<PAGE>
As filed with the Securities and Exchange Commission on May 28, 1999
Registration No.333-76675
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
To
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
COVENTRY INDUSTRIES CORP.
(Name of Small Business Issuer in Its Charter)
Florida 65-0353816
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (Primary Standard (IRS Employer
Incorporation or Organization) Industrial Identification Number)
Classification
Code Number)
1900 Corporate Boulevard, Suite 400
Boca Raton, Florida 33431
(561) 988-2544
--------------
(Address and Telephone Number of Principal Executive Offices)
1900 Corporate Boulevard, Suite 400, Boca Raton, Florida 33431
(Address of principal place of business or intended principal place of business)
Robert Hausman
Chief Executive Officer
Coventry Industries Corp.
1900 Corporate Boulevard, Suite 400
Boca Raton, Florida 33431
(561) 988-2544
--------------
(Name, Address and Telephone Number of Agent for Service)
Copies of communications to:
Michael D. Karsch, Esq.
Broad and Cassel
7777 Glades Road, Suite 300
Boca Raton, Florida 33434
Telephone No. (561) 483-7000
-------------------------------
Approximate date of commencement of proposed
sale to the public: From time to time after this
Registration Statement becomes effective.
---------------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box.[X]
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
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The information contained in this Prospectus is not complete
and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective.This Prospectus is not an offer to
sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED MAY 26, 1999
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PROSPECTUS
1,100,000 Class A Warrants
1,100,000 Class B Warrants
3,175,000 Shares of Common Stock
COVENTRY INDUSTRIES CORP.
The selling shareholders of Coventry Industries Corp. are offering for
sale up to 250,000 shares of Common Stock, 1,100,000 Class A Warrants and
1,100,000 Class B Warrants. 2,925,000 shares are issuable upon exercise of the
Class A Warrants, the Class B Warrants and other outstanding convertible
securities.
Our Common Stock is traded on The OTC Bulletin Board under the symbol
COVN. On May 24, 1999, the last sale price of the Common Stock, was $3.68 per
share.
You should carefully consider the Risk Factors beginning on page 4 of
this Prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or accurate. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is May 28, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Summary..........................................................................................................1
Risk Factors.....................................................................................................4
Use Of Proceeds................................................................................................. 9
Market For Common Equity And Related Stockholder Matters........................................................ 9
Management's Discussion and Analysis of Financial Condition and Results of Operations...........................11
Business........................................................................................................16
Management......................................................................................................28
Principal Stockholders..........................................................................................32
Certain Relationships And Related Transactions..................................................................34
Selling Shareholders............................................................................................36
Plan Of Distribution............................................................................................36
Description Of Capital Stock....................................................................................37
Where You Can Find More Information.............................................................................39
Legal Matters...................................................................................................39
Experts ........................................................................................................40
Index to Historical and Pro Forma Financial Statements..........................................................41
</TABLE>
-i-
<PAGE>
SUMMARY
Because this is a summary, it does not contain all of the information
that may be important to you. You should read the more detailed information
contained in this Prospectus. All common and preferred share numbers and the
related per share amounts are adjusted for the 1-for-8 reverse stock split on
March 22, 1999.
The Company
We are a holding company that owns various businesses. Over the last
three years we have bought and sold several companies. Our current business is
primarily manufacturing and selling various products for industrial use and
operating a respiratory therapy and respiratory therapy management business.
We provide machining, welding, specialty design and fabrication for
custom applications for clients in various industries. Some of these industries
include 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. We
are also an authorized distributor 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 several manufacturers. A
significant portion of our business in this area 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.
We operate an industrial supply house representing several lines of
power transmissions products, such as gear boxes, bearings and couplings,
together with a variety of other chain, bearing and idler distributors handling
components which are commonly used in industrial manufacturing and operating
facilities.
We also own a fabricator and distributor of custom-designed fire
sprinkler systems and components for use in both commercial and residential
application. Its present customer base is located in South Florida. We also have
a small staffing business that provides employees to two customers.
We provide temporary and contract staffing of healthcare personnel to
more than 200 long term care facilities, hospitals and home care companies
including:
o nursing personnel (including registered nurses, licensed practical
nurses and certified nursing aides),
o rehabilitation personnel (including physical therapists, occupational
therapists and speech language pathologists),
o respiratory care services and supplies
Our clients are primarily in the midwestern and southern United States.
Respiratory care is the diagnostic evaluation, treatment, management, control
and care of individuals with deficiencies and abnormalities associated with the
cardiopulmonary system. Many patients are now treated in a skilled nursing
facility instead of the hospital due to the current reimbursement system.
<PAGE>
We also have an agreement to acquire People First Staffing, LLC, which
is in the process of becoming an employee leasing company. This company will
have contracts to provide employee leasing services to healthcare facilities for
over 6,300 employees.
We were incorporated in Florida on August 17, 1992 as Wildflower
Financial Corp. and changed our name to Workforce Systems Corp. in 1994. We
changed our name from Workforce Systems Corp. to Coventry Industries Corp. on
October 28, 1997. Our principal executive offices are located at 1900 Corporate
Boulevard, Suite 400, Boca Raton, Florida 33431, and our telephone number is
(561) 988-2544.
Recent Developments
In March 1999 we completed a private placement of 1,000,000 Units. We
issued a total of 250,000 shares of Common Stock, 1,000,000 Class A Warrants and
1,000,000 Class B Warrants. We received net proceeds of approximately
$870,000.
Also in March 1999, we redeemed our outstanding 5% Convertible
Preferred Stock for
o $600,000 in cash,
o convertible notes aggregating $819,000 with fixed conversion prices,
o a nonconvertible note for $81,000
o 31,250 shares of common stock and
o the cancellation of outstanding warrants and
o cancellation of all penalties and dividends due.
At the time of redemption we owed the holder approximately $255,000 of
dividends and penalties and the holder had the right to require us to redeem the
shares for $1,625,000 in cash.
On March 22, 1999 we did a 1-for-8 reverse split of our common stock.
All of the common and preferred share numbers and per share amounts in this
prospectus have been adjusted for this split.
On May 7, 1999, our common stock was delisted from the Nasdaq Stock
Market and on May 10, 1999 the common stock began trading on the OTC Bulletin
Board.
<TABLE>
<CAPTION>
The Offering
<S> <C>
Securities Offered:
Selling Shareholders ..........................................250,000 shares of Common Stock, 1,100,000 Class A Warrants and
1,100,000 Class B Warrants
Coventry .....................................................2,925,000 shares of Common Stock upon exercise of outstanding
warrants and notes
Common Stock Outstanding............................................1,090,548 shares
Common stock outstanding upon conversion
of warrants and notes............................................4,015,548
Risk Factors........................................................This offering involves a high degree of risk. See "Risk
Factors."
Trading Symbol......................................................COVN
</TABLE>
2
<PAGE>
Summary Consolidated Financial Information
The following table summarizes the financial data for our business. You
should also read the audited and unaudited historical Consolidated Financial
Statements and the unaudited Pro Forma Combined Financial Statements, included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
COVENTRY
- --------
Year Nine Months
Ended June 30, Ended March 31,
1998 1997 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
Statement of Operations
Data:
<S> <C> <C> <C> <C>
Revenues ........................................ $ 7,869,981 $ 4,653,286 $ 6,413,195 $ 5,763,172
Gross profit .................................... $ 1,337,057 $ 1,134,786 $ 1,949,842 $ 1,724,085
Loss from continuing operations ................. $ (6,813,796) $ (2,894,751) $ (2,107,410) $ (936,064)
Dividends on preferred stock .................... 114,835 89,000
Loss from continuing operations applicable to
common stock .................................. $ (6,928,630) $ (2,894,751) $ (2,196,410) $ (936,064)
Share data:(1)
Basic loss per share -- continuing operations ... $21.08 $(28.65) $(3.63) $(3.31)
======= ======= ======= =======
Weighted average number of common shares
outstanding ................................... 328,644 101,053 604,952 283,035
======= ======= ======= =======
PRO FORMA
- ---------
Year Nine Months
Ended Ended
June 30, 1998 March 31, 1999
------------- -----------------
(unaudited) (unaudited)
Statements of Operations
Data:
Revenues ........................................ $12,084,635 $ 7,954,940
Gross profit .................................... $ 3,437,182 $ 2,304,622
Loss from continuing operations ................. $(6,559,463) $ (2,480,925)
Dividends on preferred stock .................... $ 114,835 $ 89,000
Loss from continuing operations applicable to
common stock .................................. $(6,674,298) $ (2,569,925)
Share data:(1)
Basic loss share -- continuing operations ....... $(14.93) $(3.83)
======= =======
Weighted average number of common shares
outstanding ................................... 446,894 671,657
======= =======
</TABLE>
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
---- ----
(unaudited)
Balanced Sheet Data:
<S> <C> <C>
Cash ........................................................... $ 52,188 $ 492,964
Total current assets ........................................... $ 2,518,576 $ 3,699,630
Total assets ................................................... $ 7,375,120 $ 9,361,624
Total current liabilities ...................................... $ 2,384,517 $ 3,761,986
Long term debt, net of current portion ......................... $ 395,325 $ 1,650,202
Stockholders' equity ........................................... $ 4,595,278 $ 3,885,899
</TABLE>
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(1) As adjusted for the effects of the 1-for-8 reverse split on March 22, 1999.
3
<PAGE>
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. The risks described below are not the only ones that we
face. Additional risks that we do not yet know of or that we currently think are
immaterial may also impair our business operations. Our business, operating
results or financial condition could be materially adversely affected by any of
the following risks. The trading price of our Common Stock could decline due to
any of these risks, and you may lose all or part of your investment. You should
also refer to the other information set forth in this Prospectus, including our
financial statements and the related notes.
Coventry cautions readers that certain important factors may affect our
actual results and could cause those results to differ significantly from any
forward-looking statements made in this Prospectus or otherwise made by or on
our behalf. For this purpose, any statements contained in this Prospectus that
are not statements of historical fact should be considered to be forward-looking
statements. Words such as "may," "expect," "believe," "anticipate," "intend,"
"could," "estimate," or "continue" or the negatives of those words, or other
comparable terminology, are intended to identify forward-looking statements.
These statements appear in a number of places in this prospectus and include
statements as to our intent, belief or expectations. Factors that may affect our
results include, but are not limited to, no history of profitable operations,
the need for additional financing, reliance on management and competition. We
are also subject to other risks detailed below or elsewhere in this prospectus,
or detailed from time to time in our filings with the SEC.
No History of Profitable Operations; We Received a Going Concern Opinion
We have reported a net loss of $2,107,410 for the nine months ended
March 31, 1999, $9,092,729 for the fiscal year ended June 30, 1998 and
$2,894,751 for the fiscal year ended June 30, 1997. We expect that the quarterly
net losses may continue through at least the three months ended June 30, 1999.
The report on our financial statements for the year ended June 30, 1998 from our
independent accountants includes an explanatory paragraph emphasizing that we
might not be able to continue as a going concern if we do not improve our
operating results and obtain additional financing. Our fire-sprinkler business
has been unprofitable and we are considering selling or closing of this
business. Our revenues have changed from quarter to quarter due to our
acquisition program. We cannot be certain that we can sustain growth or that we
will achieve sufficient revenues for profitability. If we do achieve
profitability, we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future.
Additional Financing Is Required And We Might Not Be Able to Obtain These Funds
We have experienced significant growth since June 1994. We currently
anticipate we will continue our current plan to grow both internally and through
acquisitions for the balance of fiscal 1999 and beyond. We will require
substantial capital in the future in order to continue this growth pattern. We
have and will likely continue to seek equity or debt financing to fund operating
losses, future expansion of the Company's operations and additional
acquisitions. Our ability to sustain our internal growth is limited by continued
availability of additional working capital. We completed a private placement in
March 1999 for $1,000,000 and hope to raise additional funds from the exercise
of the Warrants. $600,000 from the private placement was used to redeem some
outstanding preferred stock and is not available to use in our business. We had
working capital deficiency of $62,356 at March 31, 1999, although much of this
consisted of accounts receivable that may take a substantial amount of time to
collect. We cannot assure you that funding will be available at terms acceptable
or feasible to the Company or its stockholders. If we cannot raise funds, then
the continued growth of the Company would be restrained.
4
<PAGE>
Our Stock Price is Extremely Volatile
The trading price of our Common Stock has been, and in the future is
expected to be, volatile and we expect to experience further market fluctuations
as a result of a number of factors. These factors include, but are not limited
to, current and anticipated results of operations as well as changes in our
business, operations or financial results, the timing of sales of Common Stock
by selling stockholders, prospects of general market and economic conditions and
other factors.
We May Have Difficulty in Managing Growth
Since inception we have experienced rapid growth and change due to a
series of acquisitions and divestitures, which has placed a significant strain
on the Company's working capital, personnel and other resources. There can be no
assurance that we will be able to successfully implement our business strategy,
that operations will generate sufficient cash flow, or that adequate financing
will be available on acceptable terms to fund continuing growth, or that
management will successfully manage continued growth. The failure to manage
growth effectively may have a material adverse effect on our business, financial
condition and results of operations.
Majority Control by a Limited Group of Shareholders
Following the completion of the PF transaction, Stephen Rosedale, his
son Ronald Wilheim and other minority members of People First will together own
80.1% of our stock. These people will have the right to elect all of our
directors and to approve any transactions that would require a vote of all of
our shareholders. Our other shareholders thus may not have the ability to
approve certain types of corporate actions.
Competition in All of Our Business is Intense
Competition in all our business is intense. Competitors include
international and national companies, many of which have longer operating
histories, and greater financial, marketing, manufacturing and other resources
than the Company. We expect we will be subject to competition from numerous
other entities if our operations continue to grow and the products in which we
market continue to expand. We cannot guarantee that any of our divisions will
ever obtain, or if obtained, sustain a competitive advantage.
We Depend on Key Personnel
We are materially dependent upon Robert Hausman, our President and
Chief Executive Officer, and Lester Gann, a director and President of our
Manufacturing Division. Mr. Hausman is a party to a three-year management
agreement expiring in July 2000. Mr. Gann is a party to a three-year employment
agreement that expires in May 2001. We would be adversely affected by the loss
of the services of either Mr. Hausman or Mr. Gann.
5
<PAGE>
Our Healthcare Business is Subject to Extensive Government Regulation
The healthcare industry is subject to extensive Federal, state and
local regulation including, but not limited to
o regulations relating to healthcare provider licensure,
o conduct of operations,
o ownership of facilities,
o services and
o prices and reimbursement for services.
Health care is an area of rapid regulatory change. Changes in the law
or new interpretations of existing laws affect our permissible activities, the
costs of doing business, and the amount of reimbursement for our services from
government and nongovernment third party payors. We cannot predict the future
course of federal, state and local regulation or legislation, including Medicare
and Medicaid statutes and regulations, or possible changes in national
healthcare policies, including those pertaining to managed care organizations.
We could be adversely affected by future legislative and regulatory changes. See
"Business--Government Regulation and Environmental Compliance" for a more
detailed discussion of the risks that we face.
We Are Dependent On Reimbursement From The Government and Other Third Party
Payors
Because we are an ancillary services provider and generally do not bill
third-party payors directly, our contractual payments could be adversely
affected by a reduction in reimbursement. Adequate reimbursement levels may not
be available for our services that are currently being reimbursed by Medicare,
Medicaid or private third-party payors. Significant limits on the scope of
services reimbursed and on reimbursement rates and fees could have a material
adverse effect on our liquidity, financial condition and results of operations.
Due to recent changes in reimbursement rates, we have had significant pressure
on our revenues and have taken steps to adjust expenses to match our revenues.
Healthcare is one of the largest industries in the United States and
comprises a substantial portion of state and federal budgets. Accordingly,
healthcare continues to attract much legislative interest and public attention.
The federal and state governments continue to pursue ways to reduce the growth
in healthcare program expenditures, and in doing so, are increasingly focused on
ways to shift financial risk from the payor to the provider. These healthcare
reform initiatives may affect how much we will be reimbursed for providing goods
and services in the future
Our customers are principally hospitals and long-term care facilities
that derive a substantial portion of their revenues from third-party payors,
including the Medicare and Medicaid programs. These governmental programs are
highly regulated and subject to frequent and sometimes sweeping changes. In
addition, private third-party payors, including managed care organizations,
increasingly are demanding discounted fee structures and the assumption by
healthcare providers of all or a portion of the financial risk associated with
furnishing goods and services. Efforts to impose greater discounts and more
stringent cost controls by private payors are expected to continue.
6
<PAGE>
For these reasons, payments under governmental and private third-party
payor programs may not remain at levels comparable to present levels, or may not
be sufficient to cover the costs incurred to provide healthcare services. Future
healthcare legislative or other changes in the administration or interpretation
of governmental healthcare programs may have a material adverse effect on our
financial condition, results, operations and liquidity. Thus, we could be
adversely affected by the continuing efforts of governmental and private
third-party payors to contain reimbursement for healthcare services
We Do Not Anticipate Paying Dividends
We have never paid any cash dividends on our Common Stock and we do not
anticipate paying cash dividends on our Common Stock in the foreseeable future.
The future payment of dividends is directly dependent upon our future earnings,
capital requirements, financial requirements and other factors to be determined
by our Board of Directors. For the foreseeable future, it is anticipated that
earnings, if any, which may be generated from our operations will be used to
finance the growth of the Company, and that cash dividends will not be paid to
common stockholders. See "Dividend Policy."
Common Stock Eligible for Future Sale
Of the 1,090,548 shares of the Company's common stock currently issued
and outstanding, 427,323 shares are "restricted securities" as that term is
defined under the Securities Act and may only be sold pursuant to an effective
registration statement under the Securities Act or in compliance with Rule 144
under the Securities Act or other exemption from registration. Rule 144 provides
that a person holding restricted securities for a period of one year may sell
such securities during any three-month period, subject to certain exceptions, in
limited amounts. Rule 144 also permits, under certain circumstances, the sale of
shares without any quantity limitations by a person who is not an affiliate of
the Company and who has held the shares for a two year holding period. Future
sales of shares of common stock by existing stockholders under Rule 144 could
materially adversely affect the market price of the Company's Common Stock. We
cannot predict the effect, if any, that market sales of common stock or the
availability of such shares for future sale will have on the market price of the
Common Stock prevailing from time to time.
