SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-6081
COMFORCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2262248
------------------------- -----------------
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.
2001 Marcus Avenue 11042
Lake Success, New York --------
------------------------ Zip Code
Address of principal executive offices
Registrant's telephone number, including area code:
(516) 352-3200
Not Applicable
-------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at October 31, 1996
---------------------------- -------------------------------
Common stock, $.01 par value 10,060,141
COMFORCE CORPORATION
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION 1
Item 1. Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 1
Condensed Consolidated Statements of Operations
for the three and nine months ended
September 30, 1996 and September 30, 1995 3
Condensed Consolidated Statement of Changes in Shareholders'
Equity (Deficit) for the nine months ended September 30, 1996 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1996 and
September 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
PART II OTHER INFORMATION 23
Item 2. Changes in Securities 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Current Assets:
Cash and equivalents $ 952 $ 649
Restricted cash and equivalents 50 --
Receivables including $315,000 unbilled revenue at September 30, 1996
and $151,000 of unbilled revenue at December 31, 1995 less
allowance for doubtful accounts of $75,000 at September 30, 1996
and zero at December 31, 1995 10,081 1,754
Prepaid expenses 86 --
Officer loans 367 --
Other 326 61
Receivable from ARTRA GROUP Incorporated -- 1,046
----------- ----------
Total Current Assets 11,862 3,510
----------- ----------
Property, plant and equipment 587 97
Less accumulated depreciation and amortization 96 7
----------- ----------
491 90
----------- ----------
Other Assets:
Excess of cost over net assets acquired, net of accumulated amortization of
$341,000 in 1996 and $51,000 in 1995 14,036 4,801
Other 231 135
----------- ----------
14,267 4,936
----------- ----------
$ 26,620 $ 8,536
=========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
September 30, December 31,
1996 1995
------------- ------------
LIABILITIES
Current liabilities:
Notes payable $ - $ 500
Borrowings under revolving line of credit 3,250 -
Accounts payable 283 75
Accrued expenses, including $250,000 due to a related
party in 1995 2,257 719
Accrued payroll taxes 529 -
Income taxes 494 214
Liabilities to be assumed by ARTRA GROUP Incorporated
and net of liabilities of discontinued operations 350 3,699
------------ ----------
Total current liabilities 7,163 5,207
------------ ----------
Noncurrent liabilities to be assumed by
ARTRA GROUP Incorporated - 541
------------ ----------
Obligations expected to be settled by the
issuance of common stock 741 550
------------ ----------
Commitments and contingencies
SHAREHOLDERS' EQUITY (DEFICIT)
Series E convertible preferred stock, $.01 par value; 10,000
authorized, 8,871 issued and outstanding, liquidation value
of $100 per share ($8,871,000) 1 -
Series D senior convertible preferred stock, $.01 par value;
15,000 authorized, 7,002 issued and outstanding, liquidation
value of $1,000 per share ($7,002,000) 1 -
Common stock, $.01 par value; authorized 10,000,000 shares;
issued 9,817,000 shares in 1996 and 9,309,000 shares in 1995 98 92
Additional paid-in capital 17,902 95,993
Accumulated deficit - (93,847)
Retained earnings since January 1, 1996 714 -
------------ ----------
18,716 2,238
------------ ----------
$ 26,620 $ 8,536
------------ ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1996 1995 1996 1995
--------- -------- -------- ---------
Net Sales $ 20,356 $ -- $ 33,514 $ --
Costs and expenses:
Cost of goods sold 17,688 -- 28,690 --
Selling, general and administrative 1,718 3,038 2,891 3,265
Depreciation and amortization 115 -- 343 --
------- ------- ------- --------
19,521 3,038 31,924 3,265
Operating income (loss) 835 (3,038) 1,590 (3,265)
------- ------- ------- --------
Other income (expense):
Interest expense (51) (279) (102) (410)
Other income (expense), net 13 (26) 29
------- ------- ------- --------
(38) (305) (73) (3,675)
Earnings (loss) from continuing operations
before income taxes 797 (3,343) 1,517 (3,675)
Provision for income taxes (342) -- (610) --
------- ------- ------- --------
Earnings (loss) from continuing operations 455 (3,343) 907 (3,675)
------- ------- ------- --------
Discontinued operations
Earnings from operations -- (1,821) -- (16,677)
Provision for income taxes -- -- -- --
------- ------- ------- --------
Loss from discontinued operations -- (1,821) -- (16,677)
------- ------- ------- --------
Earnings (loss) before extraordinary credit 455 (5,164) 907 (20,286)
Extraordinary credit, net discharge of
indebtedness -- -- -- 6,657
------- ------- ------- --------
Net earnings (loss) 455 (5,164) 907 (13,629)
Dividends on Series D Preferred Stock (105) -- (175) --
------- ------- ------- --------
Earnings available to Common Stockholders $ 350 $(5,164) $ 732 $(13,629)
======= ======= ======= ========
Earnings (loss) per share:
Earnings (loss) from continuing operations $ 0.03 $ (1.04) $ 0.06 $ (1.14)
Loss from discontinued operations -- (.46) -- (5.00)
------- ------- ------- --------
Earnings (loss) before extraordinary credit 0.03 (1.50) 0.06 (6.14)
Extraordinary credit -- -- -- 2.04
------- ------- ------- --------
Net earnings (loss) $ 0.03 $ (1.50) $ 0.06 $ (4.10)
======= ======= ======= ========
Weighted average number of shares of common
stock and common stock equivalent outstanding
13,303 3,163 13,103 3,321
======= ======= ======= ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited in thousands, except share data)
Series E Series D
Common Stock Preferred Stock Preferred Stock Additional
--------------------- ----------------- ----------------- Paid-in
