARTICLE 4
ALTERNATE APPRECIATION RIGHTS
4.01 Award of Alternate Rights.
Concurrently with or subsequent to the award of any Stock Option or
Incentive Stock Option to purchase one or more shares of Common Stock, the
Administrator may, subject to the provisions of the Plan and such other terms
and conditions as the Administrator may prescribe, award to the optionee with
respect to each share of Common Stock, a related alternate appreciation right
("Alternate Right"), permitting the optionee to be paid the appreciation on the
option in lieu of exercising the option.
4.02. Alternate Rights Agreement.
Alternate Rights shall be evidenced by written agreements in such form
as the Administrator may from time to time determine.
4.03. Exercise.
An optionee who has been granted Alternate Rights may, from time to
time, in lieu of the exercise of an equal number of options, elect to exercise
one or more Alternate Rights and thereby become entitled to receive from the
Company payment in Common Stock the number of shares determined pursuant to
Sections 4.4 and 4.5. Alternate Rights shall be exercisable only to the same
extent and subject to the same conditions as the options related thereto are
exercisable, as provided in this Plan. The Administrator may, in its discretion,
prescribe additional conditions to the exercise of any Alternate Rights.
4.04. Amount of Payment.
The amount of payment to which an optionee shall be entitled upon the
exercise of each Alternate Right shall be equal to 100% of the amount, if any,
by which the fair market value of a share of Common Stock on the exercise date
exceeds the fair market value of a share of Common Stock on the date the option
related to said Alternate Right was granted or became effective, as the case may
be.
4.05. Form of Payment.
The number of shares to be paid shall be determined by dividing the
amount of payment determined pursuant to Section 4.4 by the fair market value of
a share of Common Stock on the exercise date of such Alternate Rights. As soon
as practicable after exercise, the Company shall deliver to the optionee a
certificate or certificates for such shares of Common Stock.
4.06. Effect of Exercise.
The exercise of any Alternate Rights shall cancel an equal number of
Stock Options and Incentive Stock Options, if any, related to said Alternate
Rights.
4.07. Retirement or Disability.
Upon termination of the optionee's employment (including employment as
a director of the Company after an optionee terminates employment as an officer
or key employee of the Company) by reason of permanent disability or retirement
(as each is determined by the Administrator), the optionee may, within six
months from the date of such termination, exercise any Alternate Rights to the
extent such Alternate Rights are exercisable during such six-month period.
4.08. Death of Optionee or Termination for Other Reasons.
Except as provided in Section 4.07, or except as otherwise determined
by the Administrator, all Alternate Rights shall terminate upon the termination
of the optionee's employment or upon the death of the optionee.
ARTICLE 5
MISCELLANEOUS
5.01. General Restriction.
Each award under the Plan shall be subject to the requirement that, if
at any time the Administrator shall determine that (i) the listing, registration
or qualification of the shares of Common Stock subject or related thereto upon
any securities exchange or under any state or Federal law, or (ii) the consent
or approval of any government regulatory body, or (iii) an agreement by the
grantee of an award with respect to the disposition of shares of Common Stock is
necessary or desirable as a condition of, or in connection with, the granting of
such award or the issue or purchase of shares of Common Stock thereunder, such
award may not be consummated in whole or in part unless such listing,
registration, qualification, consent, approval or agreement shall have been
effected or obtained free of any conditions not acceptable to the Administrator.
5.02. Non-Assignability.
No award under the Plan shall be assignable or transferable by the
recipient thereof, except by will or by the laws of descent and distribution.
During the life of the recipient, such award shall be exercisable only by such
person or by such person's guardian or legal representative.
5.03. Withholding Taxes.
Whenever the Company proposes or is required to issue or transfer
shares of Common Stock under the Plan, the Company shall have the right to
require the grantee to remit to the Company an amount sufficient to satisfy any
Federal, state and/or local withholding tax requirements prior to the delivery
of any certificate or certificates for such shares. Alternatively, the Company
may issue or transfer such shares of Common Stock net of the number of shares
sufficient to satisfy the withholding tax requirements. For withholding tax
purposes, the shares of Common Stock shall be valued on the date the withholding
obligation is incurred.
5.04. Right to Terminate Employment.
Nothing in the Plan or in any agreement entered into pursuant to the
Plan shall confer upon any participant the right to continue in the employment
of the Company or affect any right which the Company may have to terminate the
employment of such participant.
5.05. Non-Uniform Determinations.
The Administrator's determinations under the Plan (including without
limitation determinations of the persons to receive awards, the form, amount and
timing of such awards, the terms and provisions of such awards and the
agreements evidencing same) need not be uniform and may be made by it
selectively among persons who receive, or are eligible to receive, awards under
the Plan, whether or not such persons are similarly situated.
5.06. Rights as a Stockholder.
The recipient of any award under the Plan shall have no rights as a
stockholder with respect thereto unless and until certificates for shares of
Common Stock are issued to him.