Use of Preferred Stock to Resist Takeovers
Our Articles of Incorporation authorizes 250,000 shares of preferred
stock, of which 6,875 shares of Series E Cumulative Non-Participating Preferred
Stock are issued and outstanding. The balance of 243,125 shares of preferred
stock remaining without designation. As provided in our Articles of
Incorporation, preferred stock may be issued by our Board of Directors from time
to time without any action of the stockholders. The Board of Directors is
empowered, without stockholder approval, to issued preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or the right of the holders of our Common Stock. The
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Although we have no present intention to issue any additional shares of
preferred stock, there can be no assurance that we will not do so in the future.
7
<PAGE>
Stockholders May be Diluted Upon Exercise of the Warrants
The Warrants are likely to be exercised only when the market price of
the common stock is above the exercise price and a holder is able to sell the
shares in the open market. At that time, our shareholders may be diluted by the
exercise of the warrants. The warrants could also hurt our ability to raise
additional equity in the future because of the potential dilutive effect.
Our Common Stock is Traded on the OTC Bulletin Board
Our Common Stock is currently traded on the OTC Bulletin Board. We
cannot assure you that an active market for our Common Stock will exist. In
November 1998 we received a letter from the Nasdaq SmallCap Market saying that
our Common Stock would be delisted in February 1999 if the stock price was not
above $1.00 for 10 days. Prior to the deadline, we requested a hearing, which
stayed the delisting. On March 22, 1999, we completed a reverse split of our
common stock, which should help increase the price to over $1.00. The hearing
was held on March 26, 1999 and on May 7, 1999 we were notified that the Common
Stock was delisted from the Nasdaq SmallCap Market. The delisting may result in
a limited trading market and, consequently, you would likely find it more
difficult to dispose of or to obtain accurate quotations as to the price of our
Common Stock.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Regulations promulgated by the
Securities and Exchange Commission generally define a penny stock to be an
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. We meet at least one of the exceptions. Unless an exception
is available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith.
In addition, if we do not meet the other exceptions to the penny stock
regulations cited above, trading in the Common Stock would be covered by Rule
15g-9 promulgated under the Securities Exchange Act of 1934 for non-Nasdaq and
non-national securities exchange listed securities. Under such rule,
broker-dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. Securities are also exempt from this rule if the
market price is at least $5.00 per share.
8
<PAGE>
If the Common Stock becomes subject to the regulations applicable to
penny stocks, the market liquidity for the Common Stock could be adversely
affected. In such event, the regulations on penny stocks could limit the ability
of broker-dealers to sell the Common Stock and thus the ability of purchasers of
the Common Stock to sell their securities in the secondary market.
.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
or Warrants by the Selling Shareholders. The net proceeds to the Company
assuming the exercise of all Warrants will be approximately $3.7 million. The
Company intends to use these proceeds for acquisitions and general working
capital purposes. Other than the PF Acquisition, which does not involve cash,
the Company does not have any understandings with respect to any additional
acquisitions.
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, simultaneous with the one for four stock split of the
Company's Common Stock, the Common Stock began trading under the symbol "WFSY."
On November 12, 1997 the Company's common stock began trading on the Nasdaq
SmallCap MarketTM under the symbol "COVN." On May 10, 1999, the Common Stock
began trading on the OTC Bulletin Board. The following table sets forth the high
and low bid prices of the Company's Common Stock as reported on the OTC Bulletin
Board for each quarter from June 30, 1996 through November 11, 1997. The
quotations provided from November 12, 1997 through May 7, 1999 are as reported
on The Nasdaq SmallCap Market(TM), All prices are adjusted to give effect to the
1-for-8 reverse stock split. The following quotations through November 11, 1997,
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.
9
<PAGE>
<TABLE>
<CAPTION>
High Bid Low Bid
---------------------- ---------------------
<S> <C> <C>
FISCAL 1997
July 1, 1996 through September 30, 1996 $168.96 $158.72
October 1, 1996 through December 31, 1996 132.48 123.20
January 1, 1997 through March 31, 1997 89.60 83.52
April 1, 1997 through June 30, 1997 38.48 36.32
FISCAL 1998
July 1, 1997 through September 30, 1997 38.80 36.32
October 1, 1997 through November 11, 1997 40.00 28.50
November 12, 1997 through December 31, 1997 59.46 32.00
January 1, 1998 through March 31, 1998 44.50 26.50
April 1, 1998 through June 30, 1998 52.50 20.00
FISCAL 1999
July 1, 1998 through September 30, 1998 38.00 4.50
October 1, 1998 through December 31, 1998 10.00 3.00
January 1, 1999 through March 31, 1999 7.00 2.00
April 1, 1999 through May 24, 1999 5.3125 3.125
</TABLE>
On May 24, 1999, the closing bid price for the Common Stock as reported
on The OTC Bulletin Board was $3.68. As of February 28, 1999, the approximate
number of record holders of the Company's Common Stock was 181. Management of
the Company, however, believes there to be in excess of 900 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, as of March 22, 1999 has issued and outstanding 6,875
shares of Series E Cumulative Non-Participating Preferred Stock. The Series E
Cumulative Non-Participating Preferred Stock pays annual dividends of $77,000.
10
<PAGE>
The Series F Cumulative Non-Participating Preferred Stock paid annual
dividends of $55,000 prior to its retirement on May 31, 1998. No dividends were
paid on the Series A and Series C Preferred Stock prior to their retirement in
March 1999. See "Certain Relationships and Related Transactions".
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
The report of the Company's independent auditors for the fiscal year
ended June 30, 1998 included an explanatory paragraph that there is a
substantial doubt about the Company's ability to continue as a going concern
unless it can improve its results of operations or obtain additional financing.
Since that time the Company has raised additional capital, reduced expenses,
paid some liabilities with common stock and has acquired BSD, which is a
profitable operation. BSD has experienced pricing pressures in the most recent
quarter due to changes in reimbursement rates. The Company has taken steps to
adjust its expenses and expects by the June 30 quarter will have regained its
prior operating margins.
Results of Operations
Nine months ended March 31, 1999 as compared to nine months ended March 31, 1998
Consolidated revenues for the nine months ended March 31, 1999
increased $650,023 or approximately 11% from the nine months ended March 31,
1998. This increase was primarily the result of the acquisition of 80.1% of BSD
Healthcare ("BSD") effective December 1, 1998. This resulted in an increase in
revenue of $1,455,855 from the nine month period ended March 31, 1999 versus no
revenue for the nine month period ended March 31, 1998. This increase was offset
by (i) a decrease of approximately $484,000 in revenues from Federal Supply due
to an overall decrease in operations of Federal and (ii) a general decrease of
approximately $853,000 in the Company's other operating entities.
Gross profit margins as a percentage of revenues for the nine months
ended March 31, 1999 were flat from the comparable nine months in fiscal 1998.
The Company's gross profit percentage remained the same from prior quarters due
to the fact that the profit margins for BSD have been negatively impacted by the
changes in reimbursement rates in the most recent quarter since the acquisition
was completed.
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Operating expenses increased approximately $1,301,000 or 50% for the
nine months ended March 31, 1999 as compared to the comparable period ended
March 31,1998. The major component of this increase was in selling, general, and
administrative expenses, which increased by approximately $1,762,000. This
increase was primarily the result of costs associated with the BSD acquisition
and related expenses incurred in integrating these operations with the Company's
structure. The increase in selling, general, and administrative expenses was
offset by a decrease in professional fees of approximately $508,000, the
majority of which was paid through the issuance of common stock during the nine
months ended March 31, 1998. Other operating expenses were non cash items
including (i) depreciation and amortization of approximately $309,000, (ii)
professional fees related to the BSD acquisition and further expansion of the
Company's operations of approximately $239,000, (iii) approximately $437,000 of
costs associated with issuance of stock with respect to employment agreements,
(iv) approximately $ 298,000 of costs associated with settlement of certain
outstanding claims through the issuance of stock and (v) approximately $345,000
of cost associated with the issuance of stock to certain consultants.
Interest expense increased approximately $148,000 during the nine
months ended March 31, 1999 as compared to the nine months ended March 31, 1998
primarily as a result of the increased debt attributable to BSD.
On June 29, 1998, the Company completed the sale of all of the stock of
LPS Acquisition Corp. ("LPS"), a distributor of high quality custom soil mixes
to wholesale nurseries, which had been acquired in September 1997. On March 31,
1998, the Company sold all of the assets of American Industrial Management, Inc.
("AIM"), a provider of industrial personnel for light manufacturing and assembly
line operations, which had been acquired in February 1996. Accordingly, the
Company recorded a loss from discontinued operations of approximately $1,166,000
during the nine months ended March 31, 1998. As a result of all of the above,
the Company recognized a net loss of approximately $2,196,000 for the nine
months ended March 31, 1999 as compared to a net loss of approximately
$2,102,000 for the comparable period ended March 31, 1998.
Year ended June 30, 1998 as compared to year ended June 30, 1997
During the year ended June 30, 1998 consolidated revenues increased
$3,216,695 or approximately 69.1% from the year ended June 30, 1997. This
increase is attributable to (i) an increase in revenues generated by the
Company's Manufacturing Division, and (ii) a full year of revenues from Federal
Supply, Inc. and Federal Fabrication, Inc. (collectively, "Federal") which were
acquired by the Company during the last quarter of fiscal 1997. Gross profit
margins as a percentage of revenues for the year ended June 30, 1998 decreased
approximately 7.4% from the comparable year in fiscal 1997. The Company's gross
profit percentage decreased from the prior year due to the impact of Federal on
the consolidated group. Historically, Federal has experienced lower profit
margins than the Company's other subsidiaries in the comparable year. Such
reduced gross profit margins have adversely affected the overall profitability
of the Company. Management of the Company anticipates the gross profit margins
reported by Federal as a result of the nature of its business will be stable for
the foreseeable future.
Operating expenses increased approximately 85.5% for the year ended
June 30, 1998 from the year ended June 30, 1997, primarily as a result of
increased selling, general and administrative expenses ("SG&A") and marketing
and public relation services, (paid for with the Company's common stock). SG&A,
on a consolidated basis increased approximately 79.7% during the year ended June
30, 1998 from the year ended June 30, 1997 as a result of the addition of SG&A
expenses attributable to the inclusion of Federal (approximately $500,000) which
was not part of the consolidated group in the prior period, other ongoing growth
of the Company's operations and one time costs associated with the relocation of
the Company's principal executive offices from Knoxville, Tennessee to Boca
Raton, Florida. Other operating expenses were non-cash items including
depreciation and amortization of approximately $402,000, marketing and public
relation expenses of approximately $3,711,000, and professional fees (primarily
paid through the issuance of common stock) related to current and future
expansion of the Company's operations of approximately $455,000. SG&A as a
percentage of revenue increased to 36% for the year ended June 30, 1998 from 34%
for the year ended June 30, 1997.
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The Company reported a net loss of $8,977,895 for the year ended June
30, 1998 as compared to a net loss of $2,894,751 for the year ended June 30,
1997. Approximately $6,818,000 of the net loss is attributable to non-cash
items, including depreciation and amortization of approximately $402,000,
approximately $654,000 of goodwill write down related to Federal Supply,
approximately $390,000 of costs associated with certain professional fees, and
approximately $5,372,000 of charges related to common stock issued in connection
with various acquisitions that have been expensed due to the disposition of the
acquired company or the acquired company can no longer justify the carrying
value of the capitalized costs. The remaining portion of the net loss is mainly
attributable to operating losses at Federal and IFR and the discontinued
operations of LPS.
Manufacturing Division
The manufacturing division of the Company at June 30, 1998 comprises
all of the Company's operations which consist of IFR and its IFR Contract
Services and MRO divisions, and Federal Supply.
For the year ended June 30, 1998 the Manufacturing Division reported an
increase in revenues of approximately 93% from the year ended June 30, 1997.
This increase is attributable to (i) revenues from Federal for a full year, (ii)
continued increase in revenues from both Industrial Fabrication & Repair, Inc.
("IFR") and its subsidiary, Maintenance Requisition Order Corp. ("MRO"), (iii)
the internal realignment of one of the Company's subsidiaries, Outside
Industrial Services, Inc. ("OIS") from the Staffing Division to the
Manufacturing Divisions (see "Staffing Division" below). The Manufacturing
Division reported a loss from operations of approximately $447,000 for the year
ended June 30, 1998 and approximately $115,000 for the year ended June 30, 1997.
The loss for the year ended June 30, 1998 is represented by operating losses at
Federal Supply (approximately $148,000) and the Company's Tennessee operations
(approximately $299,000) which loss was made up primarily of marketing valuation
adjustments.
Staffing Division
For the year June 30, 1998 the Staffing Division reported a decrease in
revenues of approximately 4% from the year ended June 30, 1997 from $1,033,433
for the year ended June 30, 1997 to $990,746 for the year ended June 30, 1998.
The Staffing Division reported a loss from operations of approximately $38,000
for the year ended June 30, 1998 which is attributable to a concentration of
revenues generated from lower margin accounts. The Staffing Division reported a
loss from operations of approximately $168,000 for the year ended June 30, 1997.
During the year ended June 30, 1998 the Company undertook an internal
realignment of one of its subsidiaries. OIS, a staffing company which provides
personnel with specialty skills, such as transportation operation and equipment
maintenance, was realigned to fall within the Manufacturing Division, leaving
American Industrial Management, Inc. ("AIM") as the sole component of the
Staffing Division. On April 14, 1998 the Company completed the sale of the
assets of AIM to Global Industrial Services. As a result of the specialized
nature of the services provided by OIS, coupled with the synergistic customer
base of IFR and OIS, management of the Company undertook such realignment to
both increase the operating efficiency of OIS as well as to provide better
service to its customers.
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Consumer Products Division
There were no revenues for the Consumer Products Division for year
ended June 30, 1998, versus $55,420 the year ended June 30, 1997. The Consumer
Products Division reported a loss from discontinued operations of approximately
$2,164,099 for the year ended June 30, 1998. The loss related to LPS, which the
Company sold effective May, 1998. The Consumer Products Division reported a loss
from operations of approximately $245,228 for the year ended June 30, 1997.
Liquidity and Capital Resources
The Company's working capital at March 31, 1999 decreased to a
deficiency of approximately $62,000 from approximately $ 134,059 at June 30,
1998. The decrease in working capital was attributable to funding its loss for
the nine month period ending March 31, 1999. While the Company does not
presently anticipate requiring any significant capital in order to pursue the
Company's plan of operations for the remainder of fiscal 1999, consisting of its
normal business operations, it will be necessary for the Company to raise
additional working capital or to take other action to help its working capital
situation during the next twelve months.
In January 1998 the Company completed a private placement of 5%
Convertible Preferred Stock, resulting in gross proceeds of $1,250,000. The
Company filed a proxy statement for a special meeting of shareholders at which
the conversion terms of additional shares of 5% Convertible Preferred Stock
would be submitted for approval by the Company's shareholders; however, no
meeting date was set. In February 1999, the Company and the holder of the
Preferred Stock entered into an agreement pursuant to which the Preferred Stock
was exchanged in March 1999 for (i) $600,000 in cash, (ii) convertible notes
aggregating $819,000 with fixed conversion prices (iii) a non convertible note
for $81,000(iv) 31,250 shares of Common Stock and (v) the cancellation of
outstanding warrants. As of February 16, 1999, the Company owed the holder
approximately $255,000 of dividends and penalties and the holder had the right
to require the Company to redeem the 1,250 outstanding shares for $1,300 per
share.
In March 1999, the Company completed a private placement of Common
Stock and warrants to raise additional funds to fund its plan of operations for
the balance of fiscal 1999 and to pay the above-described payment. The Company
issued 250,000 shares of Common Stock, 1,000,000 Class A Warrants, and 1,000,000
Class B Warrants The Company received gross proceeds of $1,000,000. The funds
received from the private placement have been utilized.
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Additionally, a portion (approximately $2,000,000) of the Company's
property, plant and equipment and accounts receivable are unencumbered and,
accordingly, would provide additional sources of internal working capital should
the Company elect to enter into an asset based lending arrangement. The Company
also borrowed funds from its president.
Year 2000
The Company is in the process of implementing and executing a Year 2000
assessment with the objective of having all of its significant business systems
functioning properly with respect to the Year 2000 issue before January 1, 2000.
The Company believes that all of its internal systems are currently 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.
As part of this assessment, significant service providers, vendors,
suppliers, and customers believed to be critical to business operations after
January 1, 2000, have been identified and steps are being taken to reasonably
ascertain their stage of Year 2000 readiness through questionnaires, interviews,
on-site visits, and other available means. At this time, the Company believes
its significant service providers, vendors, suppliers, and customers' readiness
issues will not materially affect the Company. The Company will finish its
assessment by September 30, 1999 and will develop a contingency plan at such
time if circumstances warrant. The Company believes that a contingency plan may
require it to purchase additional raw materials prior to the end of 1999 in case
of supply disruption for its manufacturing businesses. The Company's healthcare
businesses are primarily service-oriented and any disruption to this business is
likely to be from delays in reimbursement if governments, insurance companies
and managed care organizations have any type of problems that cause delays. 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.
Based on management's assessment of the cost of addressing Year 2000
compliance issues, such cost is not currently expected to have a material
adverse impact on the Company's financial position. The total cost of the
project is estimated at under $100,000. The estimated cost of the project and
the date on which the Company believes it will complete the Year 2000
modifications and testing processes are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no assurance that these estimates will
be achieved, and actual results could differ materially from those anticipated.
Failure to complete the Year 2000 project by the year 2000 could have a material
adverse affect on future operating results and financial condition of the
Company.
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BUSINESS
General
Coventry Industries Corp., formerly known as 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, in June 1994 Mr. F. W. Miller, the Company's
then principal shareholder, President and Chairman, sold an aggregate of 569
shares of the Company's Common Stock owned by him, representing approximately
55% of the Company's then issued and outstanding stock 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 8,750 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 2,188 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 23,438 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. In November 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. As a result this share exchange, the Company owns approximately 81%
of OIS.
In November 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. ("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 operations and revenue base. Subsequently, during fiscal
1998, the Company determined that this product line was no longer viable due to
competition in the market place from lesser quality and lower price alternatives
and has suspended all manufacturing and marketing efforts of this product. The
Company has made a provision for the balance of the assets.