Shares Dollars Shares Dollars Shares Dollars Capital
--------- ---------- ------ --------- ------ --------- ------------
Balance at December 31, 1995 9,309,198 $ 92 -- -- -- -- $ 95,993
Quasi - Reorganization as of
January 1, 1996 -- -- -- -- -- -- (93,847)
Net Earnings -- -- -- -- -- -- --
Exercise of stock options 4,500 1 -- -- -- -- 22
Exercise of stock warrants 338,334 4 -- -- -- -- 1,042
Issuance of Series E convertible
preferred stock -- -- 8,871 1 -- -- 4,635
Issuance of Series D senior
convertible preferred stock -- -- -- -- 7,002 1 6,415
SEC registration fees -- -- -- -- -- -- (101)
Common stock issued as
Consideration for the Purchase
of Force Five, Inc. 27,398 -- -- -- -- -- 500
Common stock issued to pay
liabilities assumed by ARTRA 137,500 1 -- -- -- -- 275
Liability assumed by ARTRA -- -- -- -- -- -- 2,968
Dividends:
Series E preferred stock -- -- -- -- -- -- --
Series D preferred stock -- -- -- -- -- -- --
--------- -------- ---- ------- ---- ------- ----------
Balance at September 30, 1996 9,816,930 $ 98 8,871 $ 1 7,002 $ 1 $ 17,902
--------- -------- ----- ------- ----- ------- ----------
Retained Earining Total
Since Shareholders'
Accumulated January 1, Equity
(Deficit) 1996
------------- ----------------- -------------
Balance at December 31, 1995 $ (93,847) $ 2,238
Quasi - Reorganization as of
January 1, 1996 $ 93,847
Net Earnings -- $ 907 $ 907
Exercise of stock options -- -- 23
Exercise of stock warrants 1,046
Issuance of Series E convertible
preferred stock -- -- 4,636
Issuance of Series D senior
convertible preferred stock -- -- 6,416
SEC registration fees -- -- (101)
Common stock issued as
Consideration for the Purchase
of Force Five, Inc. -- -- 500
Common stock issued to pay
liabilities assumed by ARTRA -- -- 276
Liability assumed by ARTRA -- -- 2,968
Dividends:
Series E preferred stock -- (18) (18)
Series D preferred stock -- (175) (175)
------------ ------------ -----------
Balance at September 30, 1996 $ 0 $ 714 $ 18,715
============ ============ ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited in thousands)
Nine Months Ended
September 30,
-----------------------
1996 1995
---------- ---------
Net cash flows used by operating activities $ (4,321) $(2,533)
-------- -------
Cash flows from investing activities:
COMFORCE Global direct acquisition costs -- (753)
Acquisition of Williams Telecommunications (2,093) --
Acquisition of RRA (5,676) --
Acquisition of Force Five, Inc. (1,673) --
Officer loans (367) --
Payment of liabilities with restricted cash -- 550
Additions to property, plant and equipment (183) (21)
Retail fixtures -- (630)
-------- -------
Net cash flows (used by) from investing activities (9,992) (854)
-------- -------
Cash flows from financing activities:
Proceeds from revolving line of credit 4,150 3,355
Payments on revolving line of credit (900)
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 1,046 --
Dividends Paid on Preferred Stock Series D (105) --
Other (77) 1
-------- -------
Net cash flows from financing activities 14,666 2,606
-------- -------
Increase (decrease) in cash and cash equivalents 353 (781)
Cash and equivalents, beginning of period 649 783
-------- -------
Cash and equivalents, end of period $ 1,002 $ 2
======== =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 103 $ 131
Income taxes paid, net -- 9
Supplemental schedule of noncash investing and financing activities:
Common stock issued as consideration for debt restructuring -- 567
Net change in ARTRA receivables and liabilities 2,968 --
Common stock issued to settle liabilities assumed by ARTRA 275 --
Common stock issued for purchase of Force Five, Inc. 500 --
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
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
September 30, 1996, ARTRA owned approximately 18% 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.
As discussed in Note 2, on August 20, 1996 (effective July 31, 1996) the Company
purchased all of the stock of Force Five, Inc. ("Force Five"). Force Five is in
the business of providing information technology consulting services to leading
companies nationwide.
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.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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
$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 million plus related direct costs of the
acquisition of $73,000 are being amortized on a straight-line basis over 40
years.
On May 10, 1996, the Company acquired RRA for an aggregate purchase price of
$5.1 million plus contingent payments payable over three years in an aggregate
amount not to exceed $650,000. The acquisition of RRA was accounted for by the
purchase method and, accordingly, RRA operations are included in the Company's
statement of operations from the date of acquisition. The excess purchase price
over the fair value of RRA net assets acquired (goodwill) of $5.41 million plus
related acquisition costs, are being amortized on a straight-line basis over 40
years. RRA is in the business of providing contract employees to other
businesses.
On August 20, 1996 (effective July 31, 1996), the Company purchased all of the
stock of Force Five for a purchase price of $2 million, payable in $1.5 million
cash and 27,398 shares of the Company's Common Stock, plus a three year
contingent payout based on future earnings of Force Five in an aggregate amount
not to exceed $2 million. The acquisition of Force Five was accounted for under
the purchase method and, accordingly, Force Five operations are included in the
Company's statement of operations from the date of acquisition. The excess
purchase price over the fair value of Force Five net assets acquired (goodwill)
of $1.95 million plus related acquisition costs, are being amortized on a
straight-line basis over 40 years. Force Five, located in Dallas Texas,
provides information technology consulting services to leading companies
nationwide.
The following unaudited pro forma condensed consolidated statements of
operations for the three and nine months ended September 30, 1996 and September
30, 1995 present the Company's results of operations as if the acquisition of
COMFORCE Global, Williams, RRA, Force Five and the related revolving line of
credit and private placement of the Company's Common Stock and Series D and
Series E Preferred Stock had been consummated as of January 1, 1995.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
For the three months ended September 30, 1996
(In thousands)
Pro Forma
Historical Force Five(A) Adjustments Pro Forma
----------- ------------- --------------- ----------
Revenues $ 20,356 $ 627 $ 20,983
-------- ----- --------
Operating costs and expenses:
Cost of revenues 17,688 490 18,178
Other operating costs
and expenses 1,833 438 $(309) (B) 1,962
-------- ----- ----- --------
19,521 928 (309) 20,140
Operating earnings (loss) 835 (301) 309 843
-------- ----- ----- --------
Other income net 13 13
Interest and other non-operating
expenses (51) (2) (10) (C) (63)
-------- ----- ----- --------
(38) (2) (10) (50)
-------- ----- ----- --------
Earnings (loss) from continuing
operations before income taxes 797 (303) 299 793
(Provision) credit for income taxes (342) -- 2 (G) (340)
-------- ----- ----- --------
Income from continuing operations $ 455 $(303) $ 301 $ 453
======== ===== ===== ========
Dividends on Preferred Series D $ (105) $ (105)
-------- --------
Earnings available to common
shareholders $ 350 $ 348
======== ========
Income per share from continuing
operations $.03 $ .03
======= ========
Weighted average shares
outstanding (F) 13,303 13,303
======= ========
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended September 30, 1995
(In thousands)
Lori COMFORCE Pro Forma
Historical Global (A) Williams (A) RRA (A) Force Five (A) Adjustment Pro Forma
---------- ---------- ------------ -------- -------------- ----------- ---------
Revenues $ -- $ 3,354 $ 1,201 $13,017 1,735 19,307
Operating costs and
expenses:
Cost of Revenues 2,582 871 11,941 1,309 16,703
Spectrum corporate
management fees (D) 515 -- 515
Stock Compensation 3,000 425 (E) 3,425
Other operating costs
and expenses 38 246 87 754 313 82 (B) 1,520
-------- -------- ---------- ------ ------------ --------- -------
3,038 3,343 958 12,695 1,622 507 22,163
-------- -------- ---------- ------ ------------ --------- -------
Operating earnings
(loss) (3,038) 11 243 322 113 507 (2,856)
-------- -------- ---------- ------ ------------ --------- -------
Other Income (26) 5 2 (19)
Interest and other non-
operating expenses (279) (32) (22) (71) (C) (404)
-------- ------ ------------ --------- -------
(305) 5 (30) (22) (71) (423)
Earnings (loss) from
continuing operations
before income taxes (3,343) 16 243 292 91 (578) (3,279)
(Provision) credit for
income taxes -- 4 (97) (117) (37) 444 (G) (197)
-------- -------- ---------- ------ ------------ --------- -------
Income (loss) from
continuing operations $ (3,343) $ 20 $ 146 $ 175 $ 54 $ (134) $(3,082)
======== ======== ========== ====== ============ ========= =======
Loss per share from
continuing operations $ (1.06) $ (.40)
========= =======
Weighted average shares
outstanding (F) 3,163 7,626
========= =======
9
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 the operations of COMFORCE Global,
Williams, RRA and Force Five is for the periods prior to their acquisitions
(i.e., in the case of COMFORCE Global, the period from July 1, 1995 through
September 30, 1995, which precedes its October 17, 1995 acquisition; in the
case of Williams, the periods from July 1, 1995 through September 30, 1995,
which precedes its March 3, 1996 acquisition; as in the case of RRA, the
period from July 1, 1995 through September 30, 1995, which precedes its May
10, 1996 acquisition; and in the case of Force Five, the periods from July
1, 1995 through September 30, 1995 and from July 1, 1996 through July 30,
1996, which precede the July 31, 1996 effective date of its acquisition).
(B) Amortization of intangibles arising from the COMFORCE Global, Williams,
RRA, and Force Five acquisitions, net of non-recurring officers' bonus of
$313,000 in 1996 at Force Five's. The table below reflects where the
amortization of intangibles has been recorded.
Three Months Three Months
September 1996 September 1995
-------------- --------------
Historical COMFORCE $ 119
Historical Global $ 41
Williams
RRA
Pro forma Adjustment 4 82
------- -------
Adjusted Pro forma per
Financial statement $ 123 $ 123
======= =======
(C) Interest expense incurred in 1996 assumes $1.45 million outstanding for one
month at 8.25%. Interest expense incurred in 1995 assumes $3.35 million
outstanding under the line of credit for three months for the purchase of
Williams and Force Five assuming an interest rate of 8.5%.
(D) Corporate management fees from COMFORCE Global's former parent. The amount
of these management fees may not be representative of costs incurred by
COMFORCE Global on a stand alone basis.
(E) Represents the balance of the $3.42 million 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 ARTRA, 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, Series D and Series E Preferred Stock issued in
conjunction with the purchase of RRA and for working capital purposes, and
27,398 shares issued in conjunction with the purchase of Force Five.
Current management of the Company has questioned its obligation to deliver
the 150,000 shares to Peter Harvey and the 100,000 shares to ARTRA issued
in consideration of their guarantees. However, for purposes of presenting
earnings per share data, the Company is recognizing these shares as being
issued and outstanding pending resolution of the matter.
(G) Represents the tax effect, at the Company's effective tax rate, of the pro
forma adjustments, offset by the pro forma tax benefit the Company would
have realized from utilization of COMFORCE'S pre-tax loss in 1995 and Force
Five's pre-tax loss in 1996.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine months ended September 30, 1996
(In thousands)
Pro Forma
Historical Williams (A) RRA (A) Force Five Adjustments Pro Forma
---------- ------------ -------- ---------- ----------- ---------
Revenues $ 33,514 $ 657 $22,799 4,598 $ 61,568
Operating costs and expenses:
Cost of Revenues 28,690 499 20,959 3,454 53,602
Other operating costs
and expenses 3,234 65 1,409 1,288 (220) (B) 5,776
-------- --------- ------ -------- --------- -------
31,924 564 22,368 4,742 (220) 59,378
Operating earnings (loss) 1,590 93 431 (144) 220 2,190
-------- --------- ------ -------- --------- -------
Other Income 29 29
Interest and other non-operating
expenses (102) (34) (7) (99) (C) (242)
-------- ------ -------- --------- -------
(73) (34) (7) (99) (213)
Earnings (loss) from continuing
operations before income taxes 1,517 93 397 (151) 121 1,977
(Provision) credit for income taxes (610) (39) -- 49 (207) (G) (807)
-------- --------- ------ -------- --------- -------
Income (loss) from continuing
operations $ 907 $ 54 $ 397 $ (102) $ (86) $ 1,170
======== ========= ====== ======== ========= =======
Dividends on Preferred Series D $ (175) $ (175)
-------- -------
Earnings available to common
shareholders $ 732 $ 995
======== =======
Loss per share from continuing
operations $ .06 $ .08
======== =======
Weighted average shares
outstanding (F) 13,103 13,103
======== =======
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended September 30, 1995
(In thousands)
Lori COMFORCE Pro Forma Pro Forma
Historical Global (A) Williams (A) RRA (A) Force Five Adjustments Pro Forma
---------- ---------- ------------ --------- ---------- ----------- ---------
Revenues $ -- $ 9,568 $ 2,879 $ 37,441 $ 5,021 54,909
-------- ------- --------- ------- -------- --------
Operating costs and
expenses:
Cost of Revenues 7,178 2,086 34,559 3,823 47,646
Stock compensation (E) 3,000 425 (D) 3,425
Spectrum corporate
management fees (D) 1,140 -- 1,140
Other operating costs and
expenses 265 1,397 218 2,102 883 259 (B) 5,124
-------- ------- --------- ------- -------- --------
3,279 9,715 2,304 36,661 4,706 684 57,335
-------- ------- --------- ------- -------- --------
Operating earnings
(loss) (3,265) (147) 575 780 315 (684) (2,426)
-------- ------- --------- ------- -------- --------
Other Income 7 7
Interest and other non-
operating expenses (410) (115) (36) (214) (C) (775)
-------- ------- --------- ------- -------- --------
(410) 7 (115) (36) (214) (768)
Earnings (loss) from continuing
operations before income taxes (3,675) (140) 575 665 279 (898) (3,194)
(Provision) credit for income
taxes -- (15) (230) -- (112) 875 (G) 518
-------- ------- --------- ------- -------- --------
Income (loss) from continuing
operations $ (3,675) $ (155) $ 345 $ 665 $ 167 $ (23) $ (2,676)
-------- ------- --------- ------- -------- --------
Loss per share from continuing
operations $ (1.11) $ (.34)
======== ========
Weighted average shares
outstanding (F) 3,321 7,784
======== ========
12
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 the operations of COMFORCE Global,
Williams, RRA and Force Five 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 its October 17, 1995 acquisition; in
the case of Williams, the periods from January 1, 1996 through March 2,
1996 and from January 1, 1995 through September 30, 1995, which precede its
March 3, 1996 acquisition; in the case of RRA, the periods from January 1,
1996 through May 9, 1996 and from January 1, 1995 through September 30,
1995, which precede its May 10, 1996 acquisition; and in the case of Force
Five, the periods from January 1, 1995 through September 30, 1995 and from
January 1, 1996 through July 30, 1996, which precede the July 31, 1996
effective date of its acquisition).
(B) Amortization of intangibles arising from the COMFORCE Global, Williams,
RRA, and Force Five acquisitions, net of non-recurring officers' bonus of
$313,000 in 1996 at Force Five. The table below reflects where the
amortization of intangibles has been recorded
Nine Months Nine Months
September 1996 September 1995
-------------- --------------
Historical COMFORCE 290
Historical COMFORCE Global 124
Williams
RRA
Force Five
Pro forma Adjustment 93 259
--- ---
Adjusted Pro forma per
Financial statement 383 383
=== ===
(C) To record interest expense incurred for the purchase of Williams and Force
Five for the pro forma nine months ended September 30, 1995 and for the
period January 1, 1996 through March 3, 1996 for Williams and January 1,
1996 through July 31, 1996 for Force Five. Interest expense represents
interest on the line of credit assuming all $3,350,00 was outstanding for
the nine months ended September 30, 1995 and for the period January 1, 1996
through March 3, 1996 and $1,450,000 outstanding for the period March 3,
1996 through July 31, 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. 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 ARTRA, 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, Series D and Series E Preferred Stock issued in
conjunction with the purchase of RRA and for working capital purposes, and
27,398 shares issued in conjunction with the purchase of Force Five.
Current management of the Company has questioned
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
its obligation to deliver the 150,000 shares to Peter Harvey and the
100,000 shares to ARTRA issued in consideration of their guarantees.
However, for purposes of presenting earnings per share data, the Company is
recognizing these shares as being issued and outstanding pending resolution
of the matter.
(G) Represents the tax effect, at the Company's effective tax rate, of the pro
forma adjustments, and the tax effect, at the Company's effective tax rate,
of the earnings of RRA for 1996. For 1995, represents the tax effect, at
the Company's effective tax rate, of the pro forma adjustments and the tax
effect, at the Company's effective tax rate, of the earnings of RRA, offset
by the pro forma tax benefit the Company would have realized from the
utilization of COMFORCE's pre-tax loss in 1995.
3. NOTES PAYABLE
Notes payable and long-term debt (in thousands) consists of:
September 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% -- 1,736
Note payable to a bank under a revolving line of credit, due in
July 1998, with interest payable monthly at the bank's prime
rate. At September 30 the bank's prime rate was 8.25%. 3,250 --
Accounts Receivable credit facility, discontinued operations -- 1,535
Less:
Liabilities to be assumed by ARTRA (see Note 7) -- (1,986)
Liabilities included with discontinued operations -- (1,535)
------------- -------
$3,250 $ 500
============= =======
On July 22, 1996, the Company and certain subsidiaries entered into a $10
million Revolving Credit Facility (the "Credit Facility") with The Chase
Manhattan Bank ("Chase") to provide working capital for the Company's
operations. The Company, COMFORCE Global, COMFORCE Technical Services, Inc. and
COMFORCE Information Technologies, Inc. are co-borrowers under the Credit
Facility and Project Staffing Support Team, Inc. ("PSST") is a guarantor of the
obligations. Principal outstanding under the Credit Facility 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.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Available advances under the Credit Facility are based upon the amount equal to
80% of eligible receivables of COMFORCE Global, COMFORCE Technical Services,
Inc. and COMFORCE Information Technologies, Inc., less the aggregate amount of
accrued payroll taxes due by those companies.
The Credit Facility 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 Facility 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. COMFORCE Information Technologies,
Inc. and PSST are pledged as security.
As of September 30, 1996, the Company was not in compliance with certain
financial covenants under the Credit Facility. Effective as of such date, Chase
agreed to waive such noncompliance and agreed to amend certain of the financial
covenants.
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. Holders of shares of Series E
Preferred Stock are entitled to dividends equal to those declared on the Common
Stock, or if no dividends are declared on the Common Stock, nominal cumulative
dividends payable only if the Series E Preferred Stock fails to be converted
into Common Stock by September 1, 1996. The Series E Preferred Stock has a
liquidation preference of $100 per share ($887,100 in the aggregate for all
outstanding shares). Effective as of October 28, 1996, each share of Series E
Preferred Stock automatically converted into 100 shares of Common Stock. See
Note 10
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. Holders of the shares of
Series D Preferred Stock are entitled to cumulative dividends of 6% per annum,
payable quarterly in cash on the first day of February, May, August and November
in each year. The Series D Preferred Stock has a liquidation preference of
$1,000 per share ($7,002,000 in the aggregate for all outstanding shares).
In July 1996, the Company issued 137,500 shares of Common stock to pay
liabilities assumed by ARTRA.
In August 1996, 20,000 warrants were exercised at an average price of $2.00 per
share
In September 1996, 27,398 Common shares were issued as partial consideration for
the purchase of Force Five.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
5. EARNINGS PER SHARE
Earnings (loss) per common share is computed by dividing net earnings (loss),
after deducting the preferred dividends requirements, 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. Common Stock
equivalents consist of shares subject to stock options, warrants, and the Series
E Preferred Stock. For this computation, shares of the Series E Preferred Stock
are considered Common Stock equivalents at a rate of one share of Series E
Preferred Stock to 100 shares of Common Stock. The shares of Series D Preferred
Stock are not considered Common Stock equivalents and are excluded from primary
earnings per share. The dividends accrued or paid on the Series D Preferred
Stock of $175,000 have been deducted for computing earnings available to common
shareholders. Fully diluted earnings per share have not been presented as the
result is anti-dilutive.
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.
At September 30, 1996 and December 31, 1995, liabilities to be assumed by ARTRA
and net liabilities of the discontinued Jewelry Business (in thousands) consist
of:
September 30 December 31
Current: 1996 1995
------------ -----------
Liabilities to be assumed by ARTRA
Notes payable $ -- $1,986
Court ordered payments 350 990
Accrued expenses -- 349
----- ------
$ 350 $3,325
Net liabilities of the discontinued
Jewelry Business -- 374
----- ------
$ 350 $3,699
===== ======
Noncurrent:
Liabilities to be assumed by ARTRA
Court ordered payments $ -- $ 541
===== ======
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
As noted in the table above, as of September 30, 1996, remaining pre-existing
Lori liabilities assumed by ARTRA are $350,000. To the extent ARTRA is able to
make subsequent payments, they will be recorded as additional paid-in capital.
The ability of ARTRA to satisfy these obligations is uncertain. The financial
statements of ARTRA include an explanatory paragraph indicating substantial
doubt about the ability of ARTRA to continue as a going concern. The amounts
receivable from ARTRA, exclusive of subsequent payments, have not been reflected
in the Company's financial statements at September 30, 1996. No collateral has
been provided in support of these obligations.
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.
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.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
9. RELATED PARTY TRANSACTIONS
The Company made a loan of $367,000 in the aggregate to Michael Ferrentino, the
President and a Director of the Company, Christopher P. Franco, an Executive
Vice President of the Company, Kevin W. Kiernan, an employee of the Company, and
James L. Paterek, a consultant to the Company, to cover their tax liabilities
resulting from the issuance of the Company's Common Stock to them as inducement
to direct the Company's entry into the technical staffing business. Of this
amount, $55,000 was advanced in 1995, $38,000 was advanced in February 1996, and
$238,000 was advanced in April 1996, and $36,000 was advanced in July 1996.
Yield Industries, Inc., a corporation wholly-owned by Messrs. Paterek and
Ferrentino, earned a delivery fee of $500,000 in connection with the Company's
acquisition of COMFORCE Global, $250,000 of which was paid in 1995 and the
balance of which was paid in January 1996.
The Company paid L.H. Friskoff & Company, a certified public accounting firm at
which Richard Barber, a Director of the Company, is a partner, approximately
$91,000 in fees during the period from January 1, 1996 through September 30,
1996 for tax-related advisory services.
10. SUBSEQUENT EVENTS
In October and November 1996, the Company sold 3,250 shares of a new series of
Preferred Stock, par value $0.01 per share, designated as the Series F
Convertible Preferred Stock ("Series F Preferred Stock"), at a selling price of
$1,000 per share. Each share of Series F Preferred Stock will, (i) at the
option of the holder on or after the applicable conversion date or (ii)
automatically on the second anniversary of the date of issuance, be converted
into such number of shares of Common Stock determined by dividing $1,000 plus
all accrued, unpaid dividends thereon by the per share conversion price. The
conversion price is 86% of the average closing bid price of the Common Stock for
the five trading days immediately preceding the conversion date, subject to
certain limitations. The conversion date is, in the case of up to 50% of the
shares of Series F Preferred Stock, March 1, 1997 and, in the case of the
remaining shares, April 1, 1997. Holders of shares of Series F Preferred Stock
are entitled to cumulative dividends of 5% per annum, payable quarterly on the
first day of March, June, September, and December in each year, payable in cash
or Common Stock (valued at the closing price on the date of declaration), at the
Company's election. Any shares of Series F Preferred Stock remaining outstanding
on the second anniversary of the date of issuance will thereupon automatically
be converted into Common Stock. As a result of the issuance of these shares,
holders of Series F Preferred Stock will have a liquidation preference over
holders of Common Stock. Except as otherwise provided by law, the holders of
Series F Preferred Stock will not be entitled to vote.
At the Company's annual meeting held on October 28, 1996, the Company's
stockholders voted: (i) 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; (ii) 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 direct the Company's entry
into the technical staffing business; (iii) to ratify the Company's entering
into the technical staffing business and exiting the fashion jewelry business
and transactions related thereto, including (a) its acquisition of all of the
capital stock of Spectrum Global Services, Inc. (formerly d/b/a YIELD Global
and, following its acquisition by the Company, renamed COMFORCE Global, Inc.),
(b) its issuance of 1,946,667 shares of its Common Stock plus detachable
warrants to purchase 973,333 shares of its Common Stock in a private placement,
(c) if determined by management to be necessary or appropriate, its issuance of
100,000 shares and 150,000 shares, respectively, of its Common Stock to ARTRA,
and Peter R. Harvey, formerly a director of the Company, in consideration of
their guarantees in connection with the transactions, (d) its exchange of
100,000 shares of its Common Stock to ARTRA for the 9,701 shares of the
Company's Series C Preferred Stock held by ARTRA, and (e) its disposition of its
discontinued fashion jewelry operations; (iv) 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
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Common Stock and from 1,000,000 shares to 10,000,000 shares of Preferred Stock
(upon which approval, the 8,871 shares of Series E Preferred Stock which were
outstanding automatically converted to 8,871,000 shares of Common Stock); (v) to
approve an amendment to the Company's Certificate of Incorporation to eliminate
cumulative voting; (vi) to amend the Company's Long-Term Stock Investment Plan
(a) to increase the maximum number of shares which may be issued under such Plan
from 1,500,000 to 4,000,000 shares, (b) to provide for the grant of options to
non-employee directors, and (c) in various other respects, principally designed
to permit the Plan administrator additional flexibility in structuring option
grants; and (vii) 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.
On November 1, 1996, COMFORCE IT Acquisition Corp., a wholly-owned subsidiary of
the Company, merged with AZATAR Computer Systems, Inc. ("AZATAR") pursuant to
the terms of an Agreement and Plan of Reorganization entered into by such
parties and W. Mark Holbrook, formerly the controlling stockholder of AZATAR
(the "Merger Agreement"). Under the terms of the Merger Agreement, the
stockholders of AZATAR received cash payments of $1.03 million, 243,211 shares
of the Company's Common Stock valued at $4.12 million, and contingent payments
payable over three years in an aggregate amount not to exceed $1.2 million.
AZATAR is in the business of information technology consulting to leading
companies nationwide.
On November 4, 1996, the Company, through its subsidiary COMFORCE Technical
Services, Inc., entered into a definitive agreement with RHO Company, Inc.
("RHO"), and J. Scott Erbe, formerly the controlling stockholder of RHO, to
purchase all of the stock of RHO for $14.8 million, plus a three year contingent
payout based on future earnings of RHO payable in stock in an aggregate amount
not to exceed $3.3 million. RHO provides specialists for its customers
primarily in the technical services and information technology sectors. The
acquisition of RHO adds nine branch offices.
On November 7, 1996, the holder of a warrant exercised its right to purchase
111,111 shares of the Company's Common Stock at an exercise price of $9.00 per
share.
On November 8, 1996, the Company, through its subsidiary, COMFORCE Global Inc.,
purchased, pursuant to the Asset Purchase Agreement entered into with
Continental Field Service Corporation, Michael Hill, Roy Hill and COMFORCE
Global, Inc. and the Asset Purchase Agreement entered into with Progressive
Telecom, Inc., Beth Wilson Hill, and COMFORCE Global, Inc., respectively,
substantially all of the assets of Continental Field Services Corporation and
its affiliate, Progressive Telecom, Inc., for a purchase price of $4.425
million in cash, 36,800 shares of the Company's Common Stock valued at $575,000,
and contingent payments payable over three years in an aggregate amount not to
exceed $1.2 million.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was incorporated in Delaware in 1969 and, since that time, has
engaged in various businesses. In the second and third quarters of 1995, the
Company adopted a plan to discontinue its then sole remaining business and
contracted with current management to direct its entry into the technical
staffing business. The October 1995 acquisition of COMFORCE Global marked the
Company's entry into the technical staffing business, followed by the
acquisition of five additional technical staffing businesses in 1996. Prior to
its acquisition by the Company, each of these acquired businesses operated as a
separate independent entity.
Historical financial information for the Company is presented in this Report.
However, this historical information includes limited results of the Company's
technical staffing operations, all of which, except for COMFORCE Global, were
acquired during or after the nine month period ended September 30, 1996. Due to
the Company's discontinuation of the Jewelry Business in the third quarter of
1995 and its acquisition of various technical staffing businesses since that
time, a comparison of the Company's consolidated results of operations for the
three and nine months ended September 30, 1996 and September 30, 1995 is not
meaningful.
Since the pro forma financial data of the Company set forth in the notes to
the Condensed Consolidated Financial Statements shows the combined operating
results of the recently acquired technical staffing businesses during periods
when they were not under common control or management, the pro forma data
presented may not be indicative of the Company's future financial or operating
results. However, management believes that a comparison of the pro forma
results of operations of the Company for the three and nine months ended
September 30, 1996 and September 30, 1995 will be more meaningful than an
analysis of historical results. Accordingly, a comparison of the Company's pro
forma results for these periods is presented under "Results of Operations" in
this Item 2.
Staffing personnel placed by the Company are Company employees. The Company
is responsible for employee related expenses for its employees, including
workers' compensation, unemployment compensation insurance, Medicare and Social
Security taxes and general payroll expenses. The Company offers health, dental,
disability and life insurance to its billable employees.
ACQUISITION HISTORY
FISCAL
1995
YEAR ACQUISITION REVENUE OFFICES
FOUNDED DATE (MILLIONS) ACQUIRED HEADQUARTERS MARKET SERVED
------- ------------- --------- -------- ------------ -------------
YIELD Global 1987 October 1995 $12.0 5 Lake Success, NY Telecommunications
Williams 1991 March 1996 $ 4.2 1 Englewood, FL Telecommunications
RRA 1964 May 1996 $52.0 8 Tempe, AZ Technical Services
Force Five 1993 August 1996 $ 6.6 4 Dallas, TX Information Technology
Azatar 1980 November $ 6.8 2 Rochester, NY Information Technology
1996
Continental 1965 November $ 9.7 2 Elmsford, NY Telecommunications
1996
RHO 1971 Under $83.6 9 Redmond, WA Technical Services and
contract, has Information Technology
not closed
20
The Company serves customers in three principal sectors, telecommunications,
technical services and information technology. The Company provides cellular and
wireless technology, satellite and earth station deployment, network management
and plant modernization services to customers in the telecommunications
industry. The Company contracts with customers in the information technology
market to provide staffing for specific projects requiring highly specialized
skills such as applications programming and development, client/server
development, systems software architecture and design, systems engineering and
systems integration. In the technical staffing market, the Company satisfies
diverse commercial needs for highly-skilled labor in the avionics and aerospace,
architectural, automotive, energy and power, pharmaceutical, marine and
petrochemical fields.
RESULTS OF OPERATIONS
Pro Forma Three Months ended September 30, 1996 vs. Pro Forma Three Months ended
September 30, 1995
Pro forma revenues of $20.98 million for the three months ended September 30,
1996 were $1.68 million, or 9% higher than pro forma revenues for the three
months ended September 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 the growth in the
operations of Williams, RRA, and Force Five.
Pro forma cost of revenues of the three months ended September 30, 1996 was 86%
of pro forma revenues compared to pro forma cost of revenues of 86% for the
three months ended September 30, 1995. The dollar increase in the 1996 pro forma
cost of revenues is principally attributable to increased sales volume.
Pro forma operating expenses for the three months ended September 30, 1996
increased $442,000, or 30% over the pro forma operating expenses for the three
months ended September 30, 1995. This increase was principally related to
greater branch and corporate expenses incurred to open new offices and support
additional volume during the 1996 period.
Pro forma operating results for the three months ended September 30, 1995
included two non-recurring charges totaling $3.9 million. These included stock
compensation expense of $3.4 million and management fees of $515,000 paid by
COMFORCE Global to its former parent company prior to its acquisition by the
Company.
Pro forma operating income for the three months ended September 30, 1996 was
$843,000 compared to a 1995 pro forma loss of $2.85 million. The improvement
of $2 million was principally attributable to the discontinuance in the 1996
period of the non-recurring charges of $3.9 million recorded in 1995. The pro
forma operating income was also impacted by increased margins on additional
revenues offset partially by increased branch and corporate operating costs.
Pro Forma Nine Months ended September 30, 1996 vs. Pro Forma Nine Months ended
September 30, 1995
Pro forma revenues of $61.5 million for the nine months ended September 30, 1996
were $6.5 million, or 12% higher than pro forma revenues for the nine months
ended September 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, RRA, and Force Five.
Pro forma cost of revenues for nine months ended September 30, 1996 and
September 30, 1995 was 87% of pro forma revenues. The 1996 dollar increase in
pro forma cost of revenues is principally attributable to the increase in sales
volume.
Pro forma operating expenses for the nine months ended September 30, 1996
increased $652,000 compared to pro forma operating expenses for the nine months
ended September 30, 1995. The 1996 increase in pro forma operating
21
expenses is principally related to greater branch expenses and corporate
expenses incurred to open new offices and support additional volume during the
1996 period. Pro forma operating results for the nine months ended September 30,
1995 included two non-recurring charges totaling $4.6 million. These included
stock compensation expense of $3.4 million and management fees of $1.15 million
paid by COMFORCE Global to its former parent company prior to its acquisition by
the Company.
Pro forma operating income for the nine months ended September 30, 1996 was
$2.19 million as compared to pro forma operating loss of $2.4 million for the
nine months ended September 30, 1995. The improvement of $4.65 million was
principally attributable to discontinuance in the 1996 period of non-recurring
charges of $4.5 million recorded in 1995. The 1996 pro forma operating income
was also impacted by increased margins on additional revenues offset partially
by increased branch and corporate operating costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are from operations and borrowings under
its $10 million revolving line of credit under a credit facility (the "Credit
Facility") with The Chase Manhattan Bank ("Chase"). The Company's principal
uses of cash are for funding acquisitions and working capital. The Company
typically pays its billable employees weekly for their services before invoicing
its customers. As new offices are established or acquired, or as existing
offices expand and revenues are increased, there will be greater requirements
for cash resources to fund current operations.
The Company is obligated under various acquisition agreements to make earn-out
payments to the sellers of acquired companies, subject to the acquired companies
achieving specified earnings targets. The maximum amount of these potential
earn-out payments (in cash and stock) is $6.9 million (exclusive of the up to
$3.3 million contingent earn-out payment in connection with the RHO acquisition,
which has not been completed), payable over a four-year period. The Company
cannot currently estimate whether it will be obligated to pay the maximum
amount; however, the Company anticipates that the cash generated by the
operations of the acquired companies will provide all or a substantial part of
the capital required to fund the cash portion of the earn-out payments.
The Company believes that funds provided by operations and available borrowings
under the Credit Facility with Chase will be sufficient to meet its presently
anticipated needs for working capital and capital expenditures necessary to
support the Company's present level of business activity. The Company partially
financed its recent acquisitions of AZATAR and Continental and its earnest money
deposit for RHO from the proceeds of its sale of $3.25 million in Series F
Preferred Stock and borrowings under its Credit Facility. Funds provided by
operations and available for borrowing under the Credit Facility are not
expected to be sufficient to enable the Company to complete the RHO acquisition
or acquire any additional technical staffing businesses. Accordingly, the
Company expects to seek other sources of financing in order to complete the RHO
acquisition and continue to acquire existing technical staffing businesses.
There can be no assurance that additional financing will be available for such
purposes.
Cash and cash equivalents increased $353,000 during the nine months ended
September 30, 1996. Cash flows provided by financing activities of $14.66
million exceeded cash flows used in operating activities of $4.32 million and
cash flows used by investing activities of $9.99 million. Cash flows used by
operating activities were principally attributable to the temporary need to fund
Williams, RRA, and Force Five accounts receivable and their carrying costs due
to the purchase of Williams in March 1996, RRA in May 1996 and Force Five in
August 1996. Cash flows used in investing activities are principally related to
the purchase of Williams, RRA, and Force Five for a total of $9.44 million
including directly related costs, as well as loans made to certain officers of
the Company pursuant to their employment contracts in the amount of $367,000 and
the purchase of fixed assets in the amount of $183,000. Cash flows from
financing activities were attributable to net borrowings under the revolving
line of credit of $3.25 million, the exercise of warrants in the amount of $1.05
million and the issuance of Series E Preferred Stock and Series D Preferred
Stock in the amount of $4.64 million and $6.42 million respectively.
22
During the nine months ended September 30, 1996, the Company eliminated its
working capital deficiency and, at September 30, 1996, had excess working
capital of $4.7 million. The increase in working capital is principally
attributable to the Company's increase in accounts receivable due to the
acquisitions of Williams, RRA, and Force Five and the reduction in the
liabilities assumed by ARTRA.
OTHER MATTERS
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to recognize compensation expense for grants of stock,
stock options and other equity instruments to employees based on new fair value
accounting rules. Although expense recognition for employee stock-based
compensation is not mandatory, the pronouncement requires companies that choose
not to adopt the new fair value accounting to disclose the pro forma net income
and earnings per share under the new method. This new accounting principle is
effective for the Company's fiscal year ending December 31, 1996. The Company
believes that adoption will not have a material impact on its financial
statements as the Company will not adopt the new fair value accounting, but
instead will comply with the disclosure requirements.
The Company's quarterly operating results are affected primarily by the number
of billing days in the quarter and the seasonality of its customers' businesses.
Demand for services in the technical services sector has historically been lower
during the year-end holidays through January of the following year, showing
gradual improvement over the remainder of the year. Although less pronounced
than in technical services, the demand for services of the telecommunications
and IT sectors is typically lower during the first quarter until customers'
operating budgets are finalized. The Company believes that the effects of
seasonality will be less severe in the future as revenues contributed by the
information technology and telecommunications sectors continue to increase as a
percentage of the Company's consolidated revenues.
The Company is currently analyzing whether certain federal income tax net
operating loss carryforwards will be available to it. Due to the uncertainty as
to the availability of these loss carryforwards, management is currently unable
to determine what amount, if any, of such loss carryfowards will be utilizable.
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.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In October and November 1996, the Company sold 3,250 shares of its newly
authorized Series F Preferred Stock (designated as the Series F Convertible
Preferred Stock, 10,000 shares authorized) at a selling price of $1,000 per
share. Each share of Series F Preferred Stock will, (i) at the option of the
holder on or after the applicable conversion date or (ii) automatically on the
second anniversary of the date of issuance, be converted into such number of
shares of Common Stock determined by dividing $1,000 plus all accrued, unpaid
dividends thereon by the per share conversion price. The conversion price is
86% of the average closing bid price of the Common Stock for the five trading
days immediately preceding the conversion date, subject to certain limitations.
The conversion date is, in the case of 50% of the shares of Series F Preferred
Stock, March 1, 1997 and, in the case of the remaining shares, April 1, 1997.
Holders of shares of Series F Preferred Stock are entitled to cumulative
dividends of 5% per annum, payable quarterly in cash or Common Stock, at the
Company's option, on the first day of March, June, September, and December in
each year. Except as otherwise provided by law, the holders of Series F
Preferred Stock will not be entitled to vote. As a result of the issuance of
these shares, holders of Series F Preferred Stock will have a liquidation
preference over holders of the Company's Common Stock.
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
11.1 Computation of Earnings (Loss) Per Share and Equivalent Share of Common
Stock.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
During the quarter ended September 30, 1996, the Company filed the
following Current Reports on Form 8-K:
On September 4, 1996, the Company filed a Current Report in connection
with the Force Five acquisition.
On September 24, 1996, the Company filed amendments to Current Reports
with respect to its acquisitions of COMFORCE Global, Williams and RRA and
the financial statements and pro forma financial statements required in
connection with those acquisitions.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
COMFORCE CORPORATION
--------------------
Registrant
Dated: November 15, 1996 PAUL J. GRILLO
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Vice President/Finance
Chief Financial Officer
25
COMFORCE Corporation
2001 Marcus Avenue
Lake Success, NY 11042
November 15, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-1004
Gentlemen:
Pursuant to the requirements of the Securities Exchange Act of 1934, we are
transmitting herewith the attached Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.
Very truly yours,
COMFORCE Corporation
/s/ Paul Grillo
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Paul Grillo
Chief Financial Officer
Enclosures