5.07. Leaves of Absence.
The Administrator shall be entitled to make such rules, regulations and
determinations as it deems appropriate under the Plan in respect of any leave of
absence taken by the recipient of any award. Without limiting the generality of
the foregoing, the Administrator shall be entitled to determine (i) whether or
not any such leave of absence shall constitute a termination of employment
within the meaning of the Plan and (ii) the impact, if any, of any such leave of
absence on awards under the Plan previously made to any recipient who takes such
leave of absence.
5.08. Newly Eligible Employees.
The Administrator shall be entitled to make such rules, regulations,
determinations and awards as it deems appropriate in respect of any employee who
becomes eligible to participate in the Plan or any portion thereof after the
commencement of an award or incentive period.
5.09. Adjustments.
In any event of any change in the outstanding Common Stock by reason of
a stock dividend or distribution, recapitalization, merger, consolidation,
split-up, combination, exchange of shares or the like, the Administrator may
appropriately adjust the number of shares of Common Stock which may be issued
under the Plan, the number of shares of Common Stock subject to Options
previously granted under the Plan, the option price of Options previously
granted under the Plan and any and all other matters deemed appropriate by the
Administrator.
5. 10. Amendment of the Plan.
(a) The Board of Directors of the Company may, without further action
by the stockholders and without receiving further consideration from the
participants, amend this Plan or condition or modify awards under this Plan in
response to changes in securities or other laws or rules, regulations or
regulatory interpretations thereof applicable to this Plan or to comply with
stock exchange rules or requirements.
(b) The Board of Directors of the Company may at any time and from time
to time terminate or modify or amend the Plan in any respect, except that
without stockholder approval the Board may not (i) increase the maximum number
of shares of Common Stock which may be issued under the Plan (other than
increases pursuant to Section 5.09 hereof), (ii) extend the period during which
any award may be granted or exercised, or (iii) extend the term of the Plan. The
termination or any modification or amendment of the Plan, except as provided in
subsection (a), shall not without the consent of a participant, affect his or
her rights under an award previously granted to him or her. No amendment which
affects one or more provisions of the Plan which are required under Rule 16b-3
under the Securities Exchange Act of 1934, as amended, for qualification of
Article 6 as a formula plan, including the designation of the persons entitled
to receive a grant of a Stock Option, the Stock Option price, the number of
shares that are granted under a Stock Option, and the timing of the grant or
exercise of Stock Options, (or otherwise would cause Rule 16b-3 to become
inapplicable) may be made within six (6) months of a prior amendment which also
affects one of those provisions.
ARTICLE 6
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN PROVISIONS
6.01. Purpose.
The purpose of this Article 6 is to provide a means whereby the Company
may, through the grant of Options pursuant to a formula to non-employee
directors of the Company, attract and retain persons of ability as directors
(including directors who are also officers, but excluding directors who are also
employees) and motivate those directors to exert their best efforts on behalf of
the Company. In addition, the formula limitation established under this Article
6 for Stock Option awards to non-employee directors is to maintain the
disinterested status of the recipients.
6.02. Number of Shares Available.
Subject to the aggregate number of shares of Common Stock provided for
under the Plan, Stock Options shall be granted by the Company from time to time
to non-employee directors of the Company as provided in this Article 6.
6.03. Terms and Conditions.
All options granted under this Article 6 shall constitute Stock Options
and not Incentive Stock Options.
Each Stock Option granted under this Article 6 shall be evidenced by an
agreement, in form approved by the Committee, which shall be subject to the
following expressed terms and conditions and to other terms and conditions as
the Committee may deem appropriate, including those imposed by Section 5.10
following amendment of the Plan requiring shareholder approval.
(a) Grant of Stock Option. Subject to the limitations provided under
this paragraph (a) of Section 6.03, Stock Options shall be granted to each
non-employee director as follows: (i) a Stock Option for 10,000 shares of Common
Stock, following the non-employee director's initial election to the Board of
Directors of the Company (or the effective date of this Article 6, if later) and
(ii) a Stock Option for 10,000 shares of Common Stock for each year thereafter
during which the non-employee director is either reelected as a non-employee
director or maintains that status. Each stock option granted shall become fully
vested and exercisable on the first anniversary of the date of grant. On the
date this Plan is amended to include this Article 6, subject to restrictions
provided at Section 5.10, each current non-employee director shall be granted a
Stock Option for shares of Common Stock in an amount to be determined using the
same formula as is provided for under the preceding sentence but based upon all
election and re-elections of that non-employee to the Board of Directors of the
Company (and for years for which the non-employee director maintained membership
on the Board) which occurred prior to the inclusion of this Article 6. After the
initial grants, future grants shall be made annually on the same date as the
annual meeting of the shareholders of the Company. The maximum aggregate number
of shares of Common Stock which shall be granted under all Stock Options granted
under this Article 6 to any individual non-employee director is 50,000.
(b) Stock Option Price. The Stock Option price per share of Common
Stock shall be, as provided under Section 2.03, the fair market value of a share
of Common Stock on the date the Stock Option is granted (but in no event less
than the par value if any).
(c) Exercise in the Event of Death or Termination of Non-Employee
Director Status. (1) If any participant shall die (i) while a non-employee
director of the Company (ii) within three (3) months of ceasing to be a member
of the Board of Directors of the Company other than for cause, or (iii) within
three (3) months after the participant's resignation or removal as a
non-employee director of the Company because the participant is permanently and
totally disabled (as determined by the Administrator) the participant's Stock
Options may be exercised by the person or persons to whom the participant's
rights under the Stock Options pass by will or applicable law or if no person
has that right, by the participant's executors or administrators, at any time,
or from time to time (50 share
increments), within one (1) year of the date of the participant's death if
(c)(1)(i) of this Section 6.03 is applicable and within one (1) year of the date
of the participant's resignation or removal if (c)(1)(ii) or (iii) of this
Section 6.03 is applicable, but in no event later than the expiration date
specified in Section 2.04. (2) If a participant (i) resigns or is removed by the
Company because of disability, or (ii) resigns because of retirement (s
determined by the Administrator), the participant may exercise the participant's
Stock Options at any time, or from time to time (50 share increments), within
one (1) year of the date of the participant's resignation or removal, but in no
event later than the expiration date specified in Section 2.04. Except as
provided by (1) and (2) of this paragraph (c) of Section 6.03, if a participant
voluntarily resigns without cause or is involuntary removed without cause, the
participant may exercise the participant's Stock Options at any time, or from
time to time (50 share increments), within three (3) months of the date of the
participant's resignation or removal, but in no event later than the expiration
date specified in other portions of this Plan. (4) If a participant voluntarily
resigns for cause or is involuntary removed for cause, the participant's Stock
Options shall terminate immediately.
(d) No Additional Rights. The Plan and any Stock Option granted under
the Plan shall not confer upon any participant any right with respect to
continued membership on the Board of Directors of the Company, nor any other
position with the Company.
(e) Other Terms. Except as modified under this Article 6, Stock Options
granted to non-employee directors of the Company shall be subject to the
provisions generally applicable to Stock Options under Article 2.
6.04. Effective Date.
The effective date of this Article 6 shall be January 10, 1996.
6.05. Name.
This Article of the Plan shall be known as the "Long-Term Stock
Investment Plan for Non-Employee Directors."
REVISED
PRELIMINARY
PROXY
COMFORCE CORPORATION
Solicited by The Board of Directors for the Annual Meeting of Stockholders
2001 Marcus Avenue
Lake Success, New York 11042
The undersigned hereby appoints Michael Ferrentino and Christopher P.
Franco as Proxies, each with the power to appoint his or her substitute, to vote
all of the shares of common stock of COMFORCE Corporation, a Delaware
corporation (the "Company"), held of record by the undersigned on the record
date, September 2, 1996, at the Annual Meeting of Stockholders to be held on
September 27, 1996, or any adjournment thereof, as directed and, in their
discretion, on all other matters which may properly come before the meeting. The
undersigned directs said proxies to vote as specified upon the items shown on
the reverse side, which are referred to in the Notice of Annual Meeting and set
forth in the Proxy Statement.
Holders of record of the Company's Common Stock and Series E Preferred
Stock at the close of business on the record date will be entitled to vote at
the Annual Meeting. Holders of Common Stock will be entitled to one vote for
each share then held. Holders of Series E Preferred Stock will be entitled to
100 votes for each share then held, such votes to be voted on a combined basis
with the Common Stock and not on a class basis. Each stockholder may vote in
person or by proxy, with the privilege of cumulative voting in connection with
the election of directors. All shares represented by proxy will be voted in
accordance with the instructions, if any, given in such proxy. A stockholder may
abstain from voting on any proposal or may withhold authority to vote for any
nominee(s) by so indicating on the reverse side. Votes withheld for any
nominee(s) for director will be cast for the remaining nominee(s).
The votes represented by this proxy will be voted as marked by you. However, if
you execute and return the proxy unmarked, such votes will be voted FOR all of
the proposals. Please mark each box with an "x".
The Board of Directors Recommends a Vote "For" all proposals.
1. Election of Directors: Election of Directors: (Michael Ferrentino, Dr.
Glen Miller, Keith Goldberg and Richard Barber have been nominated)
FOR Withheld Withheld for the following
for all following (write the
nominee's name in the
space below).
2. Ratify issuance of stock
FOR Agaisnt Abstain
3. Ratify COMFORCE Global transactions
FOR Against Abstain
4. Amend Certificate of Incorporation
to increase authorized capital stock
FOR Against Abstain
5. Amend Certificate of Incorporation
to eliminate cumulative voting
FOR Against Abstain
6. Amend Long-Term Stock Investment Plan
FOR Against Abstain
7. Appointment of Independent Auditors
FOR Against Abstain
When shares are held as joint tenants, both should sign. When signing
as attorney, executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full corporate name by President
or other authorized officer. If a partnership, please sign in the partnership
name by authorized person.
Dated:
Signature:
Signature if held jointly