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In May 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 3,935 shares of the Company's Common Stock. IFR, a
Tennessee corporation formed in 1979 and based in Knoxville, Tennessee, provided
machining, welding, specialty 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"). MRO, 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. During the
current fiscal year, the Company merged the operations of MRO's Cleveland,
Tennessee facility into the Company's IFR Knoxville, Tennessee facility.
In October 1995, the Company formed a consumer products division and
incorporated Products That Produce, Inc., a Florida corporation ("PTP"). PTP's
mission was to identify and market new consumer products that are both
innovative and moderately priced. The first product undertaken by PTP was Mr.
Food's AlloFresh. The product was being marketed under an endorsement by Art
Ginsburg, the nationally syndicated TV 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. During fiscal 1998,
the Company suspended the operations of PTP due to the lack of revenues
generated by Mr Food's AlloFresh. The Company is currently evaluating other
possible marketing and distribution channels for the product. There can be no
assurances that the Company will be successful in these endeavors.
In February 1996 the Company acquired 100% of the issued and
outstanding capital stock of American Industrial Management, Inc. ("AIM") from
Messrs. Robert Lovelace and David Debuty and Jones Leasing, Inc. in exchange for
547 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. In
April 1998 the Company completed the sale of the assets of AIM to Global
Industrial Services, a staffing company engaged in providing support staffing
for various industries. The sale price was the assumption of the debts and
liabilities of the company in the amount of approximately $100,000.
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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 exchange for 13,750 shares of the
Company's Common Stock. 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 "Management".
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 33,750 shares of the Company's Common Stock and the assumption of
all liabilities from LPS's shareholders thereof. LPS, doing business as "Lantana
Peat and Soil", is a distributor of high quality custom soil mixes to wholesale
nurseries throughout South Florida.
The majority shareholder of LPS, owning approximately 85.2% of LPS, was
Darren Apel. 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. See "Certain Relationships
and Related Transactions."
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. On June 29, 1998, the Company completed the sale of all the
issued and outstanding common stock, or 1,000 shares (the "LPS Shares") of LPS
to American Group, Inc., a Nevada corporation ("American"). As consideration for
the LPS Shares, American transferred to the Company: (i) 9,375 shares of the
Company's Series F Preferred Stock held by American; and (ii) 1,200,000 shares
of the common stock of American. Pursuant to the terms of the agreement between
the Company and American which set forth the terms of the sale, the Company may
at its option invest up to $500,000 in American for the purpose of financing the
operations of LPS. The transaction was effective as of May 29, 1998.
In September 1997, the Company acquired 100% of the assets of Apollo
Pipe & Valve ("Apollo") in exchange for an aggregate of $100,000 and 3,125
shares of the Company's common stock. Apollo is a distributor of industrial pipe
valves and fittings throughout Florida. Effective June 30, 1998, Apollo was sold
back to its original owner in exchange for an aggregate of $50,000, the
cancellation of the balance of the purchase note due to the owner of $50,000,
and the cancellation of 2,344 shares of the Company's common stock which
represented the balance due on the original transaction.
On September 30, 1998, the Company entered into an exchange agreement
with BSD Healthcare Industries, Inc. ("BSD"), PeopleFirst L.L.C. ("PF") and PF's
members (the "Exchange Agreement"). BSD operates a respiratory therapy and
respiratory therapy management business and PF is in the process of becoming an
employee leasing company.
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The Exchange Agreement
The Exchange Agreement provides that the Company will acquire 80.1% of
BSD's outstanding capital stock in exchange for 19.95% of the Company's
outstanding Common Stock and that the Company will acquire all of the membership
interests of PF in exchange for Common Stock of the Company that when aggregated
with the shares issued to BSD's stockholders, will equal 80.1% of the Company's
outstanding shares on the closing date. BSD and PF are controlled by the same
group of persons..
The BSD transaction was completed effective December 1, 1998 and the
Company issued 118,250 shares of Common Stock.
The closing of the PF acquisition is subject to the following
conditions: (i) the conversion of all of the 5% Preferred into Common Stock,
(ii) approval of the Company's stockholders, (iii) the Company's Common Stock
will continue to be listed on the Nasdaq SmallCap Market, (iv) that PF has
acquired a sufficient number of operating contracts, (v) that the transaction be
a tax-free exchange for the members and (vi) customary closing conditions. The
5% Preferred Stock has been redeemed.
The Exchange Agreement provides that effective on the BSD closing, the
Company's board of directors will consist of eight directors and the BSD
shareholders will have the right to elect four directors. At the BSD closing,
Messrs. Rosedale, Wilheim requested that the Company defer their election to the
Board to some future date. The other two nominees have not been designated. Mr.
Rosedale will be elected Chairman of the Board and Robert Hausman will continue
to serve as the Company's President and Chief Executive Officer. Effective on
the PF closing, the BSD shareholders and PF members will have the right to elect
an additional director.
Manufacturing Division
The Manufacturing Division of the Company currently comprises all of
the Company's operations which consist of IFR and its IFR Contract Services and
MRO divisions, and Federal Supply. For the fiscal year ended June 30, 1998, the
Manufacturing Division accounted for approximately 94% of the Company's revenues
on a consolidated basis.
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, specialty 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.
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IFR is also an authorized distributor 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 accounted for
more than 5% of IFR's annual revenues for the fiscal year ended June 30, 1998.
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 suppliers, 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, 1998, management completed the restructuring of this subsidiary, through the
full integration of its Cleveland, Tennessee based facility into the existing
IFR facilities in Knoxville, Tennessee. This has enabled the Company to reduce
overhead, improve operating efficiencies, and better promote cross selling
opportunities.
IFR Contract Services division of IFR provides highly skilled contract
labor to two of IFR's customers. These two clients represent 100% of its
revenues. The loss of one of these two clients could have a material adverse
effect on the business and operations of IFR Contract Services until replacement
clients could be 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. Its present customer base is located in South Florida.
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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
suppliers. 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 the fiscal year ended June
30, 1998, Federal has no long term contracts with any of its customers.
The Company is considering selling or closing the Federal Supply
division.
Staffing Division
The Staffing Division was comprised of OIS and AIM. For the year ended
June 30, 1998, the Staffing Division accounted for approximately 6% of the
Company's revenues on a consolidated basis. On April 14, 1998 the Company
completed the sale of the assets of AIM to Global Industrial Services. During
fiscal 1998, OIS was restructured into the operations of IFR Contract Services
under the Manufacturing division to improve customer service and operating
efficiencies as the two customers of OIS are also clients of IFR for its
fabrication and repair services. For fiscal year 1999, the Company will no
longer maintain a separate staffing division.
Consumer Products Division
The Consumer Products Division was comprised of NHP, PTP and LPS. For
the fiscal year ended June 30, 1998, the Consumer Products Division had no
revenue on a consolidated basis. LPS had approximately $1,730,000 of revenue
included in discontinued operations.
As previously discussed, during fiscal 1998, the Company suspended
operations in its NHP and PTP subsidiaries. On June 29, 1998,the Company
completed the sale of all the issued and outstanding common stock, or 1,000
shares (the "LPS Shares") of LPS to American Group, Inc., a Nevada corporation
("American"). The Company no longer maintains a separate consumer products
division.
Respiratory Care Services
BSD provides temporary and contract staffing of nursing personnel
(including registered nurses, licensed practical nurses and certified nursing
aides), rehabilitation personnel (including physical therapists, occupational
therapists and speech language pathologists), respiratory care services and
supplies to more than 200 long term care facilities, hospitals and home care
companies primarily in the midwestern and southern United States through its
subsidiaries RCS Subacute, Inc. and Respiratory Care Services, Inc.
(collectively "RCS"). Respiratory care is the diagnostic evaluation, treatment,
management, control and care of individuals with deficiencies and abnormalities
associated with the cardiopulmonary system.
21
<PAGE>
The services are provided by RCS's pool of over 3,000 nurses and
therapists. RCS provides comprehensive programs that include (i) skilled medical
care programs, (ii) ventilator and complex medical programs, (iii) distribution
and inventory management of disposable medical products and (iv) medical gases.
These nurses and therapists perform a wide variety of procedures, general
patient care, rehabilitation therapy, bronchial hygiene, nebulizer and aerosol
treatments, ventilator management, and patient and family education. The Company
also provides equipment and supplies to its clients.
Respiratory services may be required to treat diseases or conditions
such as chronic obstructive pulmonary disease ("COPD", e.g., emphysema, chronic
bronchitis and asthma), acute bronchitis, cystic fibrosis, pneumonia, acute
respiratory failure and inhalation injury (i.e., gas or smoke). These treatments
may have to be administered anywhere from once a day to continuously depending
on the nature and severity of the individual's symptoms and diagnosis. In order
for the facility to receive reimbursement, the diagnosis must justify the
therapy and the therapy must be reasonable in terms of modality, amount,
frequency and duration of treatment.
The Company receives payments from the centers for services rendered
and these facilities, in turn, receive payments from the appropriate third-party
payor. These services are reimbursed to varying degrees in the Medicare systems
and by independent insurance companies.
Although the temporary staffing services market is fragmented,
significant competition exists for the Company's services. The primary
competitive factors for the contract services business are quality of services,
charges for services and responsiveness to the needs of patients and the
facilities in which the services are provided. Certain hospital companies have
entered the contract services market through affiliation agreements and
management contracts. In addition, many nursing centers are developing internal
staff to provide those services, particularly in response to the planned
implementation of the new prospective payment system for nursing centers.
Under the new prospective payment system imposed by the Budget Act,
ancillary services provided by nursing centers are subject to fixed payments. In
this new environment, the Company believes that its full-service ancillary
services contract will enhance the ability of nursing center operators to manage
effectively the cost of providing quality patient care.
The health care temporary staffing industry is extremely competitive
and is characterized by a number of larger national companies as well as many
smaller local companies. The larger companies also generally own hospitals
and/or nursing facilities, which gives them a distinct marketing advantage to
those types of facilities. Many of the local providers do not offer a
comprehensive range of cost-effective services. These local providers often do
not have the capital necessary to expand their operations or the range of
services offered, which limits their ability to compete for certain contracts
and other referrals and to realize efficiencies in their operations. As managed
care has become more prevalent, payors increasingly are seeking providers that
offer a cost-effective, comprehensive range of services in each market served,
which further inhibits the ability of local providers to compete effectively. As
a result of these economic and competitive pressures, the health care temporary
staffing industry is undergoing rapid consolidation, a trend the Company expects
will continue. The Company believes that health care facilities in the
geographic area serviced by the Company consider quality of care, reliability
and reputation to be the most important factors in retaining a provider,
although other factors such as financial stability, practices and costs are also
considered.
22
<PAGE>
Employee Leasing
PF was recently formed to develop an employee leasing business. At the time of
the acquisition of PF by the Company, PF is expected to have contracts to
provide over 6,300 employees that will be leased to health care customers in
over 24 states. As of the date of this Prospectus, PF does not have any assets
or operations. It is expected that these contracts will be assigned from a
company owned by Mr. Rosedale. The completion of the PF acquisition will require
approval by the Company's shareholders.
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.
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 this advantage in the future. MRO competes with a wide variety of
industrial supply houses, the majority of which are larger, have a longer
history of 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
Manufacturing
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.
Healthcare
General. The federal government and all states in which RCS currently
operates heavily regulate various aspects of its business. For example, certain
of RCS's employees are subject to state laws and regulations governing the
ethics and professional practice of respiratory therapy and nursing. Further, as
a supplier of goods and/or services for which payment may be made directly or
indirectly under federal and state healthcare programs, such as the Medicare and
Medicaid programs, RCS is subject to what are sometimes referred to as the fraud
and abuse laws (the "Fraud and Abuse Provisions"). These provisions, among other
things, generally prohibit, and provide severe criminal, civil and
administrative sanctions for the offering, payment, solicitation or receipt of
any remuneration in return for or to induce the referral of patients receiving
benefits from Medicare, Medicaid or other federally funded health care programs.
23
<PAGE>
Health care is an area of rapid regulatory change. Changes in the law
or new interpretations of existing laws can have an effect on our permissible
activities, the costs of with doing business, and the amount of reimbursement by
government and nongovernment third party payors. We cannot predict the future
course of federal, state and local regulation or legislation, including Medicare
and Medicaid statutes and regulations, or possible changes in national
healthcare policies, including those pertaining to managed care organizations.
RCS could be adversely affected by future legislative and regulatory changes.
Dependence on Reimbursement. RCS's customers are principally hospitals
and long-term care facilities that derive a substantial portion of their
revenues from third-party payors, including the Medicare and Medicaid programs.
These governmental programs are highly regulated and subject to frequent and
sometimes sweeping changes. In addition, private third-party payors, including
managed care organizations, increasingly are demanding discounted fee structures
and the assumption by healthcare providers of all or a portion of the financial
risk associated with furnishing goods and services. Efforts to impose greater
discounts and more stringent cost controls by private payors are expected to
continue.
Although RCS, as an ancillary services provider, generally does not
bill third-party payors directly, its contractual payments could be adversely
affected by a reduction in reimbursement. We cannot guarantee that adequate
reimbursement levels will continue to be available for services to be provided
by RCS which are currently being reimbursed by Medicare, Medicaid or private
third-party payors. Significant limits on the scope of services reimbursed and
on reimbursement rates and fees could have a material adverse effect on our
liquidity, financial condition and results of operations.
Extensive Regulation. The healthcare industry is subject to extensive
Federal, state and local regulation including, but not limited to, regulations
relating to provider licensure, conduct of operations, ownership of facilities,
services and prices for services. Further, in the ordinary course of its
business, RCS is subject regularly to inquiries, investigations and audits by
the federal and state agencies that enforce and interpret these laws and
regulations.
In particular, the Fraud and Abuse Provisions prohibit certain business
practices and relationships that might affect the provisions and cost of
healthcare services reimbursable under Medicare and Medicaid and other state and
federal healthcare programs. The "anti-kickback" statute under Fraud and Abuse
Provisions prohibits, and provides severe criminal, civil and administrative
sanctions for the offering, payment, solicitation or receipt of any remuneration
in return for the referral of individuals for services, or in return for or to
induce the purchasing or arranging of services, for which payment may be made
under federal or state healthcare programs including Medicare or Medicaid.
In 1987, Congress directed the Office of the Inspector General to
promulgate regulations specifying those payment practices which would not
violate the anti-kickback statute. If an arrangement falls within one of the
safe harbors, the participants are assured that they will not be prosecuted.
Failure to achieve safe harbor protection does not necessarily mean that the
relationship violates the anti-kickback statute, but it does mean that the
arrangement is in a "zone of uncertainty" and, therefore, subject to possible
scrutiny. All that the government must show is that at least one purpose of the
remuneration is to induce referrals, RCS does not believe its arrangements are
in violation of the anti-kickback statute or any of the other Fraud and Abuse
Provisions. There can be no assurance, however, that governmental officials
charged with enforcing the Fraud and Abuse Provisions will not assert that one
or more of RCS's arrangements violates such provisions.
24
<PAGE>
We are unable to predict the future course of federal, state and local
regulation or legislation, including Medicare and Medicaid statutes and
regulations. Changes in the regulatory framework could have a material adverse
effect on our financial condition and results of operations.
Healthcare Reform Legislation. Healthcare is one of the largest
industries in the United States and comprises a substantial portion of state and
federal budgets. Accordingly, healthcare continues to attract much legislative
interest and public attention. The federal and state governments continue to
pursue ways to reduce the growth in healthcare program expenditures, and in
doing so, are increasingly focused on ways to shift financial risk from the
payor to the provider. These healthcare reform initiatives may affect how much
RCS will be reimbursed for providing goods and services in the future.
For example, the Balanced Budget Act of 1997 ("BBA") required
implementation of a prospective payment system ("PPS") for skilled nursing
facilities ("SNFs") that participate in the Medicare program, and further
required that SNFs bill and receive for most Medicare Part B services under a
"Consolidated Billing" mechanism, regardless of whether the services are
provided directly by the SNF or by an ancillary services provider like RCS.
Under PPS, SNFs will no longer be reimbursed based upon their "reasonable cost."
Instead, SNFs will receive a per diem prospective payment applicable to all
covered Part A services and many Part B services. The PPS rates were made
available in May, 1998. Consolidated Billing was to take effect on July 1, 1998,
although its implementation has been postponed while administrative matters are
being resolved.
Commencing July 1, 1998, these reimbursement changes will take effect
for SNFs at different times throughout calendar years 1998 and 1999, depending
on the starting date for each facility's Medicare cost reporting year. The BBA
mandated that, by June 30, 1999, each SNF be reimbursed for Medicare Part A
services under a PPS rate (that includes reimbursement for respiratory therapy
services) based on the acuity level of the patient. Medicare Part B services are
reimbursed according to a fee schedule with total charges potentially being
subject to any annual cap effective January 1, 1999. The application of an
annual cap is being challenged by the long-term care industry.
PPS and Consolidated Billing were designed to contain SNF costs and
limit Medicare program expenditures. For the five-year period from federal
fiscal years 1998-2002, it has been estimated that between approximately $9.5 to
$12.9 billion dollars will be saved by implementation of PPS and Consolidated
Billing. The adverse revenue impact on SNFs could be greater than estimated, and
it is anticipated that ancillary services providers, like RCS, will also be
adversely affected by PPS, although it is difficult to predict the extent of
such impact.
For a number of years, hospitals have been reimbursed by Medicare
according to a prospective payment system (as opposed to a cost-based) system.
Accordingly, RCS, as a supplier of respiratory therapy goods and service s in
the hospital setting, is subject to some extent to the financial pressures that
remain on hospitals.
25
<PAGE>
Certain Medicare providers continue to be reimbursed based upon their
reasonable costs. To address concerns about the rising cost of ancillary
service, including respiratory care service, the Health Care Financing
Administration promulgated rules establishing "salary equivalency guidelines,"
which is a method used to determine the prudent hourly cost for respiratory
therapy services in long-term care settings. For providers that are reimbursed
under Medicare on the "reasonable cost" basis, the salary equivalency guidelines
became effective April 1, 1998, and are used by fiscal intermediaries to
determine the maximum allowable cost of respiratory therapy service furnished
"under arrangement" with a SNF by an ancillary provider like RCS. The salary
equivalency guidelines are another effort by the federal government to limit
Medicare program expenditures.
Some state Medicaid programs, and private third-party payors, have
adopted reimbursement methodologies that involve cost-containment principles
similar to those implemented at the federal level. There continue to be state
legislative proposals that would impose further limitations on government and
private payments to providers of healthcare services such as RCS. Many states
have enacted, or are considering enacting, measures that are designed to reduce
their Medicaid expenditures and to make certain changes to private healthcare
insurance.
For these reasons, there can be no assurance that payments under
governmental and private third-party payor programs will remain at levels
comparable to present levels, or will be sufficient to cover the costs incurred
to provide healthcare services. There also can be no assurance that future
healthcare legislative, or other changes in the administration or interpretation
of governmental healthcare programs, will not have a material adverse effect on
RCS's financial condition, results, operations and liquidity. Finally, there can
be no assurance that the provision of services and supplies by RCS will meet the
requirements for participation and coverage in any particular reimbursement
program. RCS could be adversely affected by the continuing efforts of
governmental and private third-party payors to contain reimbursement for
healthcare services
Employees
As of March 31, 1999, the Company had approximately 75 employees, all
of whom were full time. As of this date BSD had approximately 50 full-time
employees and over 200 part-time employees.
Properties
The Company maintains its principal executive offices in Boca Raton,
Florida of approximately 125 square feet of commercial office space on a
one-year lease expiring December 31, 1999 for monthly rent of approximately
$1,000 . The Company's OIS Division leases facilities in East Tennessee. OIS
leases 500 square feet of office space on a month to month basis for $350 per
month from an unaffiliated third party. 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 12,000 square feet to an unaffiliated third party under a
sublease expiring on September 23, 1999 that provides aggregate rental payments
to Federal of approximately $56,400.
26
<PAGE>
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 a 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. The mortgage
will be satisfied in full upon the timely payment of all 110 monthly payments.
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 assumed
certain obligations to pay 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
$110,000 in the aggregate for the years 1990 through 1997, over a period of 36
months by making monthly installments of $2,000 with a balloon due at the end of
the term. 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 $44,000 for the years 1994 through 1997, over a period of 36
months by making monthly installments of $1,684.
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 difficulty in
locating and securing alternative office space at a reasonable rate.
Legal Proceedings
The Company is not a party to any material legal proceedings.
27
<PAGE>
MANAGEMENT
The following table sets forth the names, ages and positions held with
respect to each Director and Executive Officer of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------------------ -------- -------------------------------------------------
<S> <C> <C>
Robert Hausman 43 Chairman of the Board and President (1)
Mark Weisz 39 Director
Lester Gann 53 Director and Secretary
Simon Groner 57 Director
</TABLE>
- -----------
(1) Stephen Rosedale has the right to be elected Chairman of the Board. He has
not yet exercised this right. If and when he elects to be appointed to the
Board, Mr. Hausman will remain a director of the Company.
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 the Directors and Executive Officers 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. 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 and Executive Vice
President of Bedford Weaving Mills, a Bedford, Virginia based specialty textile
mill. Bedford Weaving Mills was acquired by Mr. Hausman and his partner in
February 1982 from Belding Hemingway, Inc. 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.
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 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.
28
<PAGE>
Simon Groner was elected a director in April 1999. Mr. Groner has been
engaged in the private practice of law in Cincinnati, Ohio since 1976,
specializing in civil and criminal litigation, business law, as well as patent,
trademark and copyright law. Mr. Groner also was an engineer for
Sherwin-Williams Chemicals and Procter & Gamble before he started his law
practice.
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 34 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 IFR, MRO, and IFR Contract
Services, which are divisions under IFR.
Key Employees
While not an executive officer of the Company, the following officer
and employee of the Company's subsidiaries makes significant contributions to
the business of the Company.
Greg Hoehn. Mr. Hoehn, 37, 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.
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 Groner. The Company does not
presently maintain compensation or nominating committees of the Board of
Directors.
29
<PAGE>
Compliance With Section 16(a) of the Securities Exchange Act of 1934
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and on representations that no other
reports were required, there were no reports required under Section 16(a)
("Section 16(a)") of the Securities Exchange Act of 1934, which were not timely
filed during fiscal 1998, except that: reports on Form 4 were not timely filed
by (i) Robert Hausman reporting options granted on November 1, 1997, (ii) Robert
Hausman reporting the granting of options on January 16, 1998, (iii) Lester Gann
reporting the granting of options on January 16, 1998 and exercised on March 3,
1998 and (iv) Mark Weisz and C. Lawrence Rutstein reporting the granting of
options on January 16, 1998 and exercised on April 24, 1998.
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 $100,000. Directors of the Company do not receive compensation for
serving in such capacity.
<TABLE>
<CAPTION>
Long Term
Name and Annual Compensation Compensation
Principal Position Year Salary($) Bonus Other Options
- ---------------------------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert Hausman, 1998 120,000 0 87,839(2) 938
President, CEO, and 1997 0 0 0
Director 1996 0 0 0
Lester Gann, 1998 100,000 118,125(4) 0 938
Secretary and 1997 96,000 0 0
Director 1996 96,000 0 0
</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.
(2) On July 22, 1998, Mr. Hausman received 2,298 shares of Common Stock
in accordance with the terms of the Amendment to the Management Agreement dated
November 1, 1997. The fair market value on the date of issuance was $31.50
resulting in an aggregate value of $72,371. The balance was received as a car
allowance.
(3) On January 15, 1998, The Company granted to Mr. Hausman ISO options
to purchase 938 shares of Common Stock at an exercise price of $ 36.80 per share
pursuant to the Company's 1997 Stock Option Plan.
(4) On July 22, 1998, Mr. Gann received 3,750 shares of Common Stock as
a signing bonus in accordance with the terms of his new Employment Agreement
dated May 1, 1998. The fair market value on the date of issuance was $31.50
resulting in an aggregate value of $118,125.
(5) On January 15, 1998, the Company granted to Mr. Gann NSO options to
purchase 938 shares of Common Stock at an exercise price of $16.00 per share
pursuant to the Company's 1997 Stock Option Plan.
30
<PAGE>
Employment and Management Agreements
Hausman Agreement. On July 1, 1997 the Company entered into a
Management Agreement with Robert Hausman, President and Chairman of the Board of
the Company. This agreement was amended November 1, 1997 and December 1, 1998.
Pursuant to the term of this three year agreement, as amended, Mr. Hausman is
entitled to receive (i) annual base compensation of $131,000, which increases in
years two and three of the agreement by the greater of the percentage increase
of the Consumer Price Index or 6%, provided that payments are being deferred
until such time as the Company raises at least $500,000 of new financing, and at
such time the Company shall pay Mr. Hausman the full amount of the deferral.
The Company also agreed to adjust the exercise price of Mr. Hausman's
options to purchase 25,000 shares of common stock of the Company at an exercise
prices of $40.00 and $32.00 per share to options to purchase 6,250 shares each
with exercise prices of $14.00, $16.00, $18.00 and $20.00 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, 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 it not
been terminated prior to its expiration, together with an additional sum equal
to two years annual base compensation. Mr. Hausman and the Company also agreed
not to invoke the "change in control" provisions as a result of the transactions
set forth in the Exchange Agreement.
As of March 15, 1999, Mr. Hausman was owed approximately $282,000
consisting of accrued salary, accrued dividends on the Series E Preferred Stock
and loans to the Company. In order to repay such amount as promptly as
practicable, the Company agreed to issue a note (the "Note") to Mr. Hausman. The
Note will have the following terms: (i) bear interest at 8% per annum, (ii)
provide for 24 equal monthly installments of principal and interest that are
payable in either cash or the Company's Common Stock at the Company's option,
and (iii) provide for acceleration upon the termination of the Management
Agreement without cause.
Mr. Hausman and his wife owned 14,375 shares of the Company's Series E
Preferred Stock (the "Preferred Stock"). In December 1998, Mr. Hausman and the
Company agreed to exchange the Preferred Stock for 143,750 shares of Common
Stock, of which 75,000 shares were exchanged simultaneously with the BSD closing
and the remaining 6,875 shares will be exchanged prior to the PF closing.
Effective on such exchange, Mr. Hausman's management fee will be increased by
$77,000, which amount is equal to the dividends on the Preferred Stock. The
Company agreed to use the net cash proceeds from the sale of certain assets
first to redeem any outstanding Preferred Stock and then to repurchase Common
Stock from Mr. Hausman at a price of $1.00 per share. The Company and Mr.
Hausman will agree to facilitate the sale of these shares of Common Stock and
Mr. Hausman will use these management fee proceeds, proceeds of such sales and
from asset sales to repay principal and interest on Mr. Hausman's loan from
Chase Manhattan Bank in the approximate principal amount of $1,115,000 (the
"Loan"). The management fee will be reduced pro rata as Mr. Hausman receives
funds from the Company with respect to the sale of assets or from the sale of
Common Stock and the interest payments decrease.
31
<PAGE>
Gann Agreement. On May 1, 1998 IFR entered into a new three-year
contract with Mr. Gann providing for an annual base salary of $100,000 with the
ability to receive performance based bonuses at the discretion of the Board of
Directors. In November 1998, this Agreement was amended to extend the term to
November 2001, to accelerate the payment of a bonus of 8,750 shares of Common
Stock to the closing of the PF transaction, and to issue Mr. Gann 83,125 shares
of Common Stock in exchange for waiving his right to invoke the change of
control provisions in his agreement that were triggered by the execution of the
Exchange Agreement with BSD and People First. 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 twelve-month non-compete
following the termination of the agreement. Mr. Gann's employment agreement does
not provide for any severance payments. Mr. Gann's previous employment agreement
provided for a base salary of $96,000.
Hoehn Agreement. In October 1997, Federal entered into a two year
employment agreement with its President, Greg Hoehn, providing for an annual
base salary of $50,000. Mr. Hoehn is also entitled to participate in all benefit
programs of Federal as may be made available to other salaried employees. Mr.
Hoehn's employment agreement contains customary provisions providing for
confidentiality, as well as a twelve month non compete following the termination
of the agreement. The agreement also provides for severance equal to one year's
base salary if Mr. Hoehn is terminated without cause.
PRINCIPAL STOCKHOLDERS
As of March 31, 1999 there are 1,090,548 shares of Common Stock issued
and outstanding and 6,875 shares of Series E Cumulative Non-Participating
Preferred Stock, all of which are voting securities of the Company. The
following table sets forth, as of the close of business on March 15, 1999 (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:
32
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Amount of
Name and Beneficial Percentage
Address of Ownership of Of
Beneficial Owner Stock Class
- ------------------------------------------------------------ ------------------------- --------------------
<S> <C> <C>
Robert Hausman 193,233 17.3%
1900 Corporate Boulevard
Suite 400
Boca Raton, FL 33431
Mark Weisz 13 (2)
1900 Corporate Boulevard
Suite 400
Boca Raton, FL 33431
Simon Groner 0 (2)
1900 Corporate Boulevard
Suite 400
Boca Raton, FL 33431
Lester Gann 102,061 9.4%
2415 Sycamore Drive
Knoxville, TN 37921
Stephen Rosedale 94,600 (3) 8.7%
c/o Communicare Health Services
4700 Ashwood Drive
Cincinnati, Ohio 45241
Wirral Anstan Holdings, Ltd. 100,000 (4) 9.2%
Hirzel Court
Guernsey, GY1, 2NN
Channel Islands
All Officers and Directors as a Group (five persons) (1)(3) 295,307 26.4%
</TABLE>
(1) Includes options to acquire 25,938 shares of the Company's Common
Stock, and 2,498 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.
(2) Less than 1%.
(3) Excludes shares of Common Stock that will be issued in the PF
Transaction, which shares may result in Mr. Rosedale having voting
control of the Company.
(4) Excludes 800,000 shares that may be issued upon exercise of Warrants
that are not currently exercisable.
33
<PAGE>
<TABLE>
<CAPTION>
Series E
Amount of
Name and Beneficial Percentage
Address of Ownership of Of
Beneficial Owner Stock Class
- ------------------------------------------------------------ ------------------------- --------------------
<S> <C> <C>
Robert Hausman 6,875 100%
1800 Corporate Boulevard
Suite 400
Boca Raton, FL 33431
All Officers and Directors as a Group (five persons) 6,875 100%
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During Fiscal 1997 from time to time the Company borrowed funds from
Yucatan for working capital purposes. At June 30, 1998 the amount due Yucatan by
the Company was $151,824. In November 1998 this debt was converted into 31,250
shares of Common Stock.
In conjunction with the acquisition of Federal in May 1997, Federal
delivered a promissory note to Robert Hausman and Barbara Hausman in the
principal amount of $1,079,024. 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 14,375 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.
Dividends are current. The balance of the dividends due have been accrued. On
July 1, 1998, Federal Supply borrowed $50,000 from Robert and Barbara Hausman
and delivered a one-year promissory note bearing interest at the rate of 10% per
annum. On September 3, 1998, the Company borrowed $70,000 from Robert and
Barbara Hausman and delivered a one-year promissory note bearing interest at the
rate of 10% per annum. These monies were utilized for working capital purposes.
In conjunction with the September 1997 acquisition of LPS, 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 at the time, each received 2,498 shares of the Company's Common Stock in
exchange for their interests in LPS. 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.
34
<PAGE>
In September 1997 the Company purchased 100% of the issued and
outstanding stock of LPS from its shareholders, who included Mrs. Hausman and
Mrs. Rutstein, in exchange for 33,750 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.
On May 1, 1998 the Company determined it would unwind its acquisition
of 51% of Regenesis Holdings, Inc. ("Regenesis") acquired from a shareholder of
Regenesis effective January 16, 1998 as the parties involved were unable to
fulfill their obligations under the acquisition agreement. There were no
extraordinary charges associated with the transaction and there was no adverse
effect on the Company as a result of this transaction. C. Lawrence Rutstein, a
director of the Company, served as President of Regenesis at the time of the
transaction. Robert Hausman, President and CEO of the Company served as a
director of Regenesis at the time of the transaction.
On June 29, 1998,the Company sold its investment in LPS to American
Group, Inc., a Nevada corporation ("American")for a 23.8% ownership in American.
In February 1999, the Company entered into a Settlement Agreement with
M. Shulman & Associates pursuant to which Shulman agreed to waive any future
fees, including those that may be due in connection with the completed BSD
transaction, in exchange for the Company transferring the 120,000 shares of
American owned by it and the assumption by the Company of $100,000 of notes held
by Robert Hausman, the Company's president.
35
<PAGE>
SELLING SHAREHOLDERS
The following table set forth the name of each Selling Shareholder, the
number or shares of Common Stock beneficially owned by such Selling Shareholder
as of March 31, 1999, and the number of Shares being offered by each Selling
Shareholder. The Shares being offered hereby are being registered to permit
public secondary trading, and the Selling Shareholders may offer all or part of
the Shares for resale from time to time. However, such Selling Shareholders are
under no obligation to either (a) convert their Notes or exercise the Warrants,
as the case may be, or (b) if converted or exercised, to sell all or any portion
of such Shares immediately under this Prospectus. All information with respect
to Share ownership has been furnished by the Selling Shareholders. Because the
Selling Shareholders may sell all or a portion of their Shares, no estimate can
be given as to the number of Shares that will be held by any Selling Shareholder
upon termination of any offering made hereby; accordingly, the following table
assumes (i) the conversion of the Notes into 700,000 shares of Common Stock and
the exercise of 2,400,000 Warrants, and (iii) the sale of all Shares by the
Selling Shareholders immediately following the date of this Prospectus.
<TABLE>
<CAPTION>
Number of Shares Shares Owned
Name of Selling, Shareholder Shares Owned Offered After Offering
- ---------------------------- ------------ ------- --------------
<S> <C> <C> <C>
Wirral Anstan Holdings, Ltd. 900,000(1) 900,000 -0-
Rothchild Holdings, Inc. 450,000(2) 450,000 -0-
Lawrence Loscalzo 450,000(2) 450,000 -0-
Ira Goldberg 450,000(2) 450,000 -0-
D.L. Cromwell Investments, Inc. 225,000(3) 225,000 -0-
ProFutures Special Equities Fund, L.P. 700,000(4) 700,000 31,250
</TABLE>
- -------------------------
(1) Assumes the exercise of 400,000 Warrants at an exercise price of $1.50
and 400,000 at an exercise price of $1.75.
(2) Assumes the exercise of 200,000 Warrants at an exercise price of $1.50
and 200,000 at an exercise price of $1.75.
(3) Assumes the exercise of Placement Warrants to purchase 100,000 Units
consisting of an aggregate of 25,000 shares of Common Stock and 200,000
Warrants and the exercise of 100,000 Warrants at an exercise price of
$1.50 and 100,000 at an exercise price of $1.75.
(4) Issuable upon the conversion of outstanding Notes.
PLAN OF DISTRIBUTION
The Shares offered hereby by the Selling Shareholders may be sold from
time to time by the Selling Shareholders, or by pledgees, donees, transferees or
other successors in interest. Such sales may be made on one or more exchanges or
in the over-the-counter market (including the Nasdaq SmallCap Market), or
otherwise at prices and at terms then prevailing or at prices related to the
then current market price, or in negotiated transactions. The Shares may be sold
by one or more of the following methods, including, without limitation: (a) a
36
<PAGE>
block trade in which the broker-dealer so engaged will attempt to sell the
Shares as agent, but may position and resell a portion of the block as principal
to facilitate the transaction; (b) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this Prospectus;
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and (d) face-to-face or other direct transactions between
the Selling Shareholders and purchasers without a broker-dealer or other
intermediary. Such broker-dealers and agents and any other participating
broker-dealers, or agents may be deemed to be "underwriters" within the meaning
of the Securities Act, in connection with such sales. In addition, any
securities covered by this Prospectus that qualify for sale pursuant to Rule 144
promulgated under the Securities Act might be sold under Rule 144 rather than
pursuant to this Prospectus.
Brokers, dealers, underwriters or agents participating in the
distribution of the shares may receive compensation in the form of discounts,
concessions or commission from the Selling Shareholders and/or the purchasers of
Shares for whom such broker-dealers may act as agent or to whom they may sell as
principal, or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions). The Selling Shareholders and any
broker-dealers acting in connection with the sale of the Shares hereunder may be
deemed to be underwriters within the meaning of Section 2(11) of the Securities
Act, and any commission received by them and any profit realized by them on the
resale of the Shares as principals may be deemed underwriting compensation under
the Securities Act. Neither the Company nor any Selling Shareholder can
presently estimate the amount of such compensation. The Company knows of no
existing arrangements between any Selling Shareholder and any other stockholder,
broker dealer, underwriter or agent relating to the sale or distribution of the
Shares.
Each Selling Shareholder and any other persons participating in a
distribution of securities may be subject to applicable provisions of the
Securities Exchange Act of 1934 (the "Exchange Act") and the rules and
regulation thereunder, including, without limitation, Regulation M, which may
restrict certain activities of, and limit the timing of purchases and sales of
securities by the Selling Shareholders and other persons participant in a
distribution of securities. Furthermore, under Regulation M, persons engaged in
a distribution of securities are prohibited from simultaneously engaging in
market making and certain other activities with respect to such securities for a
specified period of time prior to the commencement of such distributions subject
to specified exceptions or exemptions. All of the foregoing may affect the
marketability of the securities offered hereby.
Under the securities laws of certain states, the Shares may be sold in
such states only through registered or licensed broker-dealers or pursuant to
available exemptions from such requirements. In addition, in certain states the
Shares may not be sold therein unless the Shares have been registered or
qualified for sale in such state or an exemption from such requirement is
available and is complied with.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 3,125,000 shares of
Common Stock, par value $.008 per share, and 250,000 shares of preferred stock,
par value $.008 per share (the "Preferred Stock"). As of March 31, 1999,
1,090,548 shares of Common Stock and an aggregate of 6,875 shares of Preferred
Stock were outstanding. The transfer agent for the Common Stock is Florida
Atlantic Stock Transfer Company, Tamarac, Florida.
37
<PAGE>
Preferred Stock
General. The Board of Directors has the authority to issue up to
250,000 shares of Preferred Stock in one or more series and to fix the number of
shares constituting any such series, the voting powers, designations,
preferences and relative participation, optional or other special rights and
qualifications, limitations or restrictions thereof, including the dividend
rights and dividend rate, terms of redemption (including sinking fund
provisions), redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series, without any further vote or
action by the shareholders. The issuance of Preferred Stock by the Board of
Directors could affect the rights of the holders of Common Stock. For example,
such issuance could result in a class of securities outstanding that would have
preferences with respect to voting rights and dividends, and in liquidation,
over the Common Stock, and could (upon conversion or otherwise) enjoy all of the
rights of the Common Stock.
Series E Preferred Stock
On October 7, 1997, the Company converted a note payable to
stockholder to 14,375 shares of Series E cumulative non-participating preferred
stock. The designations, rights and preferences of the Series E Preferred Stock
provides that (i) holders shall receive annual dividends equal to $77,000, (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 the Company having
general voting power with the common stock concerning any matter being voted
upon by the Company's stockholders, (iii) 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. In December 1998, 7,500 shares were converted to 75,000
shares of Common Stock.
Common Stock
Each share of Common Stock entitles the holder to one vote on all
matters submitted to a vote of the shareholders. The holders of Common Stock are
entitled to receive dividends, when, as and if declared by the Board of
Directors, in its discretion, from funds legally available therefor. Upon
liquidation or dissolution of the Company, the holders of Common Stock are
entitled to share ratably in the assets of the Company, if any, legally
available for distribution to shareholders after the payment of all debts and
liabilities of the Company and the liquidation preference of any outstanding
shares of the Company's Preferred Stock. The Common Stock has no preemptive
rights and no subscription, redemption or conversion privileges. The Common
Stock does not have cumulative voting rights, which means that the holders of a
majority of the outstanding shares of Common Stock voting for the election of
directors will be able to elect all members of the Board of Directors. A
majority vote will also be sufficient for other actions that require the vote or
concurrence of shareholders. All of the outstanding shares of Common Stock are,
and the shares to be sold in this offering will be, when issued and paid for,
fully paid and nonassessable.
Anti-Takeover Effects. The authority possessed by the Board of
Directors to issue Preferred Stock could potentially be used to discourage
attempts by others to obtain control of the Company through merger, tender
offer, proxy contest or otherwise by making such attempts more difficult to
achieve or more costly. The Board of Directors may issue Preferred Stock with
voting and conversion rights that could adversely affect the voting power of the
holders of Common Stock. Except as described above, there are no agreements or
understandings for the issuance of Preferred Stock and the Board of Directors
has no intention to issue additional shares of Preferred Stock as of the date of
this Prospectus.
38
<PAGE>
Certain Florida Legislation
Florida has enacted legislation that may deter or frustrate takeovers
of Florida corporations. The Florida Control Share Act generally provides that
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless such voting rights are approved by a majority vote of a
corporation's disinterested shareholders. The Florida Affiliated Transactions
Act generally requires supermajority approval by disinterested shareholders of
certain specified transactions between a public corporation and holders of more
than 10% of the outstanding voting shares of the corporation (or their
affiliates). Florida law and the Company's Articles of Incorporation also
authorize the Company to indemnify the Company's directors, officers, employees
and agents. Pursuant to such authorization, the Company has entered into
agreements with each of its directors and certain of its officers providing for
indemnification to the fullest extent permitted by law.
Shares Eligible for Future Sale
See "Risk Factors."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). You may read and copy any document we file (under either its
current or former name) at the SEC's public reference rooms located at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, at Seven World Trade Center,
Suite 1300, New York, New York 10048, and at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, Please call the SEC at (800) SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to
the public from the SEC's website located at http://www.sec.gov. The Company's
Common Stock is also quoted on the Nasdaq SmallCap Market, and our SEC filings
can also be inspected at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
We will provide without charge to each person, including any beneficial
owner, to whom a Prospectus is delivered, on the written or oral request of such
person, a copy of any or all of the information that has been incorporated by
reference (excluding exhibits unless such exhibits are specifically incorporated
by reference). Exhibits to any of such documents, however, will not be provided
unless such exhibits are specifically incorporated by reference into such
documents. Please direct such requests to Robert Hausman, Chief Executive
Officer, Coventry Industries Corp., 1900 Corporate Boulevard, Suite 400, Boca
Raton, Florida 33431, telephone number (561) 988-2544.
LEGAL MATTERS
The validity of the Shares is being passed upon for the Company by
Broad and Cassel, a partnership including professional associations, 7777 Glades
Road, Suite 300, Boca Raton, Florida 33434.
39
<PAGE>
EXPERTS
The audited consolidated financial statements of the Company as of June
30, 1998 and for the fiscal year then ended included herein have been audited by
Sweeney Gates & Co., independent certified public accountants, as indicated in
its report with respect thereto, and is included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The audited consolidated financial statements of the Company as of June
30, 1997 and for the fiscal year in the period ended June 30, 1997, included
herein, have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the period set forth in their report, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The audited consolidated balance sheet of BSD Healthcare as of December
31, 1997, included herein, has been audited by J.H. Cohn LLP, independent public
accountants, as indicated in their report with respect thereto, and is included
herein in reliance upon the authority of said firm as experts in accounting and
auditing.
The audited combined financial statements of Respiratory Care Services,
Inc. and RCS Subacute, Inc. as of December 31, 1997 and 1996 and for the years
then ended, included herein, have been audited by J.H. Cohn LLP, independent
public accountants, as indicated in their report with respect thereto, and is
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
40
<PAGE>
COVENTRY INDUSTRIES CORP.
INDEX TO HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS
Page
----
Coventry
- --------
Independent Auditors Report .............................................. F-1
Consolidated Balance Sheet as of June 30, 1998 ........................... F-4
Consolidated Statements of Operations
For the years ended June 30, 1998 and 1997 ............................... F-6
Consolidated Statements of Stockholders' Equity
For the years ended June 30, 1998 and 1997 ............................... F-7
Consolidated Statements of Cash Flows
For the years ended June 30, 1998 and 1997 ............................... F-9
Notes to the Consolidated Financial Statements ........................... F-10
Condensed Consolidated Balance Sheet as of March 31, 1999 (unaudited)
and June 30, 1998 ........................................................ F-29
Condensed Consolidated Statements of Operations for the nine months ended
March 31, 1999 and 1998 (unaudited) ...................................... F-30
Condensed Consolidated Statements of Stockholders' Equity
For the nine months ended March 31, 1999 (unaudited) ..................... F-31
Condensed Consolidated Statements of Cash Flows
For the nine months ended March 31, 1999 (unaudited) ..................... F-32
Notes to Condensed Consolidated Financial Statements ..................... F-33
BSD Healthcare Industries, Inc.
- -------------------------------
Report of Independent Public Accountants ................................. F-38
Consolidated Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997 ..................... F-39
Consolidated Statements of Income
Nine months ended September 30, 1998 (unaudited) ......................... F-40
Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1998 (unaudited) ......................... F-41
Consolidated Statement of Cash Flows
Nine months ended September 30, 1998 (unaudited) ......................... F-42
41
<PAGE>
Notes to Consolidated Financial Statements ............................... F-43
Respiratory Care Services, Inc. and RCS Subacute, Inc.
- ------------------------------------------------------
Report of Independent Public Accountants ................................. F-50
Combined Balance Sheets
January 31, 1998 (unaudited) and December 31, 1997 ....................... F-51
Combined Statements of Income
Month ended January 31, 1998 (unaudited) and
years ended December 31, 1997 and 1996 ................................... F-52
Combined Statements of Stockholders' Equity
Month ended January 31, 1998 (unaudited) and
years ended December 31, 1997 and 1996 ................................... F-53
Combined Statements of Cash Flows
Month ended January 31, 1998 (unaudited) and
years ended December 31, 1997 and 1996 ................................... F-54
Notes to Combined Financial Statements ................................... F-55
Unaudited Pro Forma Condensed Combined Financial Statements
- -----------------------------------------------------------
Introduction to unaudited pro forma
condensed combined financial statements .................................. F-61
Pro forma condensed combined statements of operations
year ended June 30, 1998 (unaudited) ..................................... F-62
Pro forma condensed combined statement of operations
nine months ended March 31, 1999 (unaudited) ............................. F-63
Notes to unaudited pro forma condensed combined statement of operations .. F-64
42
<PAGE>
Report of Independent Public Accountants
The Board of Directors and Stockholders
Coventry Industries Corp.
We have audited the accompanying consolidated balance sheet of Coventry
Industries Corp. as of June 30, 1998 and the related consolidated statements of
operations, shareholders' equity and cash flows for the year ended June 30,
1998. 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 did not audit the financial statements of
Industrial Fabrication & Repair, Inc., and Workforce Properties Corp., wholly
owned subsidiaries, which statements reflect total assets of fifty-two percent
(52%) as of June 30, 1998 and total revenues of forty-one percent (41%) for the
year then ended. Those statements were audited by other auditors whose reports
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for Industrial Fabrication & Repair. Inc. and Workforce Properties
Corp., is based solely on the reports of the other auditors.
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 from 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 Coventry Industries
Corp. as of June 30, 1998, and the results of its operations and its cash flows
for the year ended June 30, 1998 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Sweeney, Gates & Co.
Fort Lauderdale, Florida
September 28, 1998, except for the last paragraph of Note 9 as to which the date
is February 3, 1999
F-1
<PAGE>
[Reel & Swafford, PLLC Letterhead]
Report of Independent Auditors
To the Board of Directors
Industrial Fabrication and Repair, Inc.
We have audited the balance sheet of Industrial Fabrication and Repair, Inc.
(the Company) as of June 30, 1998, and the related statements of operations,
changes in stockholder's equity and cash flows for the year then ended. These
financial statements (which are not presented separately herein) are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Industrial Fabrication and
Repair, Inc. as of June 30, 1998 and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
Reel & Swafford, PLLC
Certified Public Accountants
Knoxville, Tennesse
September 11, 1998, except for Note 9 as to which the date is September 30, 1998
F-2
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders
of Coventry Industries Corp.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows for the year then ended June 30, 1997, of
Coventry Industries Corp. (formerly Workforce Systems Corp.) and subsidiaries.
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 results of operations of Coventry
Industries Corp. and subsidiaries at June 30, 1997, and their cash flows for the
year ended June 30, 1997, in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Miami, Florida
October 7, 1997
F-3
<PAGE>
COVENTRY INDUSTRIES CORP.
Consolidated Balance Sheet
June 30, 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 52,188
Accounts receivable, less $50,000 allowance for doubtful accounts 1,196,993
Inventory 1,071,140
Prepaid consulting fees 141,667
Other prepaid expenses 56,588
----------
Total current assets 2,518,576
----------
PROPERTY, PLANT AND EQUIPMENT:
Land 156,502
Building and improvements 1,439,889
Machinery and equipment 1,570,972
Autos and trucks 166,712
Accumulated depreciation (571,408)
----------
Total property, plant and equipment 2,762,667
----------
OTHER ASSETS:
Goodwill, net 1,391,724
Prepaid consulting fees 354,232
Fabrication supplies 333,307
Deposits 14,614
----------
$7,375,120
==========
The accompanying Notes are an integral part of these Financial Statements.
F-4
<PAGE>
COVENTRY INDUSTRIES CORP.
Consolidated Balance Sheet
June 30, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturites of long-term debt $ 322,655
Factoring line of credit 335,902
Trade accounts payable 1,093,270
Accrued expenses 432,970
Preferred stock dividend payable 47,896
Note payable - former shareholder 151,824
-----------
Total current liabilities 2,384,517
-----------
LONG TERM DEBT, LESS CURRENT PORTION 395,325
-----------
STOCKHOLDERS' EQUITY:
Series A preferred stock, $.008 par value, 4 shares
authorized, issued and outstanding -
Series C preferred stock, $.008 par value, 3,750 shares
authorized, issued and outstanding 30
Series E preferred stock, $.008 par value, 14,375 shares
authorized, issued and outstanding 115
5% Convertible preferred stock, $.008 par value, 313 shares
authorized, 156 issued and outstanding 1
Common stock, $.008 par value, 3,125,000 shares
authorized, 379,100 shares issued and outstanding 3,033
Additional paid in capital 21,398,987
Stock to be earned (1,416,667)
Prepaid media spots (500,000)
Deferred compensation (394,625)
Accumulated deficit (14,495,596)
-----------
Total stockholders' equity 4,595,278
-----------
$ 7,375,120
===========
The accompanying Notes are an integral part of these Financial Statements.
Share data have been adjusted for the 1-for-8 reverse stock split on March 22,
1999.
F-5
<PAGE>
COVENTRY INDUSTRIES CORP.
Consolidated Statements of Operations
Year Ended Year Ended
June 30, 1998 June 30, 1997
------------- -------------
Revenues $ 7,869,981 $ 4,653,286
Cost of revenues 6,532,924 3,518,500
----------- -----------
Gross profit 1,337,057 1,134,786
Operating expenses:
Selling, general and
administrative expenses 2,828,016 1,573,559
Marketing and public relations 3,710,714 464,596
Depreciation and amortization 402,268 282,398
Professional fees 454,560 308,996
Startup expenses -- 1,357,899
----------- -----------
Total operating expenses 7,395,558 3,987,448
----------- -----------
Loss from operations (6,058,501) (2,852,662)
Other expenses:
Loss on sale of subsidiaries 66,246 --
Interest 216,061 65,488
Impairment of goodwill 653,738 --
Acquisition expenses -- 110,000
----------- -----------
Total other expenses 936,045 175,488
----------- -----------
Loss before income taxes and
discontinued operations (6,994,546) (3,028,150)
Income tax benefit (180,750) (133,399)
----------- -----------
Loss before discontinued operations (6,813,796) (2,894,751)
Discontinued operations (2,164,099) --
----------- -----------
Net loss (8,977,895) (2,894,751)
Dividends paid (114,834) --
----------- -----------
Net loss available to common
shareholders $(9,092,729) $(2,894,751)
=========== ===========
Loss per share of common stock:
Loss from continuing operations $ (21.08) $ (28.65)
Loss from discontinued operations (6.59) --
----------- -----------
Net loss per common share $ (27.66) $ (28.65)
=========== ===========
Weighted average shares outstanding 328,644 101,053
=========== ===========
The accompanying Notes are an integral part of these Financial Statements.
Share data have been adjusted for the 1-for-8 reverse stock split on March 22,
1999.
F-6
<PAGE>
COVENTRY INDUSTRIES CORP.
Consolidated Statements of Stockholders' Equity
for the years ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Preferred stock
Series A Series C Series D
Shares Amount Shares Amount Shares Amount
------------------ ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Balance July 1, 1997 4 $ 3,750 $ 30 $
Preferred stock issued in connection
with the acquisition of LPS
Common stock issued in connection
with the acquisition of LPS
Preferred stock cancelled in connection
with disposition of LPS
Common stock issued in connection
with acquisitions
Common stock issued in connection with
compensation to consultants and employees
Preferred stock issued in connection with
conversion of notes payable
Preferred stock issued
Repurchase of common stock
Preferred stock dividends
Net loss for the year ended June 30, 1998
--------- ------ -------- ------ ------ ---------
Balance June 30, 1998 4 $ 0 3,750 $ 30 0 $ 0
========= ====== ======== ====== ====== =========
Additional Stock Prepaid Deferred
Common stock Paid-In to be Media Compensation
Shares Amount Capital Earned Spots Expense
-------------------- ---------- ------- ------ ------------
Balance July 1, 1997 244,117 $1,953 $12,567,700 $(1,416,667) $(500,000) $
Preferred stock issued in connection
with the acquisition of LPS
Common stock issued in connection
with the acquisition of LPS 45,113 361 1,831,743
Preferred stock cancelled in connection
with disposition of LPS
Common stock issued in connection
with acquisitions 30,625 245 1,274,755
Common stock issued in connection with
compensation to consultants and employees 97,356 779 3,690,638 (394,625)
Preferred stock issued in connection with
conversion of notes payable 1,149,904
Preferred stock issued 1,074,999
Repurchase of common stock (38,111) (305) (75,918)
Preferred stock dividends (114,834)
Net loss for the year ended June 30, 1998
------- ------ ----------- ----------- --------- ---------
Balance June 30, 1998 379,100 $3,033 $21,398,987 $(1,416,667) $(500,000) $(394,625)
======= ====== =========== =========== ========= =========
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Series E Series F Convertible
Shares Amount Shares Amount Shares Amount
-------------------- --------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Balance July 1, 1997 $ $ $
Preferred stock issued in connection
with the acquisition of LPS 4,375 75
Common stock issued in connection
with the acquisition of LPS
Preferred stock cancelled in connection
with disposition of LPS (4,375) (75)
Common stock issued in connection
with disposition of LPS
Common stock issued in connection with
compensation to consultants and employees
Preferred stock issued in connection with
conversion of notes payable 14,375 115
Preferred stock issued 156 1
Repurchase of common stock
Preferred stock dividends
Net loss for the year ended June 30, 1998
------- -------- ------ -------- ------ -----
Balance June 30, 1998 14,375 $ 115 0 $ 0 156 $ 1
======= ======== ====== ======== ====== =====
Total
Accumulated Stockholders'
Deficit Equity
------------ -----------
Balance July 1, 1997 $(5,517,701) $5,135,315
Preferred stock issued in connection
with the acquisition of LPS 75
Common stock issued in connection
with the acquisition of LPS 1,832,104
Preferred stock cancelled in connection
with disposition of LPS (75)
Common stock issued in connection
with disposition of LPS 1,275,000
Common stock issued in connection with
compensation to consultants and employees 3,296,792
Preferred stock issued in connection with
conversion of notes payable 1,150,019
Preferred stock issued 1,075,000
Repurchase of common stock (76,223)
Preferred stock dividends (114,834)
Net loss for the year ended June 30, 1998 (8,977,895) (8,977,895)
------------ ----------
Balance June 30, 1998 $(14,495,596) $4,595,278
============ ==========
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
Share data have been adjusted for the 1-for-8 reverse stock split on March 22,
1999.
F-7
<PAGE>
<TABLE>
<CAPTION>
Coventry Industries Corp.
Consolidated Statements of Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------
Year ended June 30,1997
- - ----------------------------------------------------------------------------------------------------------------
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 77,839 $ 623
-
Sale of common stock - - - - - - - - 1,042 8
Common stock issued in
connection with acquisition
of FSI - - - - - - - - 18,125 145
Common stock issued in
connection with
compensation to certain
consultants and employees - - - - - - - - 8,971 72
Options granted in
connection with consulting
services - - - - - - - - - -
Options exercised - - - - - - - - 63,140 505
Conversion of convertible
preferred stock - - - - - - (1,000,000) (1,000) 75,000 600
Net Loss - - - - - - - - - -
- - ----------------------------------------------------------------------------------------------------------------
Balance June 30, 1997 30 $ - - $ - 30,000 $ 30 - $ - 244,117 $1,953
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30,1997 (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) $ 5,449,512
Sale of common stock 99,992 - - 100,000
Common stock issued in
connection with acquisition
of FSI 422,668 - - 422,813
Common stock issued in
connection with
compensation to certain
consultants and employees 780,581 - - 780,653
Options granted in
connection with consulting
services 2,180,455 $(1,416,667) - 763,788
Options exercised ) 512,795 - - 513,300
Conversion of convertible
preferred stock 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
================================================================================================
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
Share data have been adjusted for the 1-for-8 reverse stock split on March 22,
1999.
F-8
<PAGE>
COVENTRY INDUSTRIES CORP.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(8,977,895) $(2,894,751)
Adjustments to reconcile net loss to
net cash (used by) operating activities
Depreciation 249,289 191,206
Amortization 152,979 91,192
Provision for doubtful accounts 50,000 246,013
Inventory valuation write-off 477,052 359,610
Goodwill write-off 653,738 -
Loss on disposal 483,746 -
Issuance of common stock and options granted
for services 3,401,630 871,521
Issuance of common stock for LPS transaction 1,576,854 -
Changes in assets and liabilities, net of businesses
acquired
(Increase) decrease in:
Trade account receivable (229,044) (112,076)
Inventory 6,736 (302,111)
Other current assets 556,661 165,461
Other assets 190,733 (28,330)
Increase (decrease) in:
Accounts payable 177,640 275,823
Accrued expenses and preferred stock dividend payable (54,086) 197,599
Income taxes payable - (73,329)
Deferred income tax liability (130,000) (60,541)
----------- -----------
Net Cash (Used) by Operating Activities (1,413,967) (1,072,713)
INVESTING ACTIVITIES:
Purchase of property and equipment (100,471) (249,634)
Investment in Apollo (18,000) -
Investment in LPS (462,500) -
----------- -----------
Net Cash Used by Investing Activities (580,971) (249,634)
FINANCING ACTIVITIES:
Net proceeds from factoring line of credit (62,956) 121,883
Proceeds from note payable - related party 9,093 10,064
Payments on note payable - stockholder - (118,131)
Payments on long term debt (212,488) (261,583)
Proceeds from long term debt 120,905 353,648
Dividends paid (66,938) -
Proceeds from sale of common stock and
exercise of stock options 1,924,189 613,300
----------- -----------
Net Cash Provided by Financing Activities 1,711,805 719,181
----------- -----------
Decrease in Cash and Cash Equivalents (283,133) (603,166)
Cash and Cash Equivalents, Beginning of Period 335,321 938,487
----------- -----------
Cash and Cash Equivalents, End of Period $ 52,188 $ 335,321
=========== ===========
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
F-9
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Coventry Industries Corp. and subsidiaries (the "Company"),
formerly known as Workforce Systems Corp., operates two lines of business,
manufacturing and staffing. The Company through its Tennessee subsidiary,
Industrial Fabrication & Repair, Inc. ("IFR"), provides specialized fabrication,
machining and design of maintenance and production equipment, and supplies
specialized labor services on a contract basis. The Company's customers are
primarily manufacturing companies. The Company, through its Florida subsidiary,
Federal Supply, Inc. ("FSI"), fabricates fire protection products. The Company's
customers are primarily contractors.
Both subsidiaries perform ongoing credit evaluations of their customers'
financial condition and extend credit to their customers based upon their
evaluations. If creditworthiness is questionable, merchandise is shipped COD.
The allowance for doubtful accounts is based upon the expected collection of
accounts receivable.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its wholly-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
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 are stated at 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. Cost of production
equipment held for resale is determined on a specific identification basis. When
equipment is purchased in lots, the individual parts are expensed at a
predetermined percentage of the sales price until the cost of the lot is
recovered. Costs to repair, inspect and/or modify the parts held for resale are
charged to the specific part when incurred.
Property, Plant and Equipment - Property, plant and equipment are stated at
cost. 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 5 to 15 years
Autos and trucks 5 years
F-10
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill - The excess of the cost over the fair value of net assets acquired
(goodwill) 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 long-lived assets may not be
recoverable.
Income Tax - Income tax assets and liabilities are computed annually for
temporary differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period, plus or minus the change during the period in deferred tax assets and
liabilities.
Revenue Recognition - Revenue from product sales is recognized at the time of
shipment. Staffing revenue is recognized when the related payroll costs are
incurred.
Loss per Share - The Company has adopted Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"), for its fiscal year ended June 30, 1998. FAS
128 requires presentation of basic and diluted earnings or loss per share. The
Company has potentially dilutive shares, however, because the Company has a
loss, the potentially dilutive shares are deemed anti-dilutive and only the
basic loss per share is presented. Loss per share is computed by dividing net
income by the weighted average number of shares outstanding during the period.
Restatement of the prior period for this pronouncement had no effect on the loss
per share amount.
Stock-Based Compensation - The Company accounts for stock-based awards using the
intrinsic value method, in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, no
compensation cost has been recognized for its incentive based stock options. The
Company provides additional pro forma disclosures as required under Statement of
Financial Accounting Standard, No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). Expense attributed to non-qualified stock options is
expensed when granted.
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.
Financial Instruments - The carrying amount of cash, accounts receivable, notes
payable, accounts payable and accrued expenses approximates fair value at June
30, 1998.
Reclassifications - Certain 1997 amounts have been reclassified to conform to
the 1998 presentation.
F-11
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
New Accounting Standard Not Yet Adopted - Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), establishes
standards for the 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, FAS 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 No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("FAS 131"), supersedes, "Financial
Reporting for Segments of a Business Enterprise" ("FAS 14"). FAS 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. FAS 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. The Company will adopt the above standards for its
fiscal year ended June 30, 1999. Implementation is not expected to have a
material effect on the financial statements.
2. OPERATIONS
The Company experienced a loss of approximately $8,978,000 in the year ended
June 30, 1998 and had difficulties meeting its obligations as they become due.
The Company's continued existence is dependent upon its ability to resolve its
liquidity problems, principally obtaining financing, raising equity capital and
generating profitable operations. Although a significant part of the 1998 loss
was attributable to non-cash expenditures (generated by stock transactions), the
Company still sustained losses from operations.
Management's plans in regard to these matters are to pursue other sources of
capital and to acquire other operations. The Company has also borrowed funds
from its President. See Note 20.
F-12
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. ACQUISITIONS, SALES AND DISCONTINUED OPERATIONS
(a) On May 29, 1997, the Company acquired the common stock of Federal Supply,
Inc. The purchase price consisted of 18,125 shares of the Company's common
stock, valued at approximately $423,000 (80% of current market value), as well
as approximately $56,000 in cash and the assumption of liabilities.
The transaction was recorded as follows:
Fair value of assets acquired $ 1,311,921
Excess cost over net assets acquired 971,036
Cash paid and common stock issued in
connection with acquisition (479,000)
-----------
Liabilities assumed $ 1,803,957
===========
The following unaudited pro forma summary presents the consolidated results of
operations of the Company for the year ended June 30, 1997, as if the
acquisition had occurred on July 1, 1996:
Revenue $ 7,903,669
Net loss (3,370,633)
Net loss per share (29.60)
The unaudited proforma assumes the amortization of excess cost over fair value
of net assets acquired over 20 years ($48,552 per year).
(b) On September 22, 1997, the Company acquired the common stock of LPS
Acquisition Corp. ("LPS") for 33,750 shares of the Company's common stock,
valued at $1,298,700 (current market value). The LPS shareholders were related
parties to the Company.
On August 11, 1997, the LPS shareholders had purchased the net assets from
Kedec, Inc. (debtor in procession) through the bankruptcy court for $190,000 and
the assumption of $750,000 in debt, the $940,000 shown in the below schedule.
The transaction also included the assumption of the new company's liabilities,
including the above mentioned $190,000. The $326,000 of additional liabilities
assumed were fees to related parties.
F-13
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition, the Company issued an option (subsequently exercised) to purchase
11,363 shares of common stock at $14.00 per share, for a value of $278,154
(excess of market value over option price) to consultants as payment for fees.
These fees have been expensed.
The transaction was recorded at the predecessor's cost (LPS) as follows:
Fair value of assets acquired $ 455,000
Excess cost over net assets acquired by
LPS shareholders (purchased goodwill) 485,000
------------
940,000
Fees to related parties 326,000
------------
Liabilities assumed $ 1,266,000
============
Market value of initial acquisition shares
to LPS shareholders $ 1,298,700
Fees 278,154
------------
Market value of stock issued $ 1,576,854
============
The following unaudited summary results of operations of LPS for the period
September 1, 1997 to May 31, 1998 are as follows:
Revenue $ 1,729,928
Net loss (791,658)
Included in the net loss is the amortization of excess cost over fair value
of net assets acquired over 20 years ($18,188 for fiscal year 1998).
In addition, in connection with the acquisition of LPS, on September 25, 1997,
the Company issued $750,000 of preferred shares to the prior owner of Kedec,
Inc., the predecessor company, for his assumption of notes payable to financial
institutions. The Company issued 9,375 shares of Series F cumulative
non-participating preferred stock with a stated capital of $10.00 per share. The
Series F preferred shareholder received approximately $ 28,400 in annual
dividends during fiscal year 1998. These shares were retired in connection with
the disposition of LPS in May 1998.
F-14
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(c) On June 29, 1998 (effective for accounting purposes on May 31, 1998), the
Company sold the stock of LPS to American Group, Inc. ("AGI") for 1,200,000
shares of AGI stock (23.8% of the outstanding shares), and the return and
cancellation of 9,375 shares of the Company's Series F preferred stock. Included
in the agreement the Company guaranteed a note payable for $125,000, and
committed, at the Company's option, to invest $500,000 in AGI. Subsequent to
year end, the Company completed lease negotiations on four leases for equipment
with monthly rentals totaling approximately $6,275. The Company intends to
transfer the leases to AGI. Since the Company has continuing involvement in AGI,
and AGI has no other significant operations, no gain has been recorded. Due to
losses during the period, the value of the equity is zero. The loss on
discontinued operations is composed of the following:
Excess liabilities over assets
assumed by AGI $ 530,413
Fees to related parties (326,000)
Write off stock issued in transaction (1,576,854)
---------------
Loss on disposal (1,372,441)
Current year loss (791,658)
---------------
Loss on discontinued operations $ (2,164,099)
===============
Because the business was sold during the current fiscal year, the operations are
shown on the consolidated financial statements as discontinued operations.
In summary, the net cash contribution for the above two transactions was zero.
(d) On September 1,1997, the Company acquired the common stock of Apollo Pipe
and Valve, Inc. ("Apollo"). The purchase price consisted of $18,000 cash, a
promise of 3,125 shares of the Company's common stock (which were not issued
during the year), and a note payable for $82,000.
Apollo was operated by the Company for three months, and due to operating
difficulties, operations ceased in January 1998. On July 27, 1998 subsequent to
year-end the assets of Apollo were sold back to the original seller for a note
receivable of $50,000. The Company also issued 781 shares of stock in lieu of
the original purchase transaction 3,125 shares.
Proforma results of operations, as if the purchase had occurred on July 1,1997,
would not have been materially different from historical results.
The Apollo transaction was accounted for by the purchase method, and
accordingly, the results of operations of the acquired business have been
included in the accompanying consolidated financial statements from the dates
the Company assumed operational control of the acquired entity. The sale of
Apollo has been included on the accompanying Consolidated Statement of
Operations as a loss on disposal of subsidiaries as if it had occurred on June
30, 1998.
F-15
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(e) On March 31, 1998, the Company sold the stock of American Industrial
Management, Inc. ("AIM") for the assumption of approximately $100,000 of
liabilities by the purchaser. AIM was a provider of industrial personnel for
light manufacturing and assembly line operations and had been acquired in
February 1996 for common stock of the Company.
Pro forma results of operations, as if the sale had occurred on July 1,1997,
would not have been materially different from historical results.
The sale of AIM has been included on the accompanying Consolidated Statement of
Operations as a loss on disposal of subsidiaries.
4. INVENTORY
Inventory as of June 30, 1998 consisted of the following:
Finished goods $ 549,724
Raw materials 521,416
------------
Total $ 1,071,140
============
Non-current inventory of $333,307 is listed as fabrication supplies and other
assets on the accompanying consolidated balance sheet. Included in cost of sales
for the year ended June 30, 1998, is a write off of approximately $477,052 for
obsolete inventory related to the inventory held in inactive subsidiaries.
5. PREPAID CONSULTING EXPENSES
In connection with a five year consulting agreement with an investment banking
firm, the Company capitalized $531,316 in consulting expenses in fiscal 1997.
The current portion at June 30, 1998, and 1997 was $141,667. The balance of
prepaid consulting fees, $354,232, are included as a non-current asset at June
30,1998.
F-16
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. GOODWILL
Goodwill as of June 30, 1998 consisted of the following:
Goodwill $1,655,629
Less: Accumulated amortization 263,905
----------
$1,391,724
==========
Amortization expense was $163,689 and $91,192, for the years ended June 30,
1998, and 1997, respectively.
At June 30, 1998, the Company reviewed a subidiary's goodwill for impairment and
provided for a charge of $653,738.
7. Long-Term Debt
Long-term debt as of June 30, 1998 consisted of the following:
<TABLE>
<S> <C>
First mortgage payable to individuals, interest at
7.75%, principal and interest of $6,300 due monthly
through July 2003, secured by land and building $ 275,910
Notespayable to a bank and credit corporations, interest ranging from
7.75% to 10.94%, principal and interest payments of $7,119 due
monthly through May 2001, secured by
automobiles and equipment 45,963
Demand note payable to a director and his wife,
interest at 7.4%, unsecured 125,000
Capital leases payable, interest ranging from 9% to 20.1%, principal
and interest payments of $10,565 due monthly through October 2002,
secured by production, telephone
and computer equipment 271,107
-----------
717,980
Less current portion 322,655
-----------
$ 395,325
===========
</TABLE>
F-17
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Maturities of long-term debt are as follows:
Year ending June 30,
1999 $ 322,655
2000 161,783
2001 115,983
2002 109,241
2003 8,318
------------
$ 717,980
============
The following property, plant and equipment are included under capital leases:
Machinery and equipment $ 487,024
Less accumulated depreciation 56,267
------------
$ 430,757
============
Factoring Line of Credit
A subsidiary of the Company maintains a factoring agreement, based upon eligible
accounts receivable, providing for up to $750,000 in a line of credit. Factoring
fees are 2.77% of eligible receivables. Interest is at prime plus 3%. The
advances are collateralized by all assets of the subsidiary. At June 30, 1998,
approximately $414,098 was still available for borrowing. The Company paid
$121,294 interest and charges during the year on the line.
Operating Leases
The Company leases office and warehouse space and office equipment under
operating leases that expire at various times through fiscal year 2002. Rental
expense under these operating leases for the years ended June 30, 1998 and 1997,
was approximately $ 263,852 and $ 114,000, respectively. 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 $30,000
and $30,000 for the years ended June 30, 1998, and 1997, respectively.
Approximate minimum future lease payments under these operating leases at June
30, 1998, are as follows:
Years ended June 30:
1999 $ 263,458
2000 266,209
2001 261,169
2002 37,938
F-18
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. PREFERRED STOCK
The Company is authorized to issue 250,000 shares of preferred stock, par value
$.008 per share, issuable in such series and bearing such voting, dividend,
conversion, liquidation and rights and preferences as the Board of Directors may
determine.
(a) Five Percent Convertible Preferred Stock
On January 16, 1998, the Company sold 219 shares of 5% convertible preferred
stock (no series), par value $.008, to ProFutures Special Equities Fund, L.P.
("ProFutures"), an unaffiliated party, in a private transaction at $1,000 per
share. The Company received $1,250,000 and issued 156 shares of the preferred
stock. In connection with this transaction, the Company incurred $175,000 of
expenses. See below as to the additional 63 shares.
The Company agreed to register the shares of common stock underlying the
preferred shares. When the registration becomes effective, ProFutures has agreed
to purchase an additional 94 shares of preferred stock at $1,000 per share. If
the registration statement is not effective within 121 days from the closing
date, the Company is subject to a penalty of 2% of the purchase price per month
($25,000) until the effective date of the registration.
The ability of ProFutures to convert the shares of preferred stock was limited
to a conversion of 75,630 shares of common stock at June 30, 1998, being a
maximum of 19.95% of the Company's currently issued and outstanding common
stock, until such time as the Company's shareholders have approved the issuance
of the registerable securities. Proceeds of $500,000 of the purchase price and a
certificate for 63 shares of preferred stock were deposited in an escrow
account pending such approval. On March 31, 1998, the Company and ProFutures
agreed to extend the time allowed for registration to June 30, 1998, and in
return ProFutures was granted 31,250 warrants to purchase the Company's common
stock at $36.00 per share and all penalties due were waived.
As of June 30, 1998, the Company had not completed the registration and the
$500,000 was returned to ProFutures and the 63 shares of preferred stock were
returned to the Company. Penalties commenced on July 1, 1998. The Company plans
to register the common stock and complete the transaction; however, there is no
assurance that the issuance will gain shareholder approval. At June 30, 1998,
dividends totaling $28,646 are due on the 5% convertible preferred stock.
F-19
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(b) Series A
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 $.008 per share, (iv) payment of dividends is 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
cessation of operations, 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. For the fiscal year
1998 and 1997 no dividends were declared by the Company's Board of Directors.
(c) Series C
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 cessation of operations 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. For the fiscal year 1998 and 1997 no dividends were
declared by the Company's Board of Directors.
(d) Series E
On October 7, 1997, the Company converted a note payable to stockholder to
14,375 shares of Series E cumulative non-participating preferred stock. The
designations, rights and preferences of the Series E Preferred Stock provides
that (i) holders shall receive annual dividends equal to $77,000, (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 the Company having general
voting power with the common stock concerning any matter being voted upon by the
Company's stockholders, (iii) 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. At June 30, 1998 approximately $19,250 was due in dividends to the
Series E shareholder.
F-20
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. COMMON STOCK
The Company resolved, for all issued and outstanding shares of common stock held
by stockholders of record on April 3, 1997, the shares 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 3,125,000 shares of common stock, par value $.008 per share.
The components of stockholders' equity, all shares and per share amounts have
been retroactively adjusted to reflect the reverse stock split.
During the year ended June 30, 1997, the Company issued 8,972 shares of 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.
During April 1997, the Company entered into a five year agreement for consulting
services. In connection therewith, the Company granted 62,500 stock options,
exercisable at $8.00 per share. One third of the options were treated as a
retainer for the services to be rendered over the term of the agreement and the
remaining two thirds were considered to be transactional options, which serve as
compensation due upon the consummation of acquisitions during the term of the
agreement. The retainer options are to be earned equally over the term of the
agreement. The transactional options are earned based on the acquisitions
concluded during the term of the agreement. If the agreement is terminated prior
to the termination date, or if no acquisitions occur, any unearned options will
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 $141,000 and $35,000 was expensed during the years ended
June 30, 1998 and 1997, respectively. The remaining $1,417,000 ascribed to the
transaction options were recorded as stock to be earned. The remaining balance
is reflected in equity and will be amortized in the future.
During April 1997, the 62,500 options were exercised and the Company received
$500,000.
In addition, during April 1997, the Company entered into a one-year agreement
for consulting services. In connection with this agreement, the Company granted
3,125 stock options exercisable at $20.00 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, 640 options were exercised. At June
30, 1998, unexercised options totaled 2,485.
During October 1997, the Company repurchased 38,111 shares of common stock from
the former majority shareholder for $76,223.
F-21
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal year 1998, the Company issued 75,738 shares of common stock
valued at market totaling $2,851,854 in connection with an acquisition and to
consultants in connection with the acquisitions of certain companies.
During July 1997, the Company entered into a six year consulting agreement to
provide certain marketing services. As compensation for the services, the
Company granted a one-year option to purchase 32,750 shares of common stock at
$1.00 per share. The stock options were valued at $966,780, the excess of market
over the excercise price at the date of grant.
During the year ended June 30, 1998, the Company issued options for 60,376
shares of common stock at prices ranging from $8.00 to $16.00 per share, in
payment for marketing and consulting services. These options were valued at
market and totaled $1,389,204. See Note 10.
On February 3, 1999, the Company's Board of Directors approved a 1-for-8 reverse
split effective March 22, 1999. All common and preferred share data and per
share amounts have been adjusted retroactively to reflect this change.
10. STOCK OPTION PLAN
On October 17, 1997, the Company adopted the 1997 Stock Option Plan ("the
Plan"). Officers, directors, employees, and consultants of the Company and its
subsidiaries may be granted incentive stock options ("ISOs") and non-statutory
options ("NSOs"), both with reload provisions. Consultants may only be granted
NSOs. The Plan calls for up to 125,000 options to purchase 125,000 shares of
common stock. The Plan terminates on October 16, 2007, unless extended by the
Company. The option price per share shall be determined by the Board or the
Stock Option Committee at the time any option is granted and shall not be less
than (i) in the case of ISOs, the fair market value, (ii) in the case of an NSO,
not less than the par value thereof, as determined by the Board or Stock Option
Committee.
A summary of the employee incentive stock option activity under the 1997 Plan is
as follows:
<TABLE>
<CAPTION>
Stock Options Range Weighted Average
------------- ----- ----------------
<S> <C> <C> <C> <C>
Balance at July 1, 1997 - - -
Granted 25,938 $32.00 to $40.00 $ 36.00
Exercised - - -
Cancelled - - -
----------- ---------
Balance at June 30, 1998 25,938 $32.00 to $40.00 $ 36.00
=========== =========
</TABLE>
F-22
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the non-statutory stock option activity under the 1997 Plan is as
follows:
<TABLE>
<CAPTION>
Stock Options Range Weighted Average
------------- ----- ----------------
<S> <C> <C> <C> <C>
Balance at July 1, 1997 - - -
Granted 109,325 $0.00 to $16.00 $ 8.96
Exercised 96,513 $0.00 to $16.00 10.00
Cancelled - - -
----------- ----------
Balance at June 30, 1998 12,812 $0.00 to $16.00 $ 1.20
=========== ==========
</TABLE>
In accordance with APB 25 and related interpretations, no compensation expense
has been recognized for employee ISOs. With regard to NSOs, compensation
expense, representing the difference between the option price and the fair
market value on the date of grant, had been recognized. Possible compensation
costs for the Company's ISOs have been determined based upon the fair value at
the grant date consistent with the Black-Scholes methodology prescribed under
FAS 123.
The fair value of the ISO options under FAS 123 was estimated at the date of
grant with a Black-Scholes option pricing model using an estimated dividend
yield of 0%, an estimated volatility of 65%, a risk-free interest rate of 6%,
and an expected life of 10 years.
Had the Company utilized FAS 123 to expense its ISOs, the pro forma net loss for
the year ended June 30, 1998 would have been approximately $9,395,495, and the
net loss per common share would have been $28.72.
11. PREPAID MEDIA SPOTS
The Company has the right to utilize network and radio advertising, valued at
$500,000, through December 2000. The Company purchased the advertising by
issuing common stock. No advertising took place during the years ended June 30,
1998 and 1997. Accordingly, the $500,000 has been recorded as an offset to
equity.
12. OTHER RELATED PARTY TRANSACTIONS
From time to time, the Company borrowed funds from Yucatan Holding Company
("Yucatan"), the Company's former principal stockholder, for working capital
purposes. As of June 30, 1998, the Company owed Yucatan $151,824 on a demand
note bearing interest at 10%.
During the year ended June 30, 1998, the Company leased a facility from a
stockholder, at $3,400 per month. The lease expired on June 30, 1998 and is
presently on a month-to-month basis. Rent expense aggregated $40,800 for the
years ended June 30, 1998 and 1997.
F-23
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. INCOME TAXES
The Company files tax returns on a separate company basis.
At June 30, 1998, the Company had a Federal net operating loss carry forward of
approximately $11,300,000 that expires from 2011 through 2015. For financial
reporting purposes, a valuation allowance of $11,300,000 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 amount 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:
Deferred Tax Liabilities: June 30, June 30,
1998 1997
-------- --------
Tax greater than book
depreciation/tax basis $ 90,000 $ 130,000
Less: valuation allowance (90,000) -
------------- -----------
$ - $ 130,000
============= ===========
Deferred Tax Assets:
Net operating loss carryforwards $ 11,300,000 $ 2,400,000
Less: valuation allowance (11,300,000) (2,400,000)
------------ -----------
$ - $ -
============ ===========
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:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------------- -------------
<S> <C> <C>
Income tax credit at statutory Federal rate $ (3,842,000) $ (1,030,000)
============ ===========
Limit on recognition of deferred tax asset
due to valuation allowance (3,842,000) (1,030,000)
Adjustment for prior year's estimate (59,030) (72,399)
Change in deferred tax liability (130,000) (61,000)
Change in deferred tax asset - -
Current year payable - -
Other taxes 8,280 -
------------ -----------
$ (180,750) $ (133,399)
============ ===========
</TABLE>
F-24
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, June 30,
1998 1997
------------ -----------
Federal statutory tax rate 34.0% 34.0%
Increase of valuation allowance and other (36.0%) (38.4%)
------- -------
Effective tax rate (2.0%) (4.4%)
------ ------
14. BUSINESS SEGMENTS
<TABLE>
<CAPTION>
Manufac- Consumer
turing Staffing Products Corporate Total
-------------- -------- --------- --------- -------
Revenues:
<S> <C> <C> <C> <C> <C> <C>
1998 $ 6,879,235 $ 990,746 $ - $ - $ 7,869,981
1997 $ 3,564,133 $ 1,033,433 $ 55,420 $ - $ 4,653,286
Operating income (loss)
1998 $ (446,607) $ (38,003) $ - $ (5,573,891) $(6,058,501)
1997 $ (114,814) $ (168,034) $ (245,228) $ (966,687) $(1,494,763)
Identifiable assets
1998 $ 6,733,280 $ 4,852 $ - $ 636,988 $ 7,375,120
1997 $ 8,587,030 $ 87,874 $ 956,998 $ 37,270 $ 9,669,172
Depreciation and amortization
1998 $ 370,435 $ 226 $ - $ 31,607 $ 402,268
1997 $ 277,322 $ 2,255 $ 1,274 $ 1,547 $ 282,398
Capital expenditures
1998 $ 85,961 $ - $ - $14,510 $ 100,471
1997 $235,867 $ 2,627 $ 2,915 $ 8,225 $ 249,634
</TABLE>
During fiscal year 1998, business in the consumer product segment is included in
discontinued operations. Furthermore, during the fiscal year 1998, the Company
sold a subsidiary in the staffing segment and combined another subsidiary in the
staffing segment with its manufacturing segment.
F-25
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Cash paid (received) for:
Year Year
Ended Ended
June 30, 1998 June 30, 1997
-------------- -------------
Interest $ 242,067 $ 68,797
Income taxes $ - $ -
Supplemental Disclosures of Non-Cash Investing and Financing Activities
In September 1998, the Company acquired all the common stock of LPS Acquisition
Corp. ("LPS"). The Company purchased all the stock of LPS for 33,750 shares of
the Company's voting common stock totaling $1,298,700. The Company issued an
option to purchase 11,363 shares of common stock at $14.00 per share, for a
value of $278,154 (excess of market value over option price) to consultants as
payment for acquisition fees. Such non cash transactions as they relate to LPS
are included in discontinued operations.
During the year ended June 30, 1998, the Company issued 32,750 shares of common
stock in connection with certain marketing services valued at $966,780 which
amount was written off to marketing and public relations of goodwill in the
current fiscal year, issued 30,625 shares of common stock in connection with
the disposition of LPS, and issued 60,375 shares of common stock in payment of
marketing and consulting services. The total value of the stock issued was
$2,434,850. In addition, a note payable of $1,150,019 was converted to 14,375
shares of preferred stock in a non-cash transaction.
During the year ended June 30, 1997, the Company issued 13,750 shares of common
stock and 4,375 shares to consultants as payment for acquisition costs valued
at approximately $423,000 in connection with the purchase of FSI; issued 8,972
shares of common stock valued at approximately $781,000 and 65,625 stock
options valued at approximately $2,180,000 in connection with employment and
consulting agreements and startup expenses in transactions not affecting cash
flows.
16. OTHER EXPENSES
Acquisition expenses totaling $110,000 have been charged to expense for the year
ended June 30, 1997 and represent the value of 1,146 shares of common stock paid
to certain consultant 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-26
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Start-up 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
product division, PTP. The remaining $363,210 was incurred during the start-up
and development of a product line for one of the Company's subsidiaries.
17. CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank accounts, which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts, and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
18. COMMITMENTS AND CONTINGENCIES
Effective July 1, 1997 and as amended on November 1, 1997, the Company entered
into a Management Contract ("Contract") with its Chairman and President for a
three-year period.. As part of the Contract, incentive stock options were
granted. See Note 10. Further the contract granted anti-dilutive rights
providing that the Chairman and President may maintain his percentage of
ownership, as of the date of the Contract, should any additional stock be issued
during the year ended June 30, 1998. Subsequent to year-end, the Chairman and
President exercised his anti-dilutive rights.
F-27
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effective May 1, 1998, the Company entered into an Employment Agreement
("Agreement") with the president of a subsidiary located in Knoxville, TN, and a
director of the Company ("the Employee") for a three-year term. A signing bonus
of 12,500 stock options (NSOs) was granted. The NSO's were granted at an option
price of $.80 per share. Accordingly, $216,775 of compensation expense and
$394,625 of deferred compensation expense were recorded. See Note 11. As part of
the Agreement, certain anti-dilutive rights were granted in a percentage equal
to the ownership percentage of the Employee as of June 8, 1998. No exercise of
the anti-dilutive rights has occurred. Further, the Company agreed that in the
event of bankruptcy, reorganization, change of control, de-listing in NASDAQ, or
the expiration of the Agreement without renewal, that the Company will purchase
and redeem 15,741 shares of common stock of the Company for $750,000, or the
fair market value of the stock, whichever is greater. Alternatively, the
Employee may elect to transfer 15,741 shares of his Company stock in return for
the previously outstanding stock of Industrial Fabrication & Repair, Inc., a
wholly-owned subsidiary of the Company. See Note 1. Additionally, the Employee
was granted an option to acquire real property and improvements located in
Knoxville, TN in exchange for the Employee's assumption of all liabilities
related to the real property and improvements and $200,000 payable in either
cash, a note to be negotiated in the future, or an equivalent number of Coventry
shares at 90% of bid price for the five day average prior to closing.
19. FOURTH QUARTER ADJUSTMENTS
Year-end adjustments made in the fourth quarter of 1998 had the effect of
increasing the net loss for the quarter by approximately $6,300,000. The
adjustments related principally to the issuance of common stock in various
transactions, adjusting the carrying amounts of certain assets for impairment,
and inventory valuations associated with prior quarters of the year ended June
30, 1998.
20. SUBSEQUENT EVENTS
During September 1998, the Company entered into an exchange agreement ("Exchange
Agreement") with BSD Healthcare Industries, Inc. and its wholly owned
subsidiaries (collectively known as "BSD") and People First, L.L.C. ("PF"). BSD
operates a respiratory therapy and respiratory therapy management business and
PF is in the process of becoming an employee leasing company. According to the
Exchange Agreement, the Company will issue 80.1% of the issued and outstanding
common stock of the Company for 100% of BSD and its subsidiaries and 100% of the
membership interests in PF. The Company, BSD and PF are in the process of due
diligence, and there is no assurance that the transaction will take place. The
Company and/or BDS and PF may terminate the agreement during the 60-day due
diligence period.
Subsequent to year-end, the Chairman and President of the Company loaned the
Company an aggregate of $120,000 through two, one year notes. The notes bear
interest at 10 %. The monies have been used as working capital.
F-28
<PAGE>
COVENTRY INDUSTRIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND JUNE 30, 1998
<TABLE>
<CAPTION>
March June
ASSETS 31, 1999 30, 1998
------------ ------------
(Unaudited) (See Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 492,464 $ 52,188
Accounts receivable, net of allowance for doubtful accounts
of $80,986 and $50,000 1,989,278 1,196,993
Inventory 945,305 1,071,140
Other current assets 272,583 198,255
------------ ------------
Total current assets 3,699,630 2,518,576
Property, plant and equipment, net of accumulated depreciation 2,705,200 2,762,667
Goodwill, net of accumulated amortization 2,284,266 1,391,724
Other assets 672,528 702,153
------------ ------------
Totals $ 9,361,624 $ 7,375,120
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,523,121 $ 1,574,136
Current portion of long-term debt 285,321 322,655
8% convertible and nonconvertible notes payable 900,000
Note payable to former stockholder 175,000 151,824
Noninterest bearing demand note payable to stockholder 382,000
Other short-term notes payable 496,544 335,902
------------ ------------
Total current liabilities 3,761,986 2,384,517
Long-term debt, net of current portion 1,650,202 395,325
Minority interest 63,537
------------ ------------
Total liabilities 5,475,725 2,779,842
------------ ------------
Stockholders' equity:
Series A preferred stock, $.008 par value; 4 shares authorized,
issued and outstanding -- --
Series C preferred stock, $.008 par value; 3,750 shares
authorized; 3,750 shares issued and outstanding (1998) -- 30
Series E preferred stock, $.008 par value; 14,375 shares
authorized; 6,875 and 14,375 shares issued and outstanding 55 115
5% convertible preferred stock, $.008 par value; 313 shares
authorized; 156 shares issued and outstanding (1998) -- 1
Common stock, $.008 par value; 3,125,000 shares authorized;
1,090,548 and 379,100 shares issued and outstanding 8,724 3,033
Additional paid-in capital 22,780,418 21,398,987
Unearned compensation and advertising fees (2,211,292) (2,311,292)
Accumulated deficit (16,692,006) (14,495,596)
------------ ------------
Total stockholders' equity 3,885,899 4,595,278
------------ ------------
Totals $ 9,361,624 $ 7,375,120
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Share data have been adjusted for the 1-for-8 reverse stock split on March 22,
1999.
F-29
<PAGE>
COVENTRY INDUSTRIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
Nine Months
Ended March 31,
---------------------------
1999 1998
----------- -----------
Revenues $ 6,413,195 $ 5,763,172
Cost of revenues 4,463,353 4,039,087
----------- -----------
Gross profit 1,949,842 1,724,085
----------- -----------
Selling, general and administrative
expenses 3,333,120 1,571,222
Professional fees 239,413 747,471
Depreciation and amortization 309,055 261,412
----------- -----------
Totals 3,881,588 2,580,105
----------- -----------
Operating loss (1,931,746) (856,020)
----------- -----------
Other income (expense):
Interest (235,127) (86,891)
Loss applicable to minority
interest 59,463
Other 6,847
----------- -----------
Totals (175,664) (80,044)
----------- -----------
Loss from continuing operations (2,107,410) (936,064)
Loss from discontinued operations (1,166,361)
----------- -----------
Net loss (2,107,410) (2,102,425)
Dividends on preferred stock 89,000
----------- -----------
Net loss applicable to common stock $(2,196,410) $(2,102,425)
=========== ===========
Basic loss per common share:
Basic loss from continuing
operations $ (3.63) $ (3.31)
Loss from discontinued operations (4.12)
----------- -----------
Net loss per common share $ (3.63) $ (7.43)
=========== ===========
Weighted average common shares
outstanding 604,952 283,035
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
Share data have been adjusted for the 1-for-8 reverse stock split on March 22,
1999.
F-30
<PAGE>
COVENTRY INDUSTRIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock
Series A Series C Series E 5% Convertible
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1998 4 $ - 3,750 $30 14,375 $115 156 $1
Common stock issued
for:
Purchase business
combination
Conversion of Series
E preferred stock (7,500) (60)
Professional and
other services, em-
ployee compensa-
tion and other ex-
penses
Common stock and
warrants sold
through private
placement
Repurchase of preferred
stock (3,750) (30) (156) (1)
Dividends declared
Net loss
----- ---- -------- ----- ------- ------ ------ -----
Balance, March 31,
1999 4 $ - - $ - 6,875 $ 55 - $-
===== ==== ======== ===== ======= ====== ====== =====
Unearned
Compensa-
Additional tion and
Common Stock Paid-in Advertising Accumulated
Shares Amount Capital Fees Deficit Total
------ ------ ------- ---- ------- -----
Balance, July 1, 1998 379,100 $3,033 $21,398,987 $(2,311,292) $(14,495,596) $4,595,278
Common stock issued
for:
Purchase business
combination 118,250 946 876,804 877,750
Conversion of Series
E preferred stock 75,000 600 (540)
Professional and
other services, em-
ployee compensa-
tion and other ex-
penses 236,948 1,895 1,322,316 100,000 1,424,211
Common stock and
warrants sold
through private
placement 250,000 2,000 822,981 824,981
Repurchase of preferred
stock 31,250 250 (1,640,130) (1,639,911)
Dividends declared (89,000) (89,000)
Net loss (2,107,410) (2,107,410)
--------- ------ ----------- ---------- ------------ ----------
Balance, March 31,
1999 1,090,548 $8,724 $22,780,418 $(2,211,292) $(16,692,006) $3,885,899
========= ====== =========== =========== ============ ==========
</TABLE>
See Notes to Consolidated Financial Statements.
Share data have been adjusted for the 1-for-8 reverse stock split on March 22,
1999.
F-31
<PAGE>
COVENTRY INDUSTRIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(2,107,410) $(2,102,425)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 203,296 186,967
Amortization 105,759 74,445
Common stock issued for services, compensation and
other expenses 1,424,211 191,904
Reserve for bad debts 30,986
Loss applicable to minority interest 59,463
Changes in operating assets and liabilities, net of effects of
purchased businesses:
Accounts receivable 1,030,472 (108,552)
Inventory 160,282 114,169
Other current assets (53,799) (238,010)
Other assets 34,007 (111,252)
Accounts payable and accrued expenses (456,003) 637,469
----------- -----------
Net cash provided by (used in) operating activities 431,264 (1,355,285)
----------- -----------
Investing activities:
Purchase of property and equipment (34,184) (114,620)
Purchases of businesses, net of cash received (2,636) (11,154)
----------- -----------
Net cash used in investing activities (36,820) (125,774)
----------- -----------
Financing activities:
Net repayments of short-term borrowings (163,611) (290,866)
Proceeds from note payable to stockholder 302,000
Payments on note payable to stockholder (20,000)
Repayments of long-term borrowings (282,457)
Cash paid in connection with redemption of preferred
stock (614,991)
Issuance of common stock and warrants 824,891 1,452,636
----------- -----------
Net cash provided by financing activities 45,832 1,161,770
----------- -----------
Increase (decrease) in cash and cash equivalents 440,276 (319,289)
Cash and cash equivalents, beginning of period 52,188 335,321
----------- -----------
Cash and cash equivalents, end of period $ 492,464 $ 16,032
=========== ===========
Supplemental disclosure of cash flow data:
Interest paid $ 235,127 $ 131,913
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-32
<PAGE>
COVENTRY INDUSTRIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Unaudited interim financial statements:
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring accruals, necessary
to present fairly the financial position of Coventry Industries
Corp. and its subsidiaries (collectively, the "Company") as of
March 31, 1999 and its results of operations and cash flows for
the nine months ended March 31, 1999 and 1998 and changes in
stockholders' equity for the nine months ended March 31, 1999.
Certain terms used herein are defined in the audited
consolidated financial statements of the Company as of June 30,
1998 and for the years ended June 30, 1998 and 1997 (the
"Audited Financial Statements") included elsewhere herein.
Pursuant to rules and regulations of the United States
Securities and Exchange Commission (the "SEC"), certain
information and disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from these
consolidated financial statements unless significant changes
have taken place since the end of the most recent fiscal year.
Accordingly, these unaudited condensed consolidated financial
statements should be read in conjunction with the Audited
Financial Statements and the other information also included
elsewhere herein.
The results of the Company's operations for the nine months
ended March 31, 1999 are not necessarily indicative of the
results of operations for the full year ending June 30, 1999.
Note 2 - Earnings (loss) per common share:
As further explained in Note 1 to the Audited Financial
Statements, the Company presents basic and, if appropriate,
diluted earnings (loss) per share in accordance with the
provisions of Statement of Financial Accounting Standards No.
128, Earnings per Share ("FAS 128"). Diluted per share amounts
have not been presented in the accompanying unaudited condensed
consolidated statements of operations because the Company had a
net loss for the nine months ended March 31, 1999 and
1998 and, accordingly, the assumed effects of the conversion of
all of the Company's outstanding shares of 5% convertible
preferred stock and the exercise of all of the Company's
outstanding stock options and the application of the treasury
stock method would have been anti-dilutive.
On March 22, 1999, the Company effected a 1-for-8 reverse split
of its common stock. All preferred and common share and per
share amounts (including the par value of each class of capital
stock) in the accompanying unaudited condensed consolidated
financial statements and these notes have been adjusted for the
effects of the reverse split.
F-33
<PAGE>
COVENTRY INDUSTRIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Purchase business combination:
On December 7, 1998, the Company consummated an agreement
whereby it acquired 80.1% of the issued and outstanding shares
of common stock of BSD Healthcare Industries, Inc. ("BSD") in
exchange for 118,250 shares of the Company's common stock (or
approximately 19.9% of its then outstanding common shares). BSD
was incorporated in 1989 as a "blind pool" or blank check"
company for the purpose of either merging with or acquiring an
operating company. BSD did not conduct any operations of a
commercial nature or have any significant activities until
February 1, 1998 when it acquired 100% of the common stock of
two commonly-controlled companies, Respiratory Care Services,
Inc. ("RCSI") and RCS Subacute, Inc. ("Subacute"). BSD is a
holding company. RCSI, which was incorporated on July 1, 1988,
provides quality respiratory therapy staff in a variety of
health care settings. Subacute, which was incorporated on
October 19, 1995, provides credentialed, licensed therapists
experienced in all phases of skilled and subacute respiratory
care. These services are provided primarily to Medicare
patients.
The Company has accounted for the acquisition of its 80.1%
interest in BSD pursuant to the purchase method of accounting
and, accordingly, the accompanying historical condensed
consolidated financial statements include the results of
operations of BSD and its subsidiaries from December 7, 1998,
the date of acquisition. The cost of the acquisition of BSD and
its subsidiaries was $877,750, of which $827,750 is the
estimated fair value of the 118,250 shares of common stock
issued by the Company to the former stockholders of BSD at the
date of acquisition and the balance of $50,000 is the
approximate amount of the Company's cash payments for legal,
accounting and other costs related to the purchase.
The cost of acquiring BSD and its subsidiaries, which exceeded
the fair value of the net assets acquired by $1,036,809, was
allocated as follows:
Cash and cash equivalents $ 47,364
Accounts receivable 1,853,746
Goodwill 1,036,809
Other current and noncurrent assets 111,267
Long-term debt (1,500,000)
Line of credit and other current liabilities (548,436)
Minority interest in subsidiaries of BSD (123,000)
-----------
Total cost of acquisition $ 877,750
===========
F-34
<PAGE>
COVENTRY INDUSTRIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Purchase business combination (concluded):
The following unaudited pro forma information (in thousands,
except per share amounts) shows the results of continuing
operations for the nine months ended March 31, 1999 and 1998 as
though the acquisition of BSD and its subsidiaries had been
consummated on July 1, 1997:
<TABLE>
<CAPTION>
Nine Months
Ended March 31,
----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues $ 7,954,940 $ 8,538,313
Cost of revenues 5,650,318 6,175,624
------------ ------------
Gross profit 2,304,622 2,362,689
Other expenses 4,785,547 3,971,080
------------ ------------
Loss from continuing operations (2,480,925) (1,608,391)
Dividends on preferred stock 89,000
------------ ------------
Loss from continuing operations
applicable to common stock $(2,569,925) $(1,608,391)
=========== ===========
Basic loss from continuing operations
per common share $(3.83) $(4.01)
======= =======
Weighted average common
shares outstanding 671,657 401,285
======= =======
</TABLE>
In addition to combining the historical results of operations of
the Company and BSD and its subsidiaries for each period, the
unaudited pro forma results of operations include adjustments
primarily to reflect for the entire period (i) the amortization
of the goodwill recorded in connection with the acquisition of
RCS based on an estimated useful life of five years and (ii)
interest expense on a term loan obtained by BSD to finance the
acquisition of its subsidiaries. The unaudited pro forma results
of operations set forth above do not purport to represent what
the combined results of operations actually would have been if
the acquisition of BSD and its subsidiaries had been consummated
on July 1, 1997 instead of December 7, 1998 or what the results
of operations would be for any future periods.
Additional audited and unaudited historical financial statements
of BSD and its subsidiaries, including information with respect
to the short-term and long-term obligations of BSD acquired by
the Company, and unaudited pro forma information combining the
accounts of the Company and BSD and its subsidiaries is included
elsewhere herein. Accordingly, these unaudited condensed
consolidated financial statements should be read in conjunction
with the historical and pro forma financial statements and the
other information also included elsewhere herein in the Form 8-K.
F-35
<PAGE>
COVENTRY INDUSTRIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Private placement:
On March 10, 1999, the Company completed the sale, through a
private placement, of 1,000,000 units at $1.00 per unit whereby
it issued 250,000 shares of common stock, 1,000,000 Class A
warrants and 1,000,000 Class B warrants and received net proceeds
of $894,981. Each Class A and each Class B warrant will enable
the holder to purchase one share of common stock at $1.50 and
$1.75 per share, respectively, during the three year period from
the date of issuance.
Note 5 - Redemption of preferred stock:
On March 10, 1999, the Company redeemed all of the 1,250 shares
of 5% convertible preferred stock then outstanding in exchange
for total consideration with a fair value of $1,625,000 comprised
of (i) cash payments of $600,000, (ii) the issuance of 8%
convertible notes in the principal amount of $819,000 and an 8%
nonconvertible note payable in the principal amount of $81,000
(see Note 6) and (iii) the issuance of a total of 31,250 shares
of common stock with a fair value of $125,000 (or $4.00 per
share). As of the date of the redemption, the Company was
obligated to make cash payments of $1,625,000 to redeem the
shares at the option of the holder. The Company also incurred
costs of $14,911 in connection with the exchange. The issuances
of notes and common stock in connection with the redemption of
the preferred stock were noncash transactions and, accordingly,
they are not reflected in the accompanying 1999 condensed
consolidated statement of cash flows. Accounts payable and
accrued expenses as of March 31, 1999 include $255,000 for the
payment of dividends and penalties accrued prior to the
redemption of the 5% convertible preferred stock.
Note 6 - 8% convertible and nonconvertible notes payable:
The 8% convertible and nonconvertible notes (collectively, the
"8% Notes") are payable at any time upon demand by the holders.
The Company may not repay the notes prior to February 15, 2000
other than upon demand by a holder. The convertible notes become
convertible into shares of common stock on April 1, 2000 as
follows: (i) notes in the principal amount of $273,000 can be
converted at $.91 per share into a total of 300,000 common
shares; and (ii) notes in the principal amount of $546,000 can be
converted at $1.36 per share into a total of 401,471 common
shares.
F-36
<PAGE>
COVENTRY INDUSTRIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Discontinued operations:
As further explained in Note 3 of the notes to the Company's
Audited Financial Statements, (i) on June 29, 1998, the Company
completed the sale of all of the stock of LPS Acquisition Corp.
("LPS"), a distributor of high quality custom soil mixes to
wholesale nurseries, which had been acquired in September 1997,
and (ii) on March 31, 1998, the Company sold all of the
outstanding shares of common stock of American Industrial
Management, Inc. ("AIM"), a provider of industrial personnel for
light manufacturing and assembly line operations, which had been
acquired in February 1996. Accordingly, the results of operations
of LPS and AIM have been reflected in the accompanying condensed
consolidated statements of operations as discontinued operations.
Note 8 - Income taxes:
As of June 30, 1998, the Company had net operating loss
carryforwards of approximately $11,300,000 available to reduce
future Federal taxable income which, if not used, will expire at
various dates through 2015 (see Note 13 in the Company's Audited
Financial Statements). As a result of uncertainties related to
the extent and timing of the Company's future taxable income, the
Company has established valuation allowances equal to the
potential benefits from such net operating loss carryforwards and
the additional amounts arising from the loss incurred for the
nine months ended March 31, 1999. Accordingly, the
accompanying condensed consolidated statements of operations do
not include income tax credits for any of the periods presented.
F-37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Directors and Stockholders
BSD Healthcare Industries, Inc.
We have audited the accompanying consolidated balance sheet of BSD HEALTHCARE
INDUSTRIES, INC. as of December 31, 1997. This consolidated financial statement
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement 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 combined balance sheet is 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 balance sheet referred to above presents
fairly, in all material respects, the financial position of BSD Healthcare
Industries, Inc. as of December 31, 1997, in conformity with generally accepted
accounting principles.
J.H. COHN LLP
Roseland, New Jersey
July 17, 1998, except for Note 8 as of
which the date is December 7, 1998
F-38
<PAGE>
BSD HEALTHCARE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
September December
ASSETS 30, 1998 31, 1997
------- ----------- --------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 96,976
Accounts receivable, net of allowance for doubtful accounts
of $203,765 1,419,552
Other current assets 157,443
-----------
Total current assets 1,673,971
Equipment, net of accumulated depreciation of $12,546 89,229
Goodwill, net of accumulated amortization of $237,314 1,542,544
-----------
Totals $3,305,744 $ --
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable to bank under revolving credit facility $ 282,079
Accounts payable 254,032
Accrued expenses and other liabilities 211,609
-----------
Total current liabilities 747,720
Notes payable to bank under term loan 1,500,000
-----------
Total liabilities 2,247,720
-----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued and outstanding
Common stock, $.001 par value; 50,000,000 shares
authorized; 1,751,005 and 1,000,000 shares issued
and outstanding 1,751 $ 1,000
Additional paid-in capital 867,884 9,000
Retained earnings (accumulated deficit) 188,389 (10,000)
----------- ------------
Total stockholders' equity 1,058,024 --
----------- ------------
Totals $3,305,744 $ --
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-39
<PAGE>
BSD HEALTHCARE INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
Revenue $2,993,952
Costs of revenue 1,419,267
----------
Gross profit 1,574,685
----------
Operating expenses:
Selling 108,508
General and administrative 742,984
----------
Total 851,492
----------
Operating income 723,193
----------
Other expenses:
Amortization of goodwill 237,314
Interest 110,169
Other 45,021
----------
Total 392,504
----------
Income before provision for income taxes 330,689
Provision for income taxes 132,300
----------
Net income $ 198,389
==========
Basic earnings per share $.13
====
Basic weighted average common shares outstanding 1,564,112
==========
See Notes to Consolidated Financial Statements.
F-40
<PAGE>
BSD HEALTHCARE INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Addi-
------------ tional
Number Paid-in Retained
of Shares Amount Capital Earnings Total
--------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 1,000,000 $1,000 $ 9,000 $(10,000) $ --
Effect of 1 for 14.5 reverse stock
split (931,034) (931) 931
Proceeds from issuance of
common stock 1,682,039 1,682 857,953 859,635
Net income 198,389 198,389
--------- ------ -------- -------- ----------
Balance, September 30, 1998 1,751,005 $1,751 $867,884 $188,389 $1,058,024
========= ====== ======== ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-41
<PAGE>
BSD HEALTHCARE INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
Operating activities:
Net income $ 198,389
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 12,546
Amortization of goodwill 237,314
Changes in operating assets and liabilities:
Accounts receivable (385,958)
Other current assets (132,670)
Accounts payable 63,858
Accrued expenses and other liabilities 148,254
----------
Net cash provided by operating activities 141,733
----------
Investing activities:
Purchase of businesses, net of cash acquired of $35,821 (2,361,416)
Purchases of equipment (14,055)
----------
Net cash used in investing activities (2,375,471)
----------
Financing activities:
Net repayments of short-term borrowings (28,921)
Proceeds from borrowings under term loan 1,500,000
Proceeds from issuance of common stock 859,635
----------
Net cash provided by financing activities 2,330,714
----------
Net increase in cash and cash equivalents 96,976
Cash and cash equivalents, beginning of period --
----------
Cash and cash equivalents, end of period $ 96,976
==========
Supplemental disclosure of cash flow data:
Interest paid $ 110,169
==========
See Notes to Consolidated Financial Statements.
F-42
<PAGE>
BSD HEALTHCARE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the
Nine Months then Ended is Unaudited)
Note 1 - History and organization of the Company:
