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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB/A
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-22653
Coventry Industries Corp.
(Name of small business issuer in its charter)
Florida
(State or other jurisdiction of incorporation or organization)
65-0353816
(I.R.S. Employer Identification No.)
7777Glades Road, Suite 211, Boca Raton, FL 33434
(Address of principal executive offices)(Zip
Code)
Issuer's telephone number 561-488-4802
Securities registered under Section 12(b) of the Exchange Act:
none
(Title of each class)
Name of each exchange on which registered
not applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
(Title of Class)
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Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [x]
State issuer's revenues for its most recent fiscal year. $ 4,653,286
for the 12 months ended June 30, 1997.
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date
within the past 60 days. The aggregate market value of the voting stock held
by non-affiliates computed at the closing bid price for which the Company's
common stock at reported on the OTC Bulletin Board on October 6, 1997 is
approximately $8,015,737.
State the number of shares outstanding of each of the issuer's class
of common equity, as of the latest practicable date. As of September 30, 1997,
2,583,346 shares of Common Stock are issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB into which the document
is incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) of
the Securities Act of 1933 ("Securities Act"). Not Applicable.
Transitional Small Business Disclosure Form (check one):
Yes No X
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PART I
ITEM 1. Description of Business
GENERAL
Workforce Systems Corp. (the "Company") is a Florida corporation
formed on August 17, 1992 to seek acquisition possibilities throughout the
United States and to make acquisitions or enter into other business endeavors
to the extent its limited assets would allow. Pursuant to this strategy, on
June 14, 1994 Mr. F. W. Miller, the Company's then principal shareholder,
President and Chairman, sold an aggregate of 4,550 shares of the Company's
Common Stock owned by him, representing approximately 55% of the Company's
then issued and outstanding stock, in a private transaction exempt from
registration under the Securities Act of 1933, as amended (the "Act") pursuant
to Section 4(2) thereof to Yucatan Holding Company, a Florida corporation
("Yucatan"), for $60,000. Concurrent with the purchase of the stock by
Yucatan, the Company's then current officers and directors resigned and the
Company elected new officers and directors.
Effective June 30, 1994 the Company acquired 51.9% of the issued and
outstanding stock of Outside Industrial Services, Inc., a Tennessee
corporation formed in 1982 ("OIS") for 70,000 shares of the Company's Series B
$5.00 Cumulative Convertible Preferred Stock ("Series B Preferred") from an
unaffiliated third-party in a private transaction exempt from registration
under the Act pursuant to Section 4(2) thereof. On May 30, 1996 the holder of
the Series B Preferred converted such shares into 17,500 shares of the
Company's Common Stock.
Also effective June 30, 1994 the Company acquired all of the issued
and outstanding stock of Prime Florida, Inc., a Florida corporation ("Prime")
from Yucatan, which was an affiliate of the Company, for 187,500 shares of the
Company's Common Stock in a private transaction exempt from registration under
the Act pursuant to Section 4(2) thereof. Prime's sole assets included its
rights under a management services agreement with OIS which entitled Prime to
all the cash flow from OIS, together with a 7.4% interest in OIS.
Giving effect to both the 51.9% interest in OIS the Company acquired
from the unaffiliated third party, together with the 7.4% interest in OIS the
Company acquired through its ownership of Prime, the Company then owned 59.3%
of the issued and outstanding stock of OIS. On November 30, 1994 the Company
exchanged 30 shares of its Series A Preferred Stock for 155 shares of the
common stock of OIS thereby completing its plan to acquire at least 80% of OIS
which began in June 1994. Following such share exchange, the Company is the
beneficial owner of approximately 81% of OIS.
On November 4, 1994 the Company entered into an agreement (the
"Naturale Agreement") with Naturale Home Products, Inc. ("Naturale"), an
unaffiliated third party, whereby the Company was named the exclusive
manufacturer through a then to- be-established wholly-owned subsidiary of the
Company for all products developed and marketed by Naturale, including the
ThawMaster(TM) thawing trays, Naturale's initial product. In addition to the
revenue to be generated through the manufacturing and sale by the Company of
the products to Naturale, the Company was entitled to a royalty of $.30 to
$.50 per unit in perpetuity on all products sold by Naturale. Following the
execution of the Naturale Agreement, in 1994 the Company formed NHP
Manufacturing Corp., a Florida corporation ("NHP").
After initially utilizing contract manufacturers to produce
ThawMaster(TM) thawing trays, the Company determined to sub-contract out the
milling and anodization of the trays to other fabricators who were
unaffiliated third parties and to internally perform the finishing stages of
the thawing trays, including silk screening, assembly, packaging and shipping.
In the spring of 1995 the Company expanded its operations and began to fully
internalize the production of the thawing trays, with the exception of the
anodization, through a series of events which led to the acquisition of IFR as
described below. This was the first step in achieving the Company's goal with
respect to diversification of its
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operations and revenue base.
On May 22, 1995 the Company acquired 100% of the issued and
outstanding capital stock of Industrial Fabrication & Repair, Inc. ("IFR")
from Lester E. Gann in exchange for 31,481 shares of the Company's Common
Stock in a private transaction exempt from registration under the Act pursuant
to Section 4(2) thereof. IFR, a Tennessee corporation formed in 1979 and based
in Knoxville, Tennessee, provided machining, welding, speciality design and
fabrication for custom applications to clientele from various industries
including paper, steel mills, rock quarry operations, coal mining applications
and bottling facilities.
In July 1996 IFR expanded its scope of business though the formation
of Maintenance Requisition Order Corp., a Florida corporation ("MRO"), which
is owned 80% by IFR and 20% by Ralph Johnson, a then unaffiliated party who
became its president following the formation of that entity. MRO, based in
Cleveland, Tennessee, is an industrial supply house representing several lines
of power transmissions products, such as gear boxes, bearings and couplings,
which are commonly used in industrial manufacturing and operating facilities.
MRO further diversified IFR's business base insomuch as historically IFR had
been a fabricator and maintenance provider without the additional competitive
advantage of being an authorized factory distributor for many of the
components used in its business.
In October 1995, the Company formed a consumer products division and
incorporated Products That Produce, Inc., a Florida corporation ("PTP") which
is owned 80% by the Company and 20% by William P. Heath, III, a then
unaffiliated third party who initially served as its president. Since November
1996 Mr. Heath has had no operational role within PTP.
PTP's mission is to identify and market new consumer products that
are both innovative and moderately priced. The first product undertaken by PTP
is Mr. Food's AlloFresh. The product is being marketed under an endorsement by
Art Ginsburg, the nationally syndicated T.V. chef known as Mr. Food. Made
naturally from minerals, non-toxic and environmentally safe, Mr. Food's
AlloFresh works to prevent food decay and eliminates bacteria, moisture, mold,
mildew and odors in refrigerators, kitchen and around the house. The product
had its debut in June 1996 through a nationwide direct response television
commercial, with this initial introduction followed by introduction into the
retail market place through mass merchandisers, grocery and drug store chains.
In February 1996 the Company acquired 100% of the issued and
outstanding capital stock of American Industrial Management, Inc., a Tennessee
corporation formed in 1995 ("AIM") from Messrs. Robert Lovelace and David
Debuty and Jones Leasing, Inc. in a private transaction exempt from
registration under the Act pursuant to Section 4(2) thereof in exchange for
4,375 shares of the Company's Common Stock. AIM, founded in 1995 and based in
Knoxville, Tennessee, provides industrial personnel for light manufacturing
and assembly line operations to businesses located in the East Tennessee area.
On April 3, 1997 the Company effected a one for four reverse stock
split of its issued and outstanding Common Stock. This stock split, which was
effected in connection with the Company's pending application for listing of
its Common Stock on The Nasdaq SmallCap Market(TM), resulted in the pro-rata
adjustment of the holdings of all Common Stockholders so that while the number
of issued and outstanding shares of Common Stock was reduced, the Common
Stockholders retained their pro-rata percentage of ownership interest in the
Company. Management of the Company elected to effect the stock split so as to
attempt to ensure the Company would meet the Nasdaq listing requirement of a
trading price of at least $3.00 per share. The Company's Common Stock was
subsequently approved for quotation on The Nasdaq SmallCap Market(TM) on
November 12, 1997 and trades under the symbol "COVN."
In May 1997 the Company further expanded its Manufacturing Division
through the acquisition of 100% of the issued and outstanding stock of Federal
Supply, Inc. and Federal Fabrication, Inc. (collectively, "Federal") from
Messrs. Robert Hausman and John Murray in a private transaction exempt from
registration under
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the Act pursuant to Section 4(2) thereof in exchange for 110,000 shares of the
Company's Common Stock. Federal Supply, Inc. and Federal Fabrication, Inc. are
both Florida corporations formed in 1994 and 1996, respectively. Federal is a
fabricator and distributor of custom-designed fire sprinkler systems and
components. In connection therewith, Robert Hausman was elected to the
Company's Board of Directors and appointed President of the Company. See Item
9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
In September 1997 the Company acquired 100% of the issued and
outstanding capital stock of LPS Acquisition Corp. ("LPS") in exchange for an
aggregate of 270,000 shares of the Company's Common Stock from LPS'
shareholders in a private transaction exempt from registration under the Act
pursuant to Section 4(2) thereof. LPS, doing business as Lantana Peat and
Soil, is a distributor of high quality custom soil mixes to wholesale
nurseries throughout South Florida. Annualized revenues are currently
estimated at approximately $3 million.
The majority shareholder of LPS, owning approximately 85.2% of LPS,
was Darren Apel, a non-affiliate of the Company. Minority shareholders in LPS,
each owning approximately 7.4% of the issued and outstanding stock, were
Barbara Hausman, wife of Robert Hausman who is Chairman and President of the
Company, and Ronna Newman Rutstein, wife of C. Lawrence Rutstein, who is a
director of the Company. Both Messrs. Hausman and Rutstein disclaim any
ownership interest in LPS by virtue of their spouses' holdings.
The calculation of the consideration paid by the Company in the
acquisition of LPS was equal to approximately 32% of the then current
annualized revenues of LPS of approximately $3 million. Management of the
Company made the determination as to the consideration to be paid based upon
their internal analysis of LPS. Pursuant to the terms of the agreement for the
acquisition of LPS, the sellers are required to deliver to the Company a
fairness opinion as to the amount of consideration tendered by the Company in
the share for share exchange. In the event such fairness opinion does not
support the exchange ratio, such exchange ratio shall be adjusted by mutual
agreement between the parties.
Finally, on October 28, 1997 the Company's changed its name to
Coventry Industries Corp. The following chart sets forth the current corporate
structure.
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INSERT CHART
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Manufacturing Division
The Manufacturing Division of the Company is comprised of IFR and
its subsidiary MRO and Federal. For the fiscal year ended June 30, 1997, the
Manufacturing Division accounted for approximately 76.6% of the Company's
revenues on a consolidated basis. As a result of the May 1997 acquisition of
Federal, the Company only reports revenues from Federal for one month in
fiscal 1997.
As a result of a combination of broad industry experience, top
quality component products, specialized design and custom fabrication
capabilities, the Manufacturing Division is able to market its products and
services to a wide range of industries. Moreover, while the breadth of its
product offering covers a wide range of specific applications, individual
products are often utilized separately or jointly by customers within a single
industrial plant. As the Manufacturing Division continues to expand the scope
of its operations, through both internal means and by acquisition, the Company
believes that it enhances its position as a one-stop source for a variety of
its customer's needs.
IFR provides machining, welding, speciality design and fabrication
for custom applications to clientele from various industries including wood,
lumber and paper, steel mills, stone and asphalt companies, utilities,
excavation contractors, reclamation operations, electronic and automobile
manufacturers, coal mining applications and bottling facilities. IFR is also
an authorized distributor
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for a variety of component products, including engineering and roller chain,
conveyor pulleys and idlers, gear and motor drives, bearings and industrial v-
belts from manufacturers such as Webster Chain, Allied-Locke-Moline, Precision
Inc., Superior Idlers, Eurodrvie and Dunlop. IFR's business and services are
marketed through its five sales representatives. IFR's primary distribution
methods include common carrier, company owned vehicles and recognized package
services such as UPS and Federal Express. A significant portion of IFR's
business is generated from its long standing relationships with clients within
the 150 mile radius of Knoxville, Tennessee including Coca-Cola Co., Pepsico,
Kimberly-Clark Corp., American Limestone, Florida Steel Corp., Vulcan
Materials Co., Dixie Cement, Blue Diamond Coal, TRW-Koyo and Westinghouse.
While IFR maintains standard distribution agreements with its suppliers, the
terms of which are customary to its industry, IFR has no long term agreements
with any supplier. While there can be no assurances, in the event IFR should
be unable to obtain component products from one or more existing supplier,
management of the Company does not foresee any difficulty in locating one or
more alternative suppliers at competitive prices for the component products
used by IFR. No single client accounts for more than 5% of IFR's annual
revenues for the fiscal year ended June 30, 1997. Although IFR does not
maintain long term contracts with its customers, and while there can be no
assurances, management of the Company does not anticipate the loss of any one
customer would have a material adverse effect on the business and operations
of the IFR.
MRO is an industrial supply house representing several lines of power
transmissions products, such as gear boxes, bearings and couplings, including
lines from Falk, Goodman Material Handling Components and Leeson Electric,
together with a variety of other chain, bearing and idler distributors
handling components which are commonly used in industrial manufacturing and
operating facilities. While MRO maintains standard distribution agreements
with its suppliers, the terms of which are customary to its industry, MRO has
no long term agreements with any supplier. While there can be no assurances,
in the event MRO should be unable to continue its distribution agreements with
one or more existing supplier, management of the Company does not foresee any
difficulty in locating one or more alternative lines at competitive prices for
distribution by MRO. MRO's products are marketed by its sales staff to both
value added manufacturers as well as direct end users. MRO's primary
distribution methods include customer pick-up, common carrier, company-owned
vehicles and recognized package services such as UPS and Federal Express. For
the fiscal year ended June 30, 1997, MRO had four clients which accounted for
50%, 25%, 10% and 10%, or approximately $59,500, $30,000, $12,000 and $12,000
respectively, of its revenues. MRO has no long term contracts with any of its
customers. The loss of one or more of these clients could have a material
adverse effect on the business and operations of MRO until replacement clients
are secured, of which there can be no assurances.
Federal is a fabricator and distributor of custom-designed fire
sprinkler systems and components for use in both commercial and residential
application. It's present customer base is located in the South Florida
market. Federal's principal products include pipe, valves, screwed and grooved
fittings, sprinkler head and hanger materials from manufacturers such as Bull
Moose Tube, Northwest Pipe, American Tube Victaulic, Ward Manufacturing,
Reliable Sprinkler Corp. and Globe Manufacturing. While Federal maintains
standard distribution agreements with its suppliers, the terms of which are
customary to its industry, Federal has no long term agreements with any
supplier. While there can be no assurances, in the event Federal should be
unable to continue its distribution agreements with one or more existing
supplier, management of the Company does not foresee any difficulty in
locating one or more alternative lines at competitive prices for distribution
by Federal. Federal's fabrication services include stocklisting, welding,
grooving, threading and hanger fabrication. Federal's products and services
are marketed to contractors and installers by its sales staff. Federal's
primary methods of distribution include common carrier, company-owned vehicles
and recognized package services such as UPS and Federal Express. For one month
period in the fiscal year ended June 30, 1997 for which the Company reported
revenues from Federal, Federal had one client which accounted for
approximately 14%, or $45,000, of its revenues. Federal has no long term
contracts with any
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of its customers. The loss of this client could have a material adverse effect
on the business and operations of Federal until replacement client(s) are
secured, of which there can be no assurance.
Competition
While IFR competes with numerous fabricators in the East Tennessee
area, management of IFR believes it has limited direct competition as a result
of the comprehensive nature of its services. Within the 150 mile radius of its
client base, IFR is one of a select few fabricators which offers a full bevy
of services from concept and design to engineering and prototype to custom
systems. Management believes the formation of MRO is also contributing to
IFR's competitive advantage by providing IFR's customers with a single source
supply for their production needs. There can be no assurances, however, that
IFR in fact will maintain a competitive advantage or that if such competitive
advantage exists, IFR will be able to retain same in the future. MRO competes
with a wide variety of industrial supply houses, the majority of which are
larger, have historical operations and greater resources. There are no
assurances MRO will be able to effectively compete in its market. Federal
competes with a variety of suppliers and manufacturers of fire sprinkler
systems, many of which have a longer operating history and greater resources
than Federal. There can be no assurances that Federal will be able to
effectively compete in its market.
Government Regulation and Environmental Compliance
The operations of the Manufacturing Division are not subject to any
state or government regulations at the present time, other than normal and
customary rules and regulations, including environmental regulations, to which
most companies are subject. There can be no assurances, however, that future
regulations at the state or federal level, if adopted, will not have a
material adverse effect on the operations of the Manufacturing Division.
Staffing Division
The Staffing Division is comprised of OIS and AIM. For the year ended
June 30, 1997, the Staffing Division accounted for approximately 22.2% of the
Company's revenues on a consolidated basis.
The Staffing Division does not offer traditional temporary services
such as providing several employees on an intermittent, as needed basis. The
Staffing Division's niche market is to provide specialized labor services on a
contract basis to businesses in the light industrial and light manufacturing
areas, augmenting the client's base of permanent employees. OIS focuses on
providing personnel with speciality skills, such as transportation and
equipment maintenance, while AIM focuses on providing personnel with a wide
variety of manufacturing skills to perform semi-skilled and unskilled tasks
including assembly line and janitorial.
The Staffing Division recruits employees on an as needed basis to
fulfill its existing contracts. Such contracts typically provide for a 30 day
termination by either party. As of the date hereof, AIM has three clients
which account for 62% (approximately $591,000), 11% (approximately
$105,000)and 10% (approximately $95,000) of its revenues, respectively, and
OIS has two clients which account for 100% of its revenues. The loss of one or
more of such clients could have a material adverse impact upon the Staffing
Division's operations until replacement clients are secured, of which there
can be no assurance. The Staffing Division maintains no long term contracts
with any of its customers.
Competition
The Staffing Division competes with many large international and
national companies, as well as many smaller regional and local companies, many
of whom have far greater assets and revenue base than the Staffing Division.
There are no assurances the Staffing Division will ever attain a competitive
advantage in its
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marketplace.
Government Regulation
In many states, the temporary services industry is regulated;
however, the Staffing Division is not subject to any specific regulation in
the State of Tennessee where all of its current operations are based. In the
event the Staffing Division should expand its operations outside the State of
Tennessee, of which there are no present plans, it may become subject to
regulation by other states. There can be no assurance that future regulations
in the State of Tennessee, if adopted, or existing or future regulations in
states in which the Staffing Division should expand its operations will not
have a material effect on the Staffing Division's operations.
Consumer Products Division
The Consumer Products Division is comprised of NHP, PTP and LPS. For
the fiscal year ended June 30, 1997, the Consumer Products Division accounted
for approximately 1.2 % of the Company's revenue on a consolidated basis. As
the acquisition of LPS was consummated in September 1997, the Company reported
no revenues from that subsidiary during Fiscal 1997.
NHP's current operations are presently limited to the manufacture of
the ThawMaster(TM) family of thawing trays. It is not presently anticipated
that NHP's operations will expand beyond their current base. The Company
experienced a significant decline of approximately 95% in revenue from NHP
during Fiscal 1997 versus the fiscal year ended June 30, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Further, the Company does not expect that revenues derived from
the manufacture of thawing trays will ever return to historic levels due to
the decreasing consumer interest, and, accordingly NHP will cease to operate.
PTP's was formed to identify and market new consumer products that
are both innovative and moderately priced. The first product to be undertaken
by PTP was Mr. Food's AlloFresh which is being marketed under a license
agreement with Ginsburg Enterprises Incorporated ("Ginsburg") which provides
for an endorsement by Art Ginsburg, the nationally syndicated T.V. chef known
as Mr. Food. Pursuant to the terms of the agreement, Ginsburg granted PTP a
license to the "Mr. Food" marks in connection with the marketing and sale of
the product. As consideration, Ginsburg is entitled to a certain royalty
payments, specifically (a) 15% of the sales price for any sales made via
direct response television or through electronic retailers or (b) 5% of the
sales price for any other sales. Made naturally from minerals, non-toxic and
environmentally safe, Mr. Food's AlloFresh works to prevent food decay and
eliminates bacteria, moisture, mold, mildew and odors in refrigerators,
kitchen and around the house.
Mr. Food's AlloFresh, which is not subject to any special government
approval or regulation, was introduced in late June 1996 through a five week
direct response television campaign. The introduction of Mr. Food's AlloFresh
into the retail market place through sales to mass merchandises, grocery and
drug store chains commenced in August 1996. PTP has been unable to
sufficiently penetrate the retail market. Accordingly, product sales for Mr.
Food's AlloFresh have been disappointing. Management is currently exploring
opportunities for use of the base mineral in commercial and industrial
applications, as well as alternate methods of distribution of Mr. Food's
AlloFresh.
In September 1997 the Company acquired 100% of the outstanding stock
of LPS. See Item 1. Description of Business. LPS, doing business as Lantana
Peat & Soil, is a distributor of fine quality custom soils mixes to commercial
nurseries in the State of Florida. LPS, a Florida corporation formed in 1997,
acquired the assets of Lantana Peat & Soil in 1997. Lantana Peat & Soil, which
has been in business for approximately 17 years, blends and mixes raw
materials to produce custom blended soilless mixes for the commercial nursery
industry. Its custom mixes are blended to its customers' specifications,
depending upon the application, and
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generally contain combinations of organic raw materials including Canadian
sphagnum peat moss and/or Florida peat moss, fresh or composted pine bark,
sawdust, cypress mulch, sand, airlite and/or perlite and composted organic
materials, amongst others. Lantana Peat & Soil uses the highest quality
organic raw materials, including Canadian sphagnum peat moss from the northern
Quebec Province of Canada, which is generally accepted by horticulturists as
the most desirable of sphagnum peat moss. Lantana Peat & Soil obtains its raw
materials from a wide variety of sources all at competitive prices. Orders are
delivered in bulk by Lantana Peat & Soil to its customer base throughout the
State of Florida, with quantities generally ranging from a minimum of 30 cubic
yards to 100 cubic yards. Lantana Peat & Soil markets its products through its
sales staff and its primary methods of distribution are company-owned
vehicles.
Lantana Peat & Soil has an established customer base of in excess of
300 commercial nurseries and landscapers in the State of Florida. Lantana Peat
& Soil's customer base generally is comprised of the higher quality nurseries
which sell fine quality, specialized plant materials to both retail and
commercial customers. Lantana Peat & Soil maintains no long term contracts
with any of its customers. Other than one customer which accounts for
approximately 20% of its current revenues, Lantana Peat & Soil is not
dependent on any one customer. In the event Lantana Peat & Soil should lose
this one major customer's business, management of the Company believes such
revenues could be replaced by other nurseries.
Lantana Peat & Soil purchases the organic raw materials used in its
custom blended mixes, other than the Canadian sphagnum peat moss, from a
variety of readily available sources which offer materials at competitive
prices. Lantana Peat & Soil's has a five year relationship with the supplier
of the Canadian sphagnum peat moss, which such supplier has sufficient
quantities of raw materials readily available to satisfy Lantana Peat & Soil's
demand over the next 10 years. As a result of this relationship, management of
the Company does not believe, although there can be no assurances, that
Lantana Peat & Soil will be subject to the cost fluctuations its competitors
may experience in purchasing Canadian sphagnum peat moss.
Competition
While Lantana Peat & Soil competes with approximately six similar
companies in the State of Florida, management of the Company believes it has
limited direct competition as a result of the high quality of its custom
blended mixes. There can be no assurances, however, that Lantana Peat & Soil
in fact will maintain a competitive advantage or that if such competitive
advantage exists, Lantana Peat & Soil will be able to retain same in the
future.
Government Regulation and Environmental Compliance
Neither the operations of Lantana Peat & Soil, nor the other entities
presently included in the Company's Consumer Products Division, are subject to
any state or government regulations at the present time, other than normal and
customary rules and regulations, including environmental regulations, to which
most companies are subject. There can be no assurances, however, that future
regulations at the state or federal level, if adopted, will not have a
material adverse effect on the operations of either Lantana Peat & Soil or the
other entities presently included in the Company's Consumer Products Division.
Employees
As of September 30, 1997, the Company has approximately 95 employees,
all of whom are full time.
Item 2. Description of Property
The Company maintains principal executive offices in Boca Raton,
Florida of approximately 1,000 square feet of commercial office space pursuant
to a lease
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expiring on August 30, 2000 with an unaffiliated third party for an annual
rent of $18,000. The Company's Staffing Division leases two separate
facilities, both located in East Tennessee. The first space which is comprised
of approximately 1,800 square feet of commercial office space is leased by AIM
from an unaffiliated third party under a five year lease expiring in September
2000 for approximately $1,000 per month. OIS leases an additional 500 square
feet of office space on a month to month basis for $350 per month from an
unaffiliated third party. MRO leases approximately 4,500 square feet of
industrial/warehouse space in Cleveland, Tennessee from an unaffiliated third
party pursuant to a lease expiring on June 1, 1999 at a monthly rental of
$900. Federal leases an aggregate of approximately 38,500 square feet of
office/warehouse space in Pompano Beach, Florida from unaffiliated third
parties under leases expiring on September 30, 2001 for an aggregate annual
rental of approximately $176,000. Federal subleases an aggregate of 18,000
square feet to two unaffiliated third parties under a subleases expiring in
January 31, 2000 and September 23, 1999, respectively, which provides
aggregate rental payments to Federal of approximately $62,540. LPS leases an
aggregate of 2,000 square feet of office space situated on 11 acres in Palm
Beach County, Florida. The terms of this triple net, month-to-month lease,
which terminates on December 31, 1997, provides that LPS pay the lessor $1,000
per month, plus the mortgage payment in the principal amount of approximately
$7,500 monthly. Upon the termination of the lease period, such lease
automatically renews on a month to month basis unless terminated by either
party with 15 days prior written notice.
Prior to its acquisition by the Company, IFR's principal offices were
located in a 13,500 square foot office/industrial building in Knoxville,
Tennessee which was leased by IFR from Mr. Gann, IFR's President and then sole
shareholder, on an annual basis at a monthly rental of $3,400. Following the
Company's acquisition of IFR, IFR continues to lease this space from Mr. Gann.
In June 1995 the Company, through a wholly-owned subsidiary Workforce
Properties Corp., acquired fee simple title to an approximate 35,000 square
foot office/industrial building in Knoxville, Tennessee from an unrelated
third party.
This building was encumbered by an existing first mortgage in the
original principal amount of approximately $585,000, with interest at 7 3/4%
over the 110 month term which commenced in June 1993. The first mortgage
provided for an initial monthly payment of $4,800 with a monthly increase of
0.377% during the term of the mortgage and no pre-payment penalty. Upon
maturing, assuming all monthly mortgage payments were then current, the
mortgage would be satisfied in full. The Company assumed the existing first
mortgage on the building, with a remaining principal balance of approximately
$ 390,000 pursuant to the original terms and conditions of the first mortgage.
In connection with the purchase of the building, the Company also
assumed approximately $101,000 in past due city and county real estate taxes
due on the property. Prior to such assumption, the Company negotiated an
arrangement with the City of Knoxville for the payment of the past due taxes,
which approximated $61,000 in the aggregate for the years 1991, 1992, 1993 and
1994, over a period of 24 months by making monthly installments of $2,538.00.
The Company also assumed a similar arrangement the prior owner of the property
had negotiated with Knox County for the payment of past due taxes, which
approximated $40,000 for the years 1990, 1991, 1992, 1993 and 1994, over a
period of 12 months by making monthly installments of $3,797.72.
The building, which is in good condition, is sufficient for the
Company's present needs and management of the Company believes it is
adequately covered by insurance. All of the leased locations are presently
sufficient for the required purposes and should the Company wish to relocate
any office in the future, management does not believe it would experience any
difficultly in locating and securing alternative office space at a reasonable
rate.
The Company has executed a five year exclusive lease, which is
renewable at the option of the Company for an additional five year term, with
an unaffiliated third party which permits the Company to excavate whatever
quantities
8
<PAGE>
of the minerals which are the component of Mr. Food's AlloFresh as it deems
necessary for an annual base fee of $30,000 for the first 1,000 tons.
Management of the Company has determined to renew the lease for the additional
five year terms pursuant to its terms. Such amount is payable in advance at
the beginning of each year of the term of the lease and no portion is
refundable in the event at least 1,000 tons are not excavated during the
subject year. Thereafter, the Company pays a fee of $30 per ton.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
On August 26, 1994 the Company's Common Stock began trading on the
OTC Bulletin Board under the symbol WFSC. Prior to such date, there had been
no market for the Company's Common Stock; thereafter, there has been limited
trading. On April 4, 1997, in connection with the one for four stock split of
the Company's Common Stock, the Common Stock began trading under the symbol
"WFSY." The following table sets forth the average of the high and low bid
prices of the Company's Common Stock as reported on the OTC Bulletin Board for
each quarter since the stock began trading on August 26, 1994, and for the
interim period from June 30, 1996 (the end of the last quarter) through
September 30, 1997, adjusted to give effect to the stock split. The following
quotations are over-the-market quotations and, accordingly, reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not represent actual transactions.
<TABLE>
<CAPTION>
Bid Price
High Low
<S> <C> <C> <C> <C> <C> <C>
August 26, 1994 through September 30, 1994 $12.00 $11.00
October 1, 1994 through December 31, 1994 $18.52 $12.00
January 1, 1995 through March 31, 1995 $22.68 $22.00
April 1, 1995 through June 30, 1995 $33.88 $32.12
July 1, 1995 through September 30, 1995 $33.96 $32.56
October 1, 1995 through December 31, 1995 $30.44 $24.16
January 1, 1996 through March 31, 1996 $23.56 $22.56
April 1, 1996 through June 30, 1996 $26.48 $25.48
July 1, 1996 through September 30, 1996 $21.12 $19.84
October 1, 1996 through December 31, 1996 $16.56 $15.40
January 1, 1997 through March 31, 1997 $11.20 $10.44
April 1, 1997 through June 30, 1997 $ 4.81 $ 4.54
July 1, 1997 through September 30, 1997 $ 4.85 $ 4.62
</TABLE>
On October 6, 1997, the closing bid price for the Common Stock as
reported on the OTC Bulletin Board was $4.56. As of September 30, 1997, the
approximate number of record holders of the Company's Common Stock was 170.
Management of the Company, however, believes there to be in excess of 1,000
beneficial holders of the Company's Common Stock.
Dividend Policy
The Company has not paid any cash dividends on its Common Stock since
its inception. The Company presently intends to retain future earnings, if
any, to finance the expansion of its business and does not anticipate that any
cash dividends will be paid in the foreseeable future. Future dividend policy
will depend on the Company's earnings, capital requirements, expansion plans,
financial condition and other relevant factors.
The Company presently has issued and outstanding 30 shares of Series
A Preferred, 30,000 shares of Series C Preferred Stock and 115,000 shares of
Series E Cumulative Non-Participating Preferred Stock. The Series A Preferred
does not
9
<PAGE>
pay any dividends; the Series C Preferred Stock does not pay any dividends
except at the discretion of the Board of Directors. The Board of Directors
does not intend to declare any dividends on the Series C Preferred Stock. The
Series E Cumulative Non-Participating Preferred Stock pays annual dividends of
$77,000. See Item 12. Certain Relationships and Related Transactions.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion regarding the Company and its business and
operations contains "forward-looking statements" within the meaning of Private
Securities Litigation Reform Act 1995. Such statements consist of any
statement other than a recitation of historical fact and can be identified by
the use of forward-looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon
or comparable terminology. The reader is cautioned that all forward-looking
statements are necessarily speculative and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward looking statements. The Company does
not have a policy of updating or revising forward-looking statements and thus
it should not be assumed that silence by management of the Company over time
means that actual events are bearing out as estimated in such forward looking
statements.
Results of Operations
Consolidated revenues for the fiscal year ended June 30, 1997
("Fiscal 1997") increased $832,606 or approximately 22% from the fiscal year
ended June 30, 1996 ("Fiscal 1996"), which reflects a significant revenue
increase in both the Manufacturing and Staffing Divisions as well as a
continued decline of revenues in the Consumer Products Division. Additionally,
it should be noted that Fiscal 1997 revenues reflect results from Federal for
one month in Fiscal 1997, as a result of its acquisition in late Fiscal 1997,
and reflect no results for LPS which was acquired in September 1997.
Gross profit margins as a percentage of revenue in Fiscal 1997
decreased approximately 19% from Fiscal 1996 as a result of (i) an increase in
costs of goods sold which includes a $90,000 inventory adjustment for
obsolescence, (ii) a full year of operations from AIM, which traditionally
carries lower margins by virtue of the type of personnel it provides; and
(iii) the expansion of the Manufacturing Divisions's operations as hereinafter
discussed.
Selling, general and administrative expenses ("SG&A") on a
consolidated basis increased approximately 365% during Fiscal 1997 from Fiscal
1996 as a result of (i) increased costs associated with the expansion of the
Company's businesses including additional personnel, (ii) non-recurring
charges related the expansion of operations, including approximately $250,000
in legal fees and (iii) certain bad debt write-offs related to the Consumer
Products Division. Accordingly, the immediate realization of such expenses
may, although there can be no assurances, result in higher margins or
profitability in future periods.
For Fiscal 1997, Other Expenses primarily represented startup
pre-opening expenses relating to Mr. Food's Allo Fresh including certain
payroll expenses and expanses related to the creation and development of
packaging.. For Fiscal 1996, such Other Expenses represented (i) mineral
exploration costs and pre-operating expenses related to Mr. Food's AlloFresh
and (ii) certain web development expenses. Since the Company has discontinued
this particular product line, no further expenses for this particular product
are anticipated. As the Company continues to expand its operations, management
of the Company anticipates it will continue to incur similar types of expenses
as those reflected in Other Expenses during Fiscal 1997, although the amounts
of same may vary, for fiscal 1998 and beyond. Accordingly, the immediate
realization of such expenses may, although there can be no assurances, result
in higher margins or profitability in future periods.
Selling, general and administrative expenses ("SG&A") on a consolidated
10
<PAGE>
basis increased approximately 365% during Fiscal 1997 from Fiscal 1996 as a
result of the expansion of the Company's operations commencing during Fiscal
1996. Primarily, such increase was attributable to expansion of operations at
the Manufacturing Division totaling approximately $400,000, including
additional personnel, operating expenses and costs associated with the new
facility, as well as an entire year of SG&A for AIM totaling approximately
$241,000, SG&A attributable to Federal totaling approximately $113,000 as well
as certain additional expenses all derived from the growth of the Company
during Fiscal 1997.
The Company reported a net loss of approximately $2,894,751 for
Fiscal 1997 as compared to a net loss of approximately $1,422,734 for Fiscal
1996. The increased loss is mainly attributable to the increase SG&A during
Fiscal 1997 as discussed above.
As discussed above, the Company's revenues for Fiscal 1997 do not
reflect any revenues from LPS and reflect only one month of revenues from
Federal. ^
Following you will find a separate discussion regarding the results
of operations for each of the Manufacturing Division, Staffing Division and
Consumer Products Division. For a discussion of the operations, including the
products and services offered by each of the divisions, please see Item 1.
Description of Business.
Manufacturing Division
For Fiscal 1997 the Manufacturing Division reported an increase of
approximately 45.5% in revenues from Fiscal 1996. The increase in the revenues
contributed by the Manufacturing Division is a result of the expansion of that
division which began in Fiscal 1997 through a broadening of the core
operations to include both a diversification of the fabrication work to
include more CNC and other higher margin fabrication work as well as the sale
as an authorized distributor of power transmission components to pre-existing
customers and to various new industrial clients with the opening of the new
Cleveland, Tennessee location of MRO. The Manufacturing Division reported a
loss from operations of approximately $114,814 in Fiscal 1997 as compared to
operating income of approximately $1,276,776 in Fiscal 1996. The loss from
operations at the Manufacturing Division is mainly attributable to increased
SG&A as a result of the expansion of that divisions' core business, including
approximately $400,000 in additional personnel, approximately $250,000 in
legal fees, approximately $113,000 in SG&A related to Federal and costs
associated with a new facility. The remaining increase of $629,000 is due to
the increase in cost of sales.
Staffing Division
For Fiscal 1997 the Staffing Division reported an increase in
revenues of approximately 78% from Fiscal 1996. This increase in revenues
reflects not only revenues from AIM, which was acquired by the Company in
February 1996, for an entire fiscal as well as an increase in revenues from
OIS. The Staffing Division reported a loss from operations of approximately
$168,034 in Fiscal 1997 as compared to operating income of approximately
$101,857 in Fiscal 1996. The loss from operations at the Staffing Division is
mainly attributable to increased SG&A of approximately $241,000 including
approximately $133,000 in payroll costs, $10,100 in rent, $5,600 in
professional fees and $92,300 in other related to a full year of operations of
AIM. In 1996 AIM was not part of the consolidated group for a full year.
Consumer Products Division
Revenues for the Consumer Products Division continued to decline in
Fiscal 1997 from Fiscal 1996. Revenue for Fiscal 1997 was approximately 93%
less than in Fiscal 1996. The introduction of Mr. Food's AlloFresh into the
retail market place through sales to mass merchandises, grocery and drug store
chains commenced in August 1996. Despite initial enthusiasm for the product,
PTP has been unable to sufficiently penetrate the retail market. Accordingly,
product sales for Mr. Food's AlloFresh have been disappointing. Management is
currently exploring opportunities for use of the base mineral in commercial
and industrial applications, as well as alternate methods of distribution of
Mr. Food's AlloFresh. In addition, as a result of the lack of sales of thawing
trays, the
11
<PAGE>
Company took a one time expense of $250,262 related primarily to an inventory
valuation adjustment. Management of the Company does not anticipate the sales
of thawing trays will ever return to historic levels.
As a result of the disappointing results in the Consumer Products
Division, the Company terminated its relationship with the division's former
president in an effort to further reduce expenses while management of the
Company evaluates options for its existing products. In addition, in September
1997 the Company acquired LPS which is a distributor of high quality custom
soil mixes to wholesale nurseries throughout South Florida. Annualized
revenues are currently estimated at $3 million.
Liquidity and Capital Resources
The Company's working capital at June 30, 1997 was $1,960,430 versus
$2,664,293 at June 30, 1996. This decrease in working capital is attributable
primarily to an increase in trade accounts payable in connection with an
expansion of the Company's business and operations during Fiscal 1997.While
the Company does not presently anticipate any significant capital expenditures
in order to pursue the Company's plan of operations for fiscal 1998,
consisting of its normal business operations and modernization of the LPS
facility, including the relocation of the facility to a more suitable locale
near its primary customer base and the addition of a computerized mixing line,
it will be necessary for the Company to raise additional working capital.
While the Company continues to seek outside sources of working capital, there
are currently no agreements in place for such funds and there can be no
assurance that such sources will be available to the Company. A substantial
portion (approximately $2,136,000) of the Company's property, plant and
equipment is unencumbered and, accordingly, would provide, in addition to any
cash flow from operations, are additional sources of internal working capital
should the Company elect to enter into an asset based lending arrangement.
The Company has been and continues to be in the process of evaluating
its information technology infrastructure for the Year 2000 compliance. The
Company has modified certain systems to be Year 2000 compliant. The Company
does not expect that the cost to modify its information technology
infrastructure to Year 2000 compliance will be material to its financial
condition or results of operations. The Company does not anticipate any
material disruption in its operations as a result of any failure by the
Company to be compliant. The Company does not current have information
concerning Year 2000 compliance status of its suppliers and customers. In the
event that any of the Company's significant suppliers or customers does not
successfully and timely achieve Year 2000 compliance, the Company's business
or operations could be adversely affected.
Item 7. Financial Statements
The Company's financial statements are contained in pages F-1 through
F-31 as follows.
12
<PAGE>
Workforce Systems Corp.
Contents
- --------------------------------------------------------------------------------
Page
----
Independent Auditors' Reports F-2 - F-3
Financial Statements
Consolidated Balance Sheets F-4 - F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Equity F-7 - F-8
Consolidated Statements of Cash Flows F-9 - F-10
Notes to Consolidated Financial Statements F-11 - F-31
F-1
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders
of Workforce Systems Corp.
We have audited the accompanying consolidated balance sheet of Workforce
Systems Corp. and subsidiaries as of June 30, 1997, and the related
consolidated statements of operations, stockholders' equity 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Workforce
Systems Corp. and subsidiaries at June 30, 1997, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Miami, Florida
October 7, 1997
F-2
<PAGE>
Independent Auditor's Report
To the Board of Directors and Stockholders
of Workforce Systems Corp.
I have audited the accompanying consolidated balance sheet of Workforce
Systems Corp. (a Florida Corporation) and subsidiaries as of June 30, 1996,
and the related consolidated statements of operations, stockholders' equity
and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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. I believe that my audit provides a reasonable basis
for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Workforce Systems
Corp. and subsidiaries as of the year ended June 30, 1996, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
Lyle H. Cooper, CPA
October 12, 1996, except for Note 14
the date of which is March 21, 1997
F-3
<PAGE>
Workforce Systems Corp.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
June 30, 1997 1996
- - ------------------------------------------------------------------------------
Assets
Current Assets
Cash (Note 3) $ 335,321 $ 938,487
Accounts receivable, less $55,442 and $0
allowance for doubtful accounts (Note 8) 1,017,949 633,188
Other receivables 47,678 --
Inventory 1,888,235 1,412,896
Prepaid expenses (Note 2) 65,571 211,510
Prepaid consulting fees (Note 13) 141,667 --
- - ------------------------------------------------------------------------------
Total Current Assets 3,496,421 3,196,081
- - ------------------------------------------------------------------------------
Property, Plant and Equipment (Note 8)
Land 156,503 156,503
Building and improvements 1,458,126 1,380,422
Machinery and equipment 1,411,698 1,125,921
Autos and trucks 212,466 146,428
Accumulated depreciation (324,062) (132,856)
- - ------------------------------------------------------------------------------
2,914,731 2,676,418
- - ------------------------------------------------------------------------------
Other Assets
Excess cost over fair value of net assets
acquired, net (Notes 4 and 6) 2,198,441 1,330,348
Prepaid consulting fees (Note 13) 531,249 --
Other 28,330 --
- - ------------------------------------------------------------------------------
$ 9,169,172 $ 7,202,847
===============================================================================
F-4
<PAGE>
<TABLE>
<CAPTION>
Workforce Systems Corp.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------------------
June 30, 1997 1996
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable $ 915,630 $ 390,895
Accrued expenses 428,026 189,375
Factoring line of credit (Note 8) 398,858 --
Income taxes payable (Note 11) 59,030 132,359
Deferred income tax liability (Note 11) -- 65,000
Current maturities of long term debt (Note 8) 234,447 254,159
Note Payable - related party (Note 9) 142,731 132,667
- - -------------------------------------------------------------------------------------------
Total Current Liabilities 2,178,722 1,164,455
Deferred Income Taxes (Note 11) 130,000 125,541
Long Term Debt, less current portion (Note 8) 575,116 463,339
Note payable-stockholder (Notes 9 and 15, subsequent events) 1,150,019 --
- - -------------------------------------------------------------------------------------------
Total Liabilities 4,033,857 1,753,335
- - -------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 12 and 13) Series A Preferred stock, $.001 par
value, 30 shares
authorized, 30 shares issued and outstanding -- --
Series C Preferred stock, $.001 par value, 30,000
shares authorized, issued and outstanding 30 30
Series D Preferred stock, $.001 par value, 1,000,000
shares authorized, 0 and 1,000,000 shares
issued and outstanding -- 1,000
Common stock, $.001 par value, 25,000,000 shares
authorized, 1,952,934 and 622,710 shares issued and
outstanding 1,953 623
Paid-in capital 12,567,700 8,570,809
Stock to be earned (Note 13) (1,416,667) --
Prepaid Media spots (Note 2) (500,000) (500,000)
Accumulated deficit (5,517,701) (2,622,950)
- - -------------------------------------------------------------------------------------------
Total stockholders' equity 5,135,315 5,449,512
- - -------------------------------------------------------------------------------------------
$ 9,169,172 $ 7,202,847
===========================================================================================
See accompanying notes to consolidated
financial statements.
</TABLE>
F-5
<PAGE>
Workforce Systems Corp.
Consolidated Statements of Operations
===============================================================================
<TABLE>
<CAPTION>
Year ended June 30, 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues, net of returns and allowances $ 4,653,286 $ 3,820,680
Cost of revenues 3,518,500 2,145,593
- ----------------------------------------------------------------------------------------------
Gross profit 1,134,786 1,675,087
- ----------------------------------------------------------------------------------------------
Operating Expenses
Selling, general and administrative expenses 1,327,546 230,815
Depreciation and amortization 282,398 181,083
Provision for doubtful accounts 246,013 --
Professional fees 308,996 54,481
Marketing and public relations 464,596 --
Mineral exploration (Note 14) -- 700,000
Startup expenses (Note 14) 1,357,899 1,091,308
Web development expense (Note 14) -- 400,000
- ----------------------------------------------------------------------------------------------
Total operating expenses 3,987,448 2,657,687
- ----------------------------------------------------------------------------------------------
(Loss) Income from Operations (2,852,662) (982,600)
- ----------------------------------------------------------------------------------------------
Other Expenses
Interest expense 65,488 48,117
Acquisition expense (Note 14) 110,000 76,890
- ----------------------------------------------------------------------------------------------
Total other expenses 175,488 125,007
- ----------------------------------------------------------------------------------------------
Loss before income tax (benefit) provision (3,028,150) (1,107,607)
Income tax (benefit) provision (Note 11) (133,399) 260,320
- ----------------------------------------------------------------------------------------------
Net Loss (2,894,751) (1,367,927)
- ----------------------------------------------------------------------------------------------
Less: Dividends paid -- (54,807)
- ----------------------------------------------------------------------------------------------
Net loss available to common stockholders $(2,894,751) $(1,422,734)
- ----------------------------------------------------------------------------------------------
Net loss per common share $ (3.58) $ (3.36)
- ----------------------------------------------------------------------------------------------
Weighted average shares outstanding 808,421 422,991
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
Workforce Systems, Corp.
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------
Years ended June 30,1997 and 1996
- - ---------------------------------------------------------------------------------------------------------------
Series A Series B Series C Series D Common
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1995 30 $ - 70,000 $ 70 30,000 $ 30 - $ - 375,931 $ 376
Issuance of preferred - - - - - - 1,000,000 1,000 - -
Common stock issued in
connection with prepaid
expenses - - - - - - - - 32,867 33
Common stock issued in
connection with acquisition
of AIM (Note 4) - - - - - - - - 4,375 4
Common stock issued in
connection with
compensation to certain
consultants - - - - - - - - 23,706 24
Common stock issued in
connection with PTP start
up and acquisition of
mineral rights (Note 14) - - - - - - - - 70,250 70
Conversion of note payable
(Note 9) - - - - - - - - 42,581 42
Conversion of convertible
preferred stock (Note 12) - - (70,000) (70) - - - - 17,500 18
Sale of common stock - - - - - - - - 55,500 56
Dividend paid - - - - - - - - - -
Net Loss - - - - - - - - - -
- - ---------------------------------------------------------------------------------------------------------------
Balance June 30, 1996 30 $ - - $ - 30,000 $ 30 1,000,000 $ 1,000 622,710 $ 623
Years ended June 30,1997 and 1996 (Continued)
- - -----------------------------------------------------------------------------------------------
Stock Prepaid Total
Paid-in to be Media Accumulated Stockholders'
Capital Earned Spots Deficit Equity
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance June 30, 1995 $ 4,076,283 - $ (1,200,216) $ 2,876,543
Issuance of preferred - - - 1,000
Common stock issued in
connection with prepaid
expenses 674,967 - (500,000) - 175,000
Common stock issued in
connection with acquisition
of AIM (Note 4) 68,059 - - 68,063
Common stock issued in
connection with
compensation to certain
consultants 474,096 - - 474,120
Common stock issued in
connection with PTP start
up and acquisition of
mineral rights (Note 14) 1,404,930 - - 1,405,000
Conversion of note payable
(Note 9) 936,728 - - 936,770
Conversion of convertible
preferred stock (Note 12) 52 - - -
Sale of common stock 935,694 - - 935,750
Dividend paid - - (54,807) (54,807)
Net Loss - - (1,367,927) (1,367,927)
- - -----------------------------------------------------------------------------------------------
Balance June 30, 1996 $ 8,570,809 - (500,000) $ (2,622,950) $ 5,449,512
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
Workforce Systems, Corp.
Consolidated Statements of Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------
Years ended June 30,1997 and 1996
- - ----------------------------------------------------------------------------------------------------------------
Series A Series B Series C Series D Common
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1996 30 $ - - $ - 30,000 $ 30 1,000,000 $ 1,000 622,710 $ 623
-
Sale of common stock
(Note 13) - - - - - - - - 8,334 8
Common stock issued in
connection with acquisition
of FSI (Note 4) - - - - - - - - 145,000 145
Common stock issued in
connection with
compensation to certain
consultants and employees
(Note 13) - - - - - - - - 71,772 72
Options granted in
connection with consulting
services (Note 13) - - - - - - - - - -
Options exercised (Note 13) - - - - - - - - 505,118 505
Conversion of convertible
preferred stock (Note 12) - - - - - - (1,000,000) (1,000) 600,000 600
Net Loss - - - - - - - - - -
- - ----------------------------------------------------------------------------------------------------------------
Balance June 30, 1997 30 $ - - $ - 30,000 $ 30 - $ - 1,952,934 $1,953
================================================================================================================
Years ended June 30,1997 and 1996 (Continued)
- - ----------------------------------------------------------------------------------------------
Stock Prepaid Total
Paid-in to be Media Accumulated Stockholders'
Capital Earned Spots Deficit Equity
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance June 30, 1996 $ 8,570,809 - (500,000) $ (2,622,950) $ 5,49,512
Sale of common stock
(Note 13) 99,992 - - 100,000
Common stock issued in
connection with acquisition
of FSI (Note 4) 422,668 - - 422,813
Common stock issued in
connection with
compensation to certain
consultants and employees
(Note 13) 780,581 - - 780,653
Options granted in
connection with consulting
services 2,180,455 $(1,416,667) - 763,788
(Note 13)
Options exercised (Note 13) 512,795 - - 513,300
Conversion of convertible
preferred stock (Note 12) 400 - - -
Net Loss - - (2,894,751) (2,894,751)
- - ----------------------------------------------------------------------------------------------
Balance June 30, 1997 $12,567,700 $(1,416,667) (500,000) (5,517,701) $ 5,135,315
================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
Workforce Systems Corp.
Consolidated Statements of Cash Flows
(Note 5)
- -------------------------------------------------------------------------------------
Year ended June 30, 1997 1996
- - -------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net loss $(2,894,751) $(1,367,927)
Adjustments to reconcile net loss to net cash provided
by operating activities
Amortization 91,192 70,281
Depreciation 191,206 111,131
Provision for doubtful accounts 246,013 --
Inventory valuation write-off 359,610 --
Acquisition, startup, and web development costs -- 1,947,183
Issuance of common stock and options granted
for services 871,521 --
Gain on sale of fixed assets -- (701)
Changes in assets and liabilities, net of businesses
acquired
(Increase) decrease in:
Account receivable (112,076) (435,750)
Other receivables (47,678) --
Related party accounts receivable -- 871,347
Inventory (302,111) (643,613)
Prepaid expenses 213,139 --
Other current assets -- (34,030)
Other assets (28,330) --
Increase (decrease) in:
Trade accounts payable 275,823 (46,447)
Accrued expenses 197,599 67,865
Income taxes payable (73,329) 67,360
Deferred income tax liability (60,541) 193,541
- - -------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (1,072,713) 800,240
- - -------------------------------------------------------------------------------------
Investing Activities
Proceeds from sale of fixed assets -- 12,159
Purchase of property and equipment (249,634) (771,589)
- - -------------------------------------------------------------------------------------
Net cash used in investing activities (249,634) (759,430)
- - -------------------------------------------------------------------------------------
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
Workforce Systems Corp.
Consolidated Statements of Cash Flows
(Note 5)
- -------------------------------------------------------------------------------------
Year ended June 30, 1997 1996
- - -------------------------------------------------------------------------------------
<S> <C> <C>
Financing Activities
Net proceeds from factoring line of credit 121,883 --
Proceeds from note payable - related party 10,064 177,667
Payments on note payable-stockholder (118,131) --
Payments on long-term debt (261,583) (280,081)
Proceeds from long-term debt 353,648 26,496
Proceeds from sale of common stock and
exercise of stock options 613,300 936,750
Dividends paid -- (54,807)
- - -------------------------------------------------------------------------------------
Net cash provided by financing activities 719,181 806,025
- - -------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (603,166) 846,835
Cash and cash equivalents, beginning of period 938,487 91,652
- - -------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 335,321 $ 938,487
- - -------------------------------------------------------------------------------------
See accompanying notes to consolidated financial
statements.
</TABLE>
F-10
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Significant Business
Accounting --------
Policies
Workforce Systems Corp. and subsidiaries (the "Company")
operate in the following geographical locations:
Tennessee
---------
The Company through its subsidiaries, Industrial
Fabrication & Repair, Inc. ("IFR"), Maintenance
Requisition Order Corp. ("MRO"), Outside Industrial
Services, Inc. ("OPS"), and American Industrial
Management, Inc. ("AIM") provides specialized
fabrication, machining and design of maintenance and
production equipment; serves as an authorized
distributor for a full line of power transmission
products; and supplies specialized labor services on a
contract basis.
Florida Operations
------------------
The Company through its subsidiary Federal Supply,
Inc. ("FSI") distributes and fabricates fire
protection products; and through its subsidiary
Products That Produce, Inc. ("PTP") specializes in
identifying, developing and marketing innovative new
consumer products.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements
include the accounts of the Company and all
majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in
consolidation.
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
F-11
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
disclosures 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.
Inventories
-----------
Inventories consisting mainly of finished product are
stated at the lower of cost or market. Provision for
potentially obsolete or slow-moving inventory is made
based on management's analysis of inventory levels and
future sales forecasts.
Advertising
-----------
Advertising costs, except for costs associated with
direct-response advertising, are charged to operations
when incurred. The costs of direct-response
advertising are capitalized and amortized over the
period during which future benefits are expected to be
recived. Currently the Company does not have any
direct response advertisng. The total amount charged
to advertising for the year ended June 30, 1997 and
1996 are $16,617 and $5,853, respectively.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost.
Major renewals and improvements are capitalized, while
maintenance and repairs are expensed when incurred.
The cost and accumulated depreciation for property,
plant and equipment sold, retired, or otherwise
disposed of are relieved from the accounts, and
resulting gains or losses are recognized. Depreciation
is computed over the estimated useful lives of
depreciable assets using the straight-line method as
follows:
Building and improvements 20 years
Machinery and equipment 15 years
Furniture, fixtures and office
equipment 7 years
Automobiles 5 years
Depreciation expense was $ 191,206 and $ 111,131 for
the years ended June 30, 1997, and 1996, respectively.
Excess Cost Over Fair Value of Net Assets Acquired
--------------------------------------------------
The excess cost over fair value of net assets acquired
is amortized on a straight-line basis over 20 years.
The Company evaluates the carrying value of this asset
whenever events or circumstances indicate that the
carrying amount of the asset may not be recoverable.
F-12
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Income Tax
----------
The Company provides deferred income tax assets and
liabilities under SFAS 109 for temporary differences
between book and taxable income.
Reclassifications
-----------------
Certain 1996 amounts have been reclassified to conform
to the 1997 presentation.
Revenue Recognition
-------------------
Revenue from product sales in the consumer products
division and in the manufacturing division is
recognized at the time of shipment. Revenue in the
staffing division is recognized when the related
payroll costs are incurred.
Net Loss Per Common Share
-------------------------
Net loss per common share is based on the weighted
average number of shares of common stock outstanding.
Statements of Cash Flows
------------------------
For purposes of the statements of cash flows, the
Company considers all highly liquid investments with
initial maturities of three months or less to be cash
equivalents.
F-13
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Financial Instruments
---------------------
The carrying amounts of financial instruments
including accounts receivable, trade accounts payable
and short-term obligations approximated fair value due
to the relatively short maturity.
New Accounting Standards
------------------------
Statement of Financial Accounting Standards (SFAS) No.
130, Reporting Comprehensive Income, establishes
standards for reporting and display of comprehensive
income, its components and accumulated balances.
Comprehensive income is defined to include all changes
in equity except those resulting from investments by
owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that
are required to be recognized under current accounting
standards as components of comprehensive income be
reported in a financial statement that is displayed
with the same prominence as other financial
statements.
Statement of Financial Accounting Standards (SFAS) No.
131, Disclosures about Segments of an Enterprise and
Related Information, supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. SFAS
131 establishes standards for the way that public
companies report information about operating segments
in annual financial statements and requires reporting
of selected information about operating segments in
interim financial statements issued to the public. It
also establishes standards for disclosures regarding
products and services, geographic areas and major
customers. SFAS 131 defines operating segments as
components of a company about which separate financial
information is available that is evaluated regularly
by the chief operating decision maker in deciding how
to allocate resources and in assessing performance.
These new standards are effective for financial
statements for periods beginning after December 15,
1997 and require comparative financial information for
earlier years to be restated. Due to the recent
issuance of these standards, management has been
unable to fully evaluate the impact, if any, they may
have on future financial statement disclosures.
F-14
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
In February 1997 the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards (SFAS) No. 128 Earnings Per Share. This
statement is effective for financial statements issued
for periods ending after December 15, 1997. SFAS No.
128 simplifies the standards for computing earnings
per share ("EPS") previously found in Accounting
Principles Board Opinion No. 15 Earnings per Share. It
replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of
the income statement for all entities with complex
capital structures and requires a reconciliation of
the numerator and denominator of the diluted EPS
computation. The Company will adopt SFAS No. 128 for
its fiscal year ended June 30, 1998 and its
implementation is not expected to have a material
effect on the financial statements.
2. Prepaid Expenses Included in prepaid expenses at June
30, 1997, and 1996, is $500,000 in prepaid advertising
for media and radio spots which can be used by the
Company at any time until December 2000. The prepaid
media sports were valued at 80% of the common stock's
book value at the time fo the transactions. No
additional cash will need to be expended in order for
the Company to utilize such spots. There have been no
changes in value to this date. The Company will
continue to evaluate the net realizable value of
this asset and make any adjustments, if appropriate.
The Company has not utilized any spots to date. The
Company intends to utilize the advertising during fiscal
1998.
No expense for prepaid advertising has been recorded
for the years ended June 30, 1997, and 1996.
3. Concentration of The Company maintains its cash in bank deposit accounts
Credit Risk which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to
any significant credit risk on cash and cash
equivalents.
4. Acquisitions a) Effective February 1996, the Company acquired all
the Common Stock of American Industrial Management,
Inc. ("AIM"). The purchase price consisted of
16,500 shares of the Company's Common Stock valued
at $68,063.
F-15
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
The transaction was recorded as follows:
Fair value of assets acquired $ 65,506
Acquisition costs 76,890
Common stock issued in connection
with acquisition ( 68,063)
-----------------------------------------------------
Liabilities assumed $ ( 74,333)
=====================================================
Pro forma results of operations would not have been
materially different from historical results.
(b) On May 29, 1997 (June 1, 1997 for financial
statement purposes) the Company acquired all of
the common stock of Federal Supply, Inc. and
Federal Fabrication, Inc. ("FSI"). The purchase
price consisted of 110,000 shares of the Company's
voting common stock and 35,000 shares of common
stock to consultants as payment for acquisition
costs valued at approximately $423,000 (80% of
current market value) as well as approximately
$56,000 in cash for additional acquisition costs.
The transaction was recorded as follows:
Fair value of assets acquired $ 1,311,921 Excess
cost over net assets acquired 971,036 Common stock
issued in connection with acquisition and
acquisition costs ( 479,000)
-------------------------------------------------------
Liabilities assumed $ (1,803,957)
=======================================================
The following unaudited pro forma summary presents the
consolidated results of operations of the Company as
if the acquisition had occurred on July 1, 1996 and
1995:
F-16
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Year ended June 30, 1997 1996
------------------------------------------------------
Revenue $ 7,903,699 $ 7,217,027
Net loss ( 3,370,633) (1,615,933)
Net loss per share $ ( 3.70) $ ( 3.64)
======================================================
The unaudited pro forma assumes the amortization of
excess cost over fair value of net assets acquired
over 20 years ($48,552).
The above transactions were accounted for by the
purchase method, and accordingly, the results of
operations of the acquired businesses have been
included in the accompanying consolidated financial
statements from the dates the Company assumed
operational control of each acquired entity.
5. Supplemental Cash was paid as follows:
Disclosures of
Cash Flows
Year ended June 30, 1997 1996
-----------------------------------------------------
Interest $ 68,797 $ 62,632
Income taxes $ - $ 18,500
Supplemental Disclosures of Non-Cash Investing
--------------------------------------------------------
Financing Activities
--------------------
During the year ended June 30, 1997, the Company
issued 110,000 shares of common stock and 35,000
shares to consultants as payment for acquisition costs
valued at approximately $423,000 in connection with
the purchase of FSI; issued 71,772 shares of common
stock valued at approximately $781,000 and 525,000
stock options valued at approximately $2,180,000 in
connection with employment and consulting agreements
and startup expenses in transactions not affecting
cash flows. For further information see Notes 4 and
13.
F-17
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
During the year ended June 30, 1996, the Company
issued 33,117 shares of common stock valued at $
675,000 in connection with prepaid advertising and
prepaid legal expenses; issued 4,375 shares of common
stock valued at $ 68,063 in connection with the
acquisition of AIM; issued 20,000 shares of common
stock valued at $ 400,000 in connection with equipment
acquisitions, the development and maintenance of web
sites on the Internet; issued 70,250 shares of common
stock valued at $1,405,000 in connection with mine
exploration and startup costs related to PTP; issued
3,706 shares of Common Stock valued at $ 74,120 in
connection with certain operating expenses in
transactions not affecting cash flows. In addition,
during the year ended June 30, 1996, a note payable of
$ 936,770 was converted to 55,500 shares of common
stock in a transaction not affecting cash.
6. Excess Cost Over
Fair Value of Net
Assets Acquired
June 30, 1997 1996
-------------------------------------------------------
Excess cost over fair
value of net assets $ 2,364,914 $ 1,405,629
acquired
Less: Accumulated amortization ( 166,473) ( 75,281)
-------------------------------------------------------
$ 2,198,441 $ 1,330,348
=======================================================
Amortization expense was $91,192 and $70,281 for the
years ended June 30, 1997 and 1996, respectively.
7. Operating Leases The Company leases office and warehouse space and office
equipment under operating leases that expire at various
times through fiscal 2002. In addition, the Company
leases land used in mineral excavation under an
operating lease that expires in June 2001 with a five
year renewal option. Rental expense was $114,000 and
$45,000 for the years ended June 30, 1997, and 1996,
respectively.
F-18
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Approximate minimum future lease payments under these
operating leases at June 30, 1997, are as follows:
Years ended June 30:
-----------------------------------------------------
1998 $ 296,390
1999 265,955
2000 260,039
2001 258,421
2002 75,877
-----------------------------------------------------
$ 1,156,682
=====================================================
8. Long Term Debt Long-term debt consisted of the following:
and Factoring
Line of Credit
June 30, 1997 1996
-------------------------------------------------------
Note payable to individuals,
interest at 7.4%, unsecured. $ 31,000 $ 37,000
Notes payable to credit corporations, interest
ranging from 7.75% to 10.94%, principal and interest
payments of $4,086 due monthly through May 2001,
secured by automobiles. 67,521 60,157
Note payable to a bank, interest at 7.75%, principal
and interest payments of $3,425 due monthly through
December 1998, secured by
equipment. 57,120 92,259
F-19
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Capital leases payable, interest at 10%, principal
and interest payments of $7,855 due monthly through
January 2002, secured by production
equipment. 283,064 167,241
Capital leases payable, interest ranging from 11.5%
to 13.43%, principal and interest payments of $1,762
due monthly through July 2000, secured by forklift
and computer equipment. 47,644 -
First mortgage payable to individuals, interest at
7.75%, principal and interest of $5,500 due monthly
through June 2001,
secured by land and building. 323,214 360,841
-------------------------------------------------------
809,563 717,498
-------------------------------------------------------
Less current portion 234,447 254,159
-------------------------------------------------------
$ 575,116 $ 463,339
=======================================================
Fixed assets securing capital leases were
approximately $381,000 at June 30, 1997.
Maturities of long-term debt were as follows:
Year ending June 30,
-------------------------------------------------------
1998 $ 234,447
1999 195,457
2000 157,650
2001 110,803
2002 104,013
Thereafter 7,193
-------------------------------------------------------
$ 809,563
=======================================================
F-20
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Factoring Line of Credit
------------------------
A subsidiary of the Company entered into factoring
agreements prior to its acquisition by the Company
providing for up to $500,000 in lines of credit, based
upon eligible accounts receivable. Fees charged for
factoring were 3.7% of all eligible receivables up to
$500,000 a year. The advances are collateralized by
the related receivables. At June 30, 1997,
approximately $101,000 was still available for
borrowing under the agreement.
9. Related Party At June 30, 1997, the note payable-stockholder is
Transactions unsecured, and resulted from the acquisition of FSI in
May 1997. The note bears interest at a rate of 8.5%
per annum. Interest expense for the one month period
ended June 30, 1997 was $6,908. The note was converted
into preferred stock in October 1997. (See Note 15).
From time to time the Company has borrowed funds from
Yucatan Holding Company, the Company's principal
stockholder ("Yucatan"), for working capital purposes.
As of June 30, 1997, the Company owed Yucatan
$142,731.
On June 30, 1995, the Company issued Yucatan a
promissory note in the principal amount of $936,770,
bearing quarterly interest at the prime rate as
published in the Wall Street Journal, the initial rate
of interest being 8.75%. On November 27, 1995, Yucatan
converted the face value of the Note into shares of
the Company's common stock based upon a conversion
ratio equal to the closing bid price of the Company's
common stock as reported on the NASD OTC Bulletin
Board on the date of conversion which was $22.00 per
share. Accordingly, the Company issued Yucatan 42,581
shares of its common stock during the year ended June
30, 1996.
During the year ended June 30, 1997, the Company
leased a facility from a stockholder, at a rate of
$3,400 per month, expiring in June 30, 1998. Rent
expense aggregated $ 40,800.
F-21
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
During the year ended June 30, 1996, the Company
issued 35,000 shares of common stock to related
parties, pursuant to costs associated with the
successful prospecting, acquisition of mineral rights
and the geophysical analysis of the mineral used in
Mr. Food's AlloFresh. As discussed in Note 14, costs
of $ 700,000 have been charged to expense for the year
ended June 30, 1996.
10. Business Segments
<TABLE>
<CAPTION>
Manufact- Consumer
uring Staffing Products Corporate Total
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
1997 $ 3,564,133 $ 1,033,433 $ 55,720 $ - $ 4,653,286
1996 $ 2,451,323 $ 582,217 $ 787,140 $ - $ 3,820,680
Operating income (loss)
1997 $( 114,814) $( 168,034) $( 245,228) $( 966,687) $(1,494,763)
1996 $ 1,276,776 $ 101,587 $ - $( 169,655) $ 1,208,708
Identifiable assets
1997 $ 8,587,030 $ 87,874 $ 956,998 $ 37,270 $ 9,669,172
1996 $ 6,483,333 $ 104,161 $ 1,115,353 $ - $ 7,702,847
Depreciation and amortization
1997 $ 277,322 $ 2,255 $ 1,274 1,547 $ 282,398
1996 $ 180,944 $ - $ 139 $ - $ 181,083
Capital expenditures
1997 $ 235,867 $ 2,627 $ 2,915 $ 8,225 $ 249,634
1996 $ 771,589 $ - $ - $ - $ 771,589
</TABLE>
11. Income Tax The Company files tax returns on a separate
company basis which can result in income tax expense
while having an overall consolidated loss.
F-22
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
At June 30, 1997, the Company had a Federal net
operating loss carry forward of approximately
$6,400,000 that expires through 2011. For financial
reporting purposes, a valuation allowance of
$2,400,000 has been recognized to offset the net
deferred tax assets related to these carry forwards.
Realization of the benefits related to pre-acquisition
losses may be limited in any one year due to change of
ownership rules under the Internal Revenue Code.
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of
assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax
liabilities and assets are as follows:
June 30, 1997 1996
-------------------------------------------------------
Deferred Tax
Liabilities:
Tax greater than book
depreciation/tax basis $ 130,000 $ 191,000
=======================================================
Deferred Tax Assets:
Net operating loss
carryforwards $ 2,400,000 $ 1,014,000
Less: Valuation allowance ( 2,400,000) (1,014,000)
-------------------------------------------------------
- -
=======================================================
The reconciliation between the provision for income
taxes and the amount which results from applying the
federal statutory tax rate of 34% to loss before
income taxes is as follows:
F-23
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1997 1996
------------------------------------------------------------------------
<S> <C> <C>
Income tax credit at statutory Federal rate $( 1,030,000) $( 380,000)
------------------------------------------------------------------------
Limit on recognition of deferred tax
asset due to valuation allowance 1,030,000 380,000
Adjustment for prior year's estimate ( 72,399) -
Change in deferred tax liability ( 61,000) ( 44,091)
Change in deferred tax asset - 237,632
Current year payable - 66,779
------------------------------------------------------------------------
Net (benefit) provision $( 133,399) $ 260,320
========================================================================
</TABLE>
12. Preferred Stock The Company is authorized to issue
2,000,000 shares of preferred stock, par value $.001
per share, issueable in such series and bearing such
voting, dividend, conversion, liquidation and obtained
rights and preferences as the Board of Directors may
determine.
The designations, rights and preferences of the Series
A Preferred Stock provide that the shares (i) have
full voting rights, share for share, with the then
outstanding common stock of the Company as well as any
other series of preferred stock then outstanding, (ii)
are not convertible into any other class of equity of
the Company, (iii) are redeemable at any time at the
Company's option at par value of $.001 per share, (iv)
pay dividends at the sole discretion of the Company's
Board of Directors, (v) are not transferable without
the consent of the Company's Board of Directors and
(vi) in the event of a liquidation or winding up of
the Company, carry a liquidation preference equal to
par value, without interest, and are junior in
interest to the Series B $5.00 Cumulative Convertible
Preferred Stock of the Company then outstanding.
F-24
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
The designations, rights and preferences of the Series
B Preferred Stock provides that the shares (i) shall
receive annual dividends equal to $.43 per share, (ii)
are entitled to full voting rights, share for share,
with any then outstanding common stock as well as with
any other class or series of stock of the Company
having general voting power with the common stock
concerning any matter being voted upon by the
Company's stockholders, (iii) are entitled to convert
their shares of preferred stock into shares of the
Company's restricted common stock at any time on a one
for one basis and (iv) are redeemable at the option of
the Company at $4.30 per share. On May 30, 1996, the
holder of the Series B Preferred Stock converted such
shares into 70,000 shares of common stock pursuant to
the designations, rights and preferences thereof.
The designations, rights and preferences of the Series
C Preferred Stock provide that the shares (i) have no
voting rights, (ii) are not convertible into any other
class of equity of the Company, (iii) are redeemable
at any time at the Company's option at an amount equal
to the prior year's annual dividend as previously set
by action of the Company's Board of Directors, (iv)
pay dividends at the sole discretion of the Company's
Board of Directors, (v) are not transferable without
the consent of the Company's Board of Directors and
(vi) in the event of a liquidation or winding up of
the Company, carry a liquidation preference equal to
par value, without interest, and are junior in
interest to the Series B $5.00 Cumulative Convertible
Preferred Stock of the Company then outstanding. A
dividend of $36,000 for the calendar year 1996 was
declared by the Board of Directors. For calendar year
1997 no dividends were declared by the Company's Board
of Directors.
The designations, rights and preferences of the Series
D Preferred Stock provide that the shares (i) have
full voting rights, share for share, with the then
outstanding common stock of the Company as well as any
other series of preferred stock then outstanding, (ii)
are redeemable at any time at the option of the
Company at a rate of .6 shares of common stock for
each share of
F-25
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
preferred stock, (iii) are redeemable at any time at
the Company's option at a price per share to be
mutually agreed upon by the Company and the holder at
the time of redemption, (iv) do not pay any dividends,
and (v) in the event of a liquidation or winding up of
the Company, carry a liquidation preference equal to
par value, without interest. During June 1997, the
1,000,000 shares of Series D preferred stock was
converted into 600,000 shares of common stock.
13. Common Stock The Company resolved for all issued and
outstanding shares of common stock held by
stockholders of record on April 3, 1997 shall be
automatically combined at a rate of four to one. Any
fractional shares as a result of this split were
rounded up to the next whole share. The Company is
currently authorized to issue 25,000,000 shares of
common stock, par value $.001 per share.
The components of stockholders' equity, all shares and
per share amounts have been retroactively adjusted to
reflect the reverse stock split.
During November 1996, The Company sold to accredited
investors, a total of 8,334 shares of the Company's
restricted common stock at a purchase price of $12 per
share in a private transaction exempt from
registration under applicable Federal securities laws.
The Company collected a total of $100,000 in
connection with this transaction. No offering costs
were incurred as part of the transaction.
During the year ended June 30, 1997, the Company
issued 71,772 shares of unrestricted common stock in
connection with the compensation of certain
consultants and employees. The total expense recorded
in connection with these transactions amounted to
approximately $781,000, based upon the market value at
the date of issuance.
Subsequent to June 30, 1997, the Company issued 630,412
shares of common stock to consultants in connection with
an acquisition of a Company (Note 14).
F-26
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
During April 1997, the Company entered into a five
year agreement for consulting services (Option Plan
I). In connection therewith, the Company granted
500,000 stock options exerciseable at $1.00 per share.
One third of the options are treated as a retainer for
the services to be rendered over the term of the
agreement and the remaining two thirds are considered
to be, transactional options, which serve as
compensation due upon the consummation of acquisitions
during the term of the agreement (as defined). The
retainer options are earned equally over the term of
the agreement. The transactional options shall be
earned based on the acquisitions consummated during
the term of the agreement. If the agreement is
terminated prior to the termination date, any unearned
options shall be returned to the Company
The stock options were valued at approximately
$2,125,000, the market value at the date of grant. In
connection with this transaction, the Company recorded
the retainer options as prepaid consulting fees
totaling approximately $708,000 of which approximately
$35,000 was expensed during the year ended June 30,
1997. The remaining $1,417,000 ascribed to the
transaction options were recorded as stock to be
earned.
During April 1997 the 500,000 options were exercised
and the Company issued 500,000 shares of common stock.
In connection with this transaction the Company
collected proceeds of $500,000.
In addition, during April 1997, the Company entered
into a one year agreement for consulting services
(Option Plan II). In connection with this agreement,
the Company granted 25,000 stock options exerciseable
at $2.50 per share. The stock options were valued at
approximately $55,000, the market value at the date of
grant . In connection with this transaction, the
Company recorded consulting fees totaling
approximately $55,000. During April 1997, 5,118
options were exercised. At June 30, 1997, unexercised
options totaled 19,882.
The Company has adopted Statement of Financial
Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123) which
requires the Company to value option to non-employees
at fair value.
F-27
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
A summary of the status of the Company's Option Plan I
as of June 30, 1997 and changes during the year then
ended is presented below:
1997
---------------------------------
Shares Weighted
Under Average
Option Exercise Price
-------- --------------
Outstanding beginning of year --
Granted 500,000 $1.00
Exercised 500,000 $1.00
Forfeited --
-------
Outstanding end of year --
-------
Options exercisable at year - end --
-------
A summary of the status of the Company's Option Plan II
as of June 30, 1997 and changes during the year then
ended is presented below:
1997
---------------------------------
Shares Weighted
Under Average
Option Exercise Price
-------- --------------
Outstanding beginning of year --
Granted 25,000 $2.50
Exercised 5,118 $2.50
Forfeited --
-------
Outstanding end of year 19,882 $2.50
-------
Options exercisable at year - end 19,882
-------
The weighted average of all stock options issued
during the year ended June 30, 1997 is $1.07.
Subsequent to June 30, 1997, the Company entered into
a six year consulting agreement to provide certain
marketing services during July 1997. As compensation
for the services the Company granted a one year option
to purchase 262,000 shares of common stock at $1.00
per share.
14. Other Expenses 1996
----
On August 30, 1996, the Company filed with the
Securities and Exchange Commission (the SEC) Form
SB-2, a registration Statement under the Securities
Act of 1933. The SEC issued comments on the filing by
letter dated November 4, 1996. On January 14, 1997,
the Company responded to the SEC and amended the SB-2
filing. The SEC issued additional comments by letter
dated February 14, 1997. As a result of these
comments, the Company made the following expense
charges to its financial statements for the years
ended June 30, 1996.
Acquisition Expenses
--------------------
Acquisition expenses totaling $76,890 have been
charged to expense for the year ended June 30, 1996
and represent the value of 4,375 shares of common
stock and cash paid to unrelated parties pursuant to
the acquisition of AIM. The acquisition has been
accounted for based on the purchase method of
accounting.
F-28
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mineral Exploration
-------------------
Mineral exploration expenses totaling $700,000 have
been charged to expense for the year ended June 30,
1996. The mineral exploration expenses were incurred
in connection with the successful prospecting,
acquisition of mineral rights and the geophysical
analysis of the mineral used in Mr. Food's AlloFresh
and was paid to a related party, as defined under SFAS
57, with the issuance of 35,000 shares of common
stock.
Startup Expenses
----------------
Startup expenses totaling $1,091,308 have been charged
to expense for the year ended June 30, 1996. Startup
expenses represent pre-operating expenses incurred in
the development of Mr. Food's AlloFresh under the
Company's consumer products division, PTP. As a result
of the formation of PTP, 35,250 shares of stock were
issued to unrelated parties. The remaining $386,308 in
startup expenses represents operating expenses
incurred during the startup phase.
Web Development
---------------
Web development expenses totaling $400,000 have been
charged to expense for the year ended June 30, 1996.
The expenses were incurred in connection with certain
contracts to acquire equipment and to develop and
maintain Internet web sites ultimately as an Internet
provider to market its consumer products and through
its manufacturing division, its inventory of
refurbished gear boxes and other power transmission
components internationally. The web development was
paid for with the issuance of 20,000 shares of stock
to an unrelated party.
1997
----
Acquisition Expenses
--------------------
Acquisition expenses totaling $110,000 have been
charged to expense for the year ended June 30, 1997
and represent the value of 9,167 shares of common
stock paid to certain consultants as compensation for
services pertaining to identifying and closing
potential acquisition targets. As no such acquisitions
were closed, the amount was expensed in full.
F-29
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Startup Expenses
----------------
Startup expenses totaling $1,357,899 have been charged
to expense for the year ended June 30, 1997. $994,689
of the expenses relate to pre-operating expenses
incurred in the development of Mr. Food's AlloFresh
under the Company's consumer products division, PTP.
The remaining $363,210 was incurred during the startup
of one of the Company's subsidiaries and development
of a product line.
15. Subsequent Events a) On September 22, 1997, the Company acquired 100%
of the issued and outstanding capital stock of LPS
Acquisition Corp. ("LPS") in exchange for an
aggregate of 270,000 shares of the Company's
restricted common stock from LPS stockholders in a
private transaction exempt from registration under
the Securities Act of 1933. LPS, doing business as
Lantana Peat And Soil, is a distributor of high
quality custom soil mixes to wholesale nurseries
throughout South Florida. Annualized revenues are
currently estimated at $3 million.
The majority stockholder of LPS, owning
approximately 85.2% of LPS, was a non-affiliate
of the Company. Minority stockholders in LPS,
each owning approximately 7.4% of the issued and
outstanding stock, were the wife of the Chairman
and President of the Company, and the wife of a
director of the Company. The sellers are
required to deliver to the Company a fairness
opinion as to the amount of consideration
tendered by the Company in the share for share
exchange. In the event such fairness opinion
does not support the exchange ratio, such
exchange ratio shall be adjusted by mutual
agreement between the parties.
F-30
<PAGE>
Workforce Systems Corp.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
b) In conjunction with the acquisition of FSI, the
Company began negotiations with FSI's principal
stockholder regarding the conversion of the note
payable-stockholder. Such negotiations were
consummated as follows:
Effective October 7, 1997, the note
payable-stockholder was converted to 115,000
shares of Series E cumulative non participating
preferred stock. The designations, rights and
preferences of the Series E Preferred Stock
provides that holders shall receive annual
dividends equal to $77,000, are entitled to full
voting rights, share for share with any then
outstanding common stock as well as with any
other class or series of the Company having
general voting power with the common stock
concerning any matter being voted upon by the
Company's stockholders, and are redeemable
solely at the Company's option at a redemption
price to be negotiated by the parties at the
time of the redemption.
If the conversion had occurred at June 30, 1997,
the Company's consolidated balance sheet would
have been as follows:
Total assets $9,669,172
Total liabilities $2,883,838
Stockholders' equity $6,785,334
Net tangible assets $4,586,893
16. Fourth Quarter Year end adjustments made in the fourth quarter of 1997
Adjustments had the effect of decreasing net income for the quarter
(Unaudited) by approximately $1,400,000. The adjustments related
principally to the carrying amounts of certain assets,
principally bad debt write-offs and inventory
valuations, and expense accruals associated with prior
quarters of the year ended June 30, 1997.
F-31
<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On August 4, 1997 Lyle H. Cooper C.P.A. was dismissed as the
Company's principal accountant. Lyle H. Cooper C.P.A. had served as the
Company's principal accountant since July 6, 1994. During the period Lyle H.
Cooper C.P.A. was engaged as the Company's principal accountant there were no
disagreements with Lyle H. Cooper C.P.A. on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure. No accountant's report on the financial statements of the Company
issued by Lyle H. Cooper C.P.A. contained an adverse opinion or a disclaimer
of opinion, or was qualified or modified as to uncertainty, audit scope or
accounting principles. The Company requested that Lyle H. Cooper C.P.A.
furnish it with a letter addressed to the Securities and Exchange Commission
stating whether or not he agreed with the statements made by the Company in
response to Item 4 of the Report on Form 8-K filed by the Company with the
Securities and Exchange Commission on August 6, 1997 and, if not, stating the
respects in which he did not agree. The Company filed a copy of such letter
from Lyle H. Cooper, C.P.A. confirming his agreement to the Company's
statements as an exhibit to the Form 8-K Report filed with the Securities and
Exchange Commission on August 6, 1997. See Exhibit 16.3 hereto.
On August 4, 1997 the Company engaged BDO Seidman, LLP as its
independent accountant for the fiscal year ended June 30, 1997. The decision
to change accountants was approved by the Company's Board of Directors. The
Company consulted with BDO Seidman, LLP within the last two years concerning
the application of purchase accounting in the acquisitions of OIS, NHP and
IFR. The oral advice of BDO Seidman, LLP was considered by the Company in
reaching its decision as to the application of purchase accounting in such
acquisitions.
13
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth the names, ages and positions held
with respect to each Director and Executive Officer of the Company.
Name Age Position
---- --- --------
Robert Hausman 41 Director, President
Jayme Dorrough 30 Director and Secretary
Mark Weisz 38 Director
Lester Gann 52 Director
C. Lawrence Rutstein 51 Director
All officers of the Company will hold office until the next annual
meeting of the Company. There are no arrangements or understanding between any
such officer of the Company and any other person or persons pursuant to which
such officer was or is to be selected as an officer of the Company.
The following sets forth biographical information as to the business
experience of each current Director and Executive Officer of the Company.
Robert Hausman. Mr. Hausman joined the Company's Board of Directors
and was elected President on June 1, 1997 following the acquisition of
Federal. See Item 1. Business - Overview. Mr. Hausman, who was elected
Chairman of the Board in September 1997, also serves on the Board of Directors
of each of the Company's subsidiaries and is a member of the Audit Committee.
Mr. Hausman devotes substantially all of his time and attention to the
business of the Company. From October 1994 to October 1997, Mr. Hausman was
President and Chief Executive Officer of Federal and since May 1995, Mr.
Hausman has also been 25% shareholder of South Eastern Sound & Communications,
Inc., a Boca Raton based sales, service and installation company of sound and
communications systems. In addition, since May 1996 Mr. Hausman has owned a
one-third interest in All-Star Sports Camp, Boca Raton, Florida. From February
1982 until July 1994, Mr. Hausman was a 50% owner of Bedford Weaving Mills, a
Bedford, Virginia based speciality textile mill. Mr. Hausman, a 50% owner and
Executive Vice President of Bedford Weaving Mills, which was acquired by Mr.
Hausman and his partner in February 1982 from Belding Hemingway Inc.
(NYSE:BHY). Subsequent to such acquisition, Bedford Weaving Mills increased
its revenues and earnings from a approximately $5 million, with operating
losses, to approximately $20 million with pre-tax profits. Mr. Hausman is also
a member of the Board of Directors of QPQ Corporation (Nasdaq: QPQQ). Mr.
Hausman received a B.S. in Management and Marketing in 1977 from Philadelphia
College of Textiles and an MBA in Marketing and Management in 1978 from Babson
College.
Jayme Dorrough. Mrs. Dorrough has served as a director and Secretary
of the Company since June 14, 1994. Mrs. Dorrough is also an officer and
director of Yucatan Holding Company, a principal shareholder of the Company.
Mrs. Dorrough, who is not an employee of the Company and has other business
interests outside of the Company, devotes as much time to the affairs of the
Company as she deems necessary which equates to approximately 10% of her time.
From August 1987 until October 1989, Mrs. Dorrough was employed by Baker,
Worthington, Crossley, Stansberry & Woolf, Knoxville, Tennessee as an
administrative assistant.
Mark Weisz. Mr. Weisz joined the Company's Board of Directors in
September 1997 and serves on its Audit Committee. Since May 1997 Mr. Weisz has
served as Regional Director of Tax for Northern Telecom, Ltd. (NYSE: NT).
Prior to assuming
14
<PAGE>
that position, from January 1993 until April 1997 Mr. Weisz served as Tax
Manager for Coopers & Lybrand, LLP in Miami, Florida. Earlier he served as
Senior Tax Associate (January 1990 to December 1992) and Tax Associate (June
1987 to December 1989) for Coopers & Lybrand, LLP in Princeton, New Jersey.
From 1986 to 1987 he served in a tax internship with Arthur Young & Company in
Metro Park, NY. Mr. Weisz holds a B.S. in Accounting from Rutgers University.
C. Lawrence Rutstein. Mr. Weisz joined the Company's Board of
Directors in September 1997 and serves on its Audit Committee. Since May 1997
Mr. Rutstein as served as Chairman, CEO and President of QPQ Corporation
(Nasdaq: QPQQ) which has been in the food services and medical weight loss
business. Since 1995 he has also served as President of CapQuest Partners,
Inc., a company which has made several investments in emerging software
companies. A Harvard Law School graduate, Mr. Rutstein has practiced
corporate, banking and securities law in Philadelphia, Pennsylvania. Mr.
Rutstein previously served as Chief Counsel to the Pennsylvania Department of
Banking from 1971 to 1972, and served as Resident Counsel to a major
Philadelphia bank. From 1989 to 1991 he served as Chairman of the Board of
Cedar Group, Inc., a Nasdaq listed importer and distributor of fasteners. From
1992 until 1994 he was a General Partner of the Memphis Chicks AA baseball
club and during 1995 he was Chairman of the Rittenhouse Group, Inc., a private
consulting company. Mr. Rutstein currently serves on the Board of Directors of
Boca Raton Capital Corporation (Nasdaq: BRCC) and Packquistion Corp.
and Future Graph, Inc., privately-held companies.
Lester Gann. Mr. Gann joined the Company's Board of Directors in
September 1997. Mr. Gann is President and a director of Industrial Fabrication
& Repair, Inc. ("IFR"), a subsidiary of the Company. Mr. Gann founded IFR in
1979 and has served as its President and a director continuously since the
date of formation. Mr. Gann has 33 years experience in tool and machinery
design and power transmission equipment and has received extensive training
from various manufacturers and distributors of the foregoing equipment. Mr.
Gann is responsible for all day to day operations of the industrial
fabrication division of the Company.
Key Employees
While not executive officers of the Company, the following officers
and employees of the Company's subsidiaries make significant contributions to
the business of the Company.
Greg Hoehn. Mr. Hoehn, 36, has been President of Federal since
October 1, 1997 and was Operations Manager from January 1996 until October 1,
1997. He is responsible for day to day operations, including oversight of
administrative, sales, warehouse, stocklisting and fabrication activities.
From August 1994 until joining Federal, Mr. Hoehn was employed by Summers Fire
Springs as Production Manger and from June 1993 until August 1994 he was
Senior Technical Writer for Professional Management and Advisory Corp. In this
position Mr. Hoehn managed a staff of technical writers producing proposals
for contractors bidding on state and federal contracts where his
responsibilities included supervising the cost estimating for each contract
and providing budget estimates and escalation costs. Mr. Hoehn was Product
Manager/Quality Control from February 1992 until June 1993 at SciCor where he
was directly responsible for assigned products from bidding to final testing
and quality inspections. Mr. Hoehn attended both the Community College of the
Air Force and the University of Maryland.
Robert Lovelace. Mr. Lovelace, 50, is President and a director of
AIM, serving in such position since its formation in April 1995. Mr. Lovelace
is responsible for day to day operations of AIM. From June 1992 until founding
AIM in 1995 Mr. Lovelace was employed as a regional sales manager for Borg
Wagner for Wells Fargo Guard Service, Burns Guard Service and Borg Wagner
Facility Staffing. From January 1990 until May 1992 Mr. Lovelace was regional
Vice President for Sears Security Systems residential alarm systems. During
his career, Mr. Lovelace has completed in excess of 20 schools within the Dale
Carnegie & Associates organization covering training and supervisory
management in attitude,
15
<PAGE>
communication, human relations, memory training, leadership, public speaking
and business management.
John Stewart. Mr. Stewart, 53, is General Manager of Lantana Peat &
Soil, a position he had held since June 1992. Mr. Stewart is responsible for
all day to day operations at Lantana Peat & Soil
There is no family relationship between any of the officers, key
employees and directors. The Company currently maintains an Audit Committee
which is comprised of Messrs. Hausman, Weisz and Rutstein. The Company does
not presently maintain compensation or nominating committees of the Board of
Directors.
Item 10. Executive Compensation
The following table summarizes all compensation accrued by the
Company in each of the last three fiscal years for the Company's Chief
Executive Officer and each other executive officers serving as such whose
annual compensation exceeded $100,000. Directors of the Company do not receive
compensation for serving in such capacity.
<TABLE>
<CAPTION>
Long - Term
Annual Compensation Compensation Awards Options
Name and Other Annual Number of All Other
Principal Position Year Salary Bonus Compensation Shares Compensation
- ------------------ ---- ------ ----- ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert Hausman, 1997 0 0 0 0 0
President, Chief 1996 0 0 0 0 0
Executive Officer 1995 0 0 0 0 0
and Director(1)
Ella Chesnutt(2) 1997 0 0 0 0 0
1996 0 0 0 0 0
1995 0 0 0 0 $318,645(3)
Jayme Dorrough 1997 0 0 0 0 0
Secretary 1996 0 0 0 0 0
and Director 1995 0 0 0 0 0
$318,645(3)
</TABLE>
(1) Mr. Hausman was elected the Company's President on June 1, 1997
and entered into a Management Agreement with the Company commencing July 1,
1997. See "Executive Compensation Employment and Management Agreements.".
(2) Mrs. Chesnutt served as the Company's President from June 14,
1994 until her resignation on June 1, 1997.
(3) On March 21, 1995 Mrs. Chesnutt and Mrs. Dorrough were each
awarded 12,125 shares of Common Stock for services rendered by them in
connection with the Naturale Agreement. The fair market value on the date of
issuance was $26.28 per share resulting in aggregate value to each of Mrs.
Chesnutt and Mrs. Dorrough of $318,645.
Employment and Management Agreements
On July 1, 1997 the Company entered into a Management Agreement with
Robert Hausman, President and a director of the Company. Pursuant to the term
of this three year agreement, Mr. Hausman is entitled to receive (i) annual
base compensation of $100,000, which increases in years two and three of the
agreement by the greater of the percentage increase of the Consumer Price
Index or 6% and (ii) options to purchase 100,000 shares of the Company's
Common Stock at an exercise price of $5.00 per share. During the term of the
Management Agreement should there be a change of control of the Company, as
that term is defined in the Management Agreement (see Exhibit 10.4 hereto),
the Company at its sole option may terminate the Management Agreement upon 30
days prior written notice and thereafter will be obligated to pay Mr. Hausman
the balance of the compensation payable under the Management Agreement had
same not been terminated prior to its expiration, together with an additional
sum equal to two years annual base
16
<PAGE>
compensation. The Management Agreement contains customary provisions providing
for confidentiality.
In May 1995 IFR entered into a three year employment agreement with
Lester Gann providing for an annual base salary of $96,000 with the ability to
receive performance based bonuses at the discretion of the Board of Directors.
As of the date hereof, no such performance bonuses have been awarded. Mr. Gann
is also entitled to participate in all benefit programs of IFR as may be made
available to other salaried employees. Mr. Gann's employment agreement
contains customary provisions providing for confidentiality as well as a 12
month non-compete following the termination of the agreement. Mr. Gann's
employment agreement does not provide for any severance payments.
In March 1996 AIM entered into a three year employment agreement with
Robert Lovelace. Such agreement provides for an annual base compensation of
$66,000 and certain additional compensation in the form of an aggregate of the
issuance of 6,818 shares of the Company's Common Stock which have been
registered under the Act. Such stock is issued in 24 monthly installments
providing Mr. Lovelace is still employed by AIM. The employment agreement also
contains customary provisions providing for confidentiality as well as a 12
month non-compete following the termination of the agreements. Mr. Lovelace's
employment agreement does not provide for any severance payments. As
additional incentive to build the business of AIM, pursuant to the terms of
the AIM acquisition the Company granted Mr. Lovelace certain incentives.
Specifically, in the event the financial statements of AIM, as prepared in
accordance with generally accepted accounting principles applied on a
consistent basis reflect a certain pre-determined average gross profit per
month for the immediately preceding three month period (based upon fiscal
quarters for the fiscal year ending June 30) as hereinafter set forth, and Mr.
Lovelace is then an employee of AIM, Mr. Lovelace is entitled to earn
additional shares of the Company's Common Stock. Specifically, at such time as
AIM's financial statements reflect an average gross profit (as defined in the
agreement) of at least $50,000 per month for the preceding fiscal quarter, Mr.
Lovelace shall be entitled to receive a one time issuance of 12,500 shares of
the Company's Common Stock; and at such time as AIM's financial statements
reflect an average gross profit (as defined in the share exchange agreement)
of at least $70,000 per month for the preceding fiscal quarter, Mr. Lovelace
shall be entitled to receive a one time issuance of an additional 25,000
shares of the Company's Common Stock; and at such time as AIM's financial
statements reflect an average gross profit (as defined in the share exchange
agreement) of at least $90,000 per month for the preceding fiscal quarter, Mr.
Lovelace shall be entitled to receive a one time issuance of an additional
30,625 shares of the Company's Common Stock. To date, AIM has not reached any
of the aforedescribed thresholds.
Item 11. Security Ownership of Certain Beneficial Owners and Management
As of October 9, 1997 hereof there are 2,583,346 shares of Common
Stock issued and outstanding and 30 shares of Series A Preferred Stock and
115,000 shares of Series E Cumulative Non-Participating Preferred Stock issued
and outstanding, all of which are voting securities of the Company. The 30,000
shares of Series C Preferred Stock which are issued and outstanding do not
have voting rights. The following table sets forth, as of the close of
business on October 9, 1997, (a) the name, address and number of shares of
each person known by the Company to be the beneficial owner of more than 5% of
any class of each the Company's voting securities and (b) the number of shares
of each class of voting securities owned by each director and all officers and
directors as a group, together with their respective percentage holdings of
such shares:
17
<PAGE>
<TABLE>
<CAPTION>
Series A Preferred Stock
Name and Amount of Percentage
Address of Beneficial of
of Beneficial Owner Ownership of Stock Class
------------------- ------------------ -----
<S> <C> <C>
Outside Industrial 30 100%
Services, Inc. (1)
2415 Sycamore Drive
Knoxville, TN 37921
All Officers and
Directors as a
Group (five persons) none n/a
Series E Cumulative Non-Participating Preferred Stock
Name and Amount of Percentage
Address of Beneficial of
of Beneficial Owner Ownership of Stock Class
------------------- ------------------ -----
Robert Hausman 115,000 100%
7777 Glades Road
Suite 211
Boca Raton, FL 33433
All Officers and
Directors as a
Group (five persons) 115,000 100%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Name and Amount of Percentage
Address of Beneficial of
of Beneficial Owner Ownership of Stock Class (4)
------------------- ------------------ ---------
<S> <C> <C>
Yucatan Holding 504,891 19.5%
Company (2)
8870 Cedar Springs Lane
Suite 5
Knoxville, TN 37923
Robert Hausman(3) 219,980 8.2%
7777 Glades Road
Suite 211
Boca Raton, FL 33434
Jayme Dorrough (2) (2)
8870 Cedar Springs Lane
Suite 5
Knoxville, TN 37923
Mark Weisz 100 (4)
7777 Glades Road
Suite 211
Boca Raton, FL 33434
C. Lawrence Rutstein(5) 19,980 (4)
7777 Glades Road
Suite 211
Boca Raton, FL 33434
Lester Gann 121,481 4.7%
2415 Sycamore Drive
Knoxville, TN 37921
Darren Apel 230,000 8.9%
6480 Via Rosa
Boca Raton, FL 33433
All Officers and
Directors as a
Group (five persons)
(2)(3)(5) 866,432 32.3%
</TABLE>
(1) Outside Industrial Services, Inc. is a subsidiary of the Company.
(2) Mrs. Dorrough is the sole officer, director and shareholder of
Yucatan Holding Company. Of such shares, Mrs. Dorrough has sole voting and
depository power of an aggregate of 304,891 shares and Mrs. Ella Chesnutt, the
former president of Yucatan Holding Company, has sole voting and depository
power over an aggregate of 200,000 shares.
18
<PAGE>
(3) Includes options to acquire 100,000 shares of the Company's
Common Stock, and 19,980 shares of Common Stock owned by Barbara Hausman, his
spouse, however, pursuant to Rule 16a-3 of the Securities Exchange Act of
1934, as amended, Mr. Hausman disclaims beneficial ownership of the shares
held by his wife. See Item 1. Description of Business - General. and Item 10.
Executive Compensation - Employment and Management Agreements.
(4) Less than 1%.
(5) Includes 19,980 shares of Common Stock owned by Ronna Newman
Rutstein, his spouse, however, pursuant to Rule 16a-3 of the Securities
Exchange Act of 1934, as amended, Mr. Rutstein disclaims beneficial ownership
of the shares held by his wife. See Item 1. Description of Business - General.
Item 12. Certain Relationships and Related Transactions
On March 21, 1995 Mrs. Dorrough and Mrs. Chesnutt, a former officer
and director of the Company, were each awarded 12,125 shares of Common Stock
for services rendered by them in connection with the Naturale Agreement. The
fair market value on the date of issuance was $ 26.28 per share resulting in
aggregate value to each of Mrs. Chesnutt and Mrs. Dorrough of $318,645.
From time to time, the Company has borrowed funds from Yucatan
Holding Company, the Company's principal shareholder ("Yucatan"), for working
capital purposes. Mrs. Chesnutt and Mrs. Dorrough are the officers and
directors of Yucatan and Mrs. Dorrough is its sole shareholder. Pursuant to
the terms of certain promissory note in the principal amount of $936,770 dated
June 30, 1995 issued by the Company to Yucatan (the "June Note"), Yucatan, in
its sole discretion, could convert all or a portion of the principal and
accrued unpaid interest pursuant to the June Note into shares of the Company's
Common Stock based upon a conversion ratio to be determined by the parties at
the time of conversion. Subsequent to June 30, 1995, Yucatan advanced the
Company additional funds for working capital and on September 30, 1995 the
principal amount due Yucatan by the Company was $1,210,446.
On November 27, 1995, Yucatan converted the face value of the June
Note into shares of the Company's Common Stock based upon conversion ratio
equal to the closing bid price of the Company's common stock as reported on
the OTC Bulletin Board on the date of conversion which was $22.00 per share.
Accordingly, the Company issued Yucatan 42,581 shares of its restricted Common
Stock. The Company remained indebted, on an unsecured basis to Yucatan for
advances made subsequent to June 30, 1995 in the amount of $273,676.
Subsequent to November 27, 1995 such amount has been repaid to Yucatan by the
Company.
During Fiscal 1997 from time to time the Company borrowed additional
funds from Yucatan for working capital purposes. At June 30, 1997 the amount
due Yucatan by the Company was $142,731.
In conjunction with the acquisition of Federal in May 1997 (see Item
1. Description of Business), Federal delivered a promissory note to Robert
Hausman and Barbara Hausman in the principal amount of $1,079,024.31. Mr.
Hausman was a 90% shareholder in Federal prior to its acquisition by the
Company. On October 7, 1997 Robert Hausman and Barbara Hausman converted the
principal and any accrued but unpaid interest thereon into 115,000 shares of
the Company's Series E Cumulative Non-Participating Preferred Stock (the
"Series E"). The designations, rights and preferences of the Series E provide
(a) for annual dividends equal to $77,000, (b) full voting rights, share for
share, with any then outstanding Common Stock as well as with any other class
or series of stock of the Company having general voting power with the Common
Stock concerning any matter being voted upon by the Company's stockholders,
(c) is not convertible into any other class of capital stock of the Company
and (d) is redeemable at the option of the Company at a redemption price to be
negotiated by the parties at the time of redemption.
In conjunction with the September 1997 acquisition of LPS (see Item
1.
19
<PAGE>
Description of Business), Barbara Hausman, the wife of Robert Hausman, the
Company's President and a director, and Ronna Newman Rutstein, the wife of C.
Lawrence Rutstein, a director of the Company, each received 19,980 shares of
the Company's Common Stock in exchange for their interests in LPS. As set
forth under Item 11. Security Ownership of Certain Beneficial Owners and
Management, pursuant to Rule 16a-3 of the Securities Exchange Act of 1934, as
amended, each of Messrs. Hausman and Rutstein disclaim beneficial ownership
interest in the shares held by their respective spouses. In August 1997 LPS
purchased the assets out of bankruptcy of Kedac, Inc., an unaffiliated third
party, which such assets consisted for substantially all of the existing
operating assets, accounts receivable, furniture and equipment and general
intangibles, including the trade name "Lantana Peat & Soil" for a total
consideration of $190,000 in cash and the assumption of $750,000 of notes with
a financial institution. As set forth in Item 1. Description of Business, in
September 1997 the Company purchased 100% of the issued and outstanding stock
of LPS from its shareholders, who includes Mrs. Hausman and Mrs. Rutstein, in
exchange for 270,000 shares of the Company's restricted Common Stock in a
private transaction exempt from registration under the Act in reliance on
Section 4(2) thereof.
20
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
The following documents are filed as a part of this report or are
incorporated by reference to previous filings, if so indicated:
(a) Exhibits
Exhibit No. Description
2.1 Stock Purchase Agreement dated June 14, 1994 by and
between F. W. Miller, Wildflower Financial Corp. and
Yucatan Holding Company is hereby incorporated by
reference to the Report on Form 8-K as filed with the
Securities and Exchange Commission on June 20, 1994
2.2 Agreement dated as of June 30, 1994 by and between
Wildflower Financial Corp., Yucatan Holding Company and
Prime Florida, Inc. is hereby incorporated by reference
to the Report on Form 8-K as filed with the Securities
and Exchange commission on July 13, 1994
2.3 Agreement dated as of June 30, 1994 by and between
Wildflower Financial Corp. and a certain shareholder of
Outside Industrial Services, Inc. is hereby incorporated
by reference to the Report on Form 8-K as filed with the
Securities and Exchange commission on July 13, 1994
2.4 Agreement dated November 30, 1994 by and between
Workforce Systems Corp. and Outside Industrial Services,
Inc. is hereby incorporated by reference to the Report on
Form 10-QSB for the quarter ended December 31, 1994 as
filed with the Securities and Exchange commission on
February 15, 1995
2.5 Agreement dated May 22, 1995 by and between Workforce
Systems Corp. and Lester E. Gann, the Sole Shareholder of
Industrial Fabrication & Repair, Inc. is hereby
incorporated by reference to the Report on Form 8-K as
filed with the Securities and Exchange commission on May
23, 1995
2.6 Agreement dated as of May 29, 1997 by and between
Workforce Systems Corp. and Robert Hausman and John
Murray as Sole Shareholders of Federal Supply, Inc. and
Robert Hausman as Sole Shareholder of Federal
Fabrication, Inc. is incorporated by reference to the
Report on Form 8-K as filed with the Securities and
Exchange Commission on June 4, 1997
3.1 Articles of Incorporation are hereby incorporated by
reference to the Registration Statement on Form SB-2 as
declared effective by the Securities and Exchange
Commission on January 12, 1993
3.2 Articles of Amendment to the Articles of Incorporation
setting forth the designations, rights and preferences of
the Series B $5.00 Cumulative Convertible Preferred Stock
are hereby incorporated by reference to the Report on
Form 8-K as filed with the Securities and Exchange
Commission on July 13, 1994
3.3 Articles of Amendment to the Articles of Incorporation
21
<PAGE>
changing the corporation name are hereby
incorporated by reference to the Report on
Form 8-K as filed with the Securities and
Exchange Commission on July 11, 1994
3.4 Articles of Amendment to the Articles of Incorporation
setting forth the designations, rights and preferences of
the Series A and Series C Preferred Stock are hereby
incorporated by reference to the Report on Form 10-QSB
for the quarter ended December 31, 1994 as filed with the
Securities and Exchange commission on February 15, 1995
3.5 Articles of Amendment to the Articles of Incorporation
setting forth the designations, rights and preferences of
the Series D Preferred Stock is hereby incorporated by
reference to the Report on Form 10-KSB for the fiscal
year ended June 30, 1996 as filed with the Securities and
Exchange Commission on October 15, 1996
3.6 Articles of Amendment to the Articles of Incorporation
increased the amount of authorized common stock and
setting forth the redemption provisions of the Series D
Preferred Stock is hereby incorporated by reference to
the Registration Statement on Form SB-2, File No. 333-
11169, as filed with the Securities and Exchange
Commission on August 30, 1996, as amended
3.7 Articles of Amendment to the Articles of Incorporation
decreasing the number of authorized common stock and
effecting a one for four stock split of the common stock
is hereby incorporated by reference to the Registration
Statement on Form SB-2, File No. 333-11169, as filed with
the Securities and Exchange Commission on August 30,
1996, as amended
3.8 By-Laws of the Company are hereby incorporated by
reference to the Registration Statement on Form SB-2 as
declared effective by the Securities and Exchange
Commission on January 12, 1993.
3.9 Articles of Amendment to the Articles of Incorporation
setting forth the designations, rights and preferences of
the Series E Cumulative Non-Participating Preferred Stock
are hereby incorporated by reference to the Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1997.
10.1 Licensing Agreement dated May 31, 1996 by and between
Ginsburg Enterprises Incorporated and Products That
Produce, Inc. is hereby incorporated by reference to the
Report on Form 10-KSB for the fiscal year ended June 30,
1996 as filed with the Securities and Exchange Commission
on October 15, 1996
10.2 Employment Agreement between Industrial Fabrication &
Repair, Inc. and Lester E. Gann is hereby incorporated by
reference to the Registration Statement on Form SB-2,
File No. 333-11169, as filed with the Securities and
Exchange Commission on August 30, 1996, as amended
10.3 Employment Agreement between American Industrial
Management, Inc. and Robert Lovelace is hereby
incorporated by reference to the Registration Statement
on Form SB-2, File No. 333-11169, as filed with the
Securities and Exchange Commission on August 30, 1996, as
amended
22
<PAGE>
10.4 Management agreement between Workforce Systems Corp. and
Robert Hausman is hereby incorporated by reference to the
Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1997.
10.5 Amended and Restated Consulting Acquisition Management
Agreement between Workforce Systems Corp. and Manny J.
Shulman and Shulman & Associates, Inc. is hereby
incorporated by reference to the registration statement
on Form S-8 as filed with the Securities and Exchange
Commission on September 24, 1997
10.6 Stock Purchase and Sale Agreement dated September 22 ,
1997 between Workforce Systems Corp., a Florida
corporation, and Darren Apel, Barbara Hausman and Ronna
Newman Rutstein, as shareholders of LPS Acquisition Corp.
is incorporated by reference to the Report on Form 8-K as
filed with the Securities and Exchange Commission on
September 22, 1997
10.7 Conversion Agreement dated October 7, 1997 between
Workforce Systems Corp., Federal Supply, Inc. and Robert
Hausman and Barbara Hausman is hereby incorporated by
reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1997.
16.1 Letter from Richard H. Harris & Associates, P.A.
regarding change in certifying accountants is hereby
incorporated by reference to the Report on Form 8-K as
filed with the Securities and Exchange Commission on July
11, 1994
16.2 Letter from Lyle H. Cooper, C.P.A. regarding change in
certifying accountants is hereby incorporated by
reference to the Report on Form 8-K as filed with the
Securities and Exchange Commission on July 11, 1994
16.3 Letter from Lyle H. Cooper, C.P.A. regarding change in
certifying accountants is hereby incorporated by
reference to the Report on Form 8-K as filed with the
Securities and Exchange Commission on August 6, 1997
16.4 Letter from BDO Seidman, LLP regarding change in
certifying accountants is hereby incorporated by
reference to the Report on Form 8-K as filed with the
Securities and Exchange Commission on August 6, 1997
21 Subsidiaries of the Registrant is hereby incorporated by
reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1997
27 Financial Data Schedule
99 Information regarding the name change of the Company is
hereby incorporated by reference to the Report on Form 8-
K as filed with the Securities and Exchange Commission on
July 11, 1994
(b) Reports on Form 8-K
On June 4, 1997 the Company filed with the Securities and Exchange
Commission a Report on Form 8-K regarding the acquisitions of Federal Supply,
Inc. and Federal Fabrication, Inc.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Coventry Industries Corp. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
COVENTRY INDUSTRIES CORP.
By: /s/ Robert Hausman
Robert Hausman, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Robert Hausman President, July , 1998
- ------------------------------ Chairman
Robert Hausman
/s/ Mark Weisz Director July , 1998
- ------------------------------
Mark Weisz
/s/ Lester Gann Director July , 1998
- ------------------------------
Lester Gann
/s/ C. Lawrence Rutstein Director July , 1998
- ------------------------------
C. Lawrence Rutstein
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WORKFORCE SYSTEMS CORP. FOR THE FISCAL YEAR ENDED JUNE
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 335,321
<SECURITIES> 0
<RECEIVABLES> 1,121,069
<ALLOWANCES> 0
<INVENTORY> 1,888,235
<CURRENT-ASSETS> 3,996,421
<PP&E> 3,238,793
<DEPRECIATION> 324,062
<TOTAL-ASSETS> 9,669,172
<CURRENT-LIABILITIES> 2,178,722
<BONDS> 0
0
30
<COMMON> 1,953
<OTHER-SE> 5,635,315
<TOTAL-LIABILITY-AND-EQUITY> 9,669,172
<SALES> 4,653,286
<TOTAL-REVENUES> 4,653,286
<CGS> 3,518,500
<TOTAL-COSTS> 3,518,500
<OTHER-EXPENSES> 2,629,549
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,488
<INCOME-PRETAX> (3,028,150)
<INCOME-TAX> (133,399)
<INCOME-CONTINUING> (2,894,751)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (2,894,751)
<EPS-PRIMARY> (3.58)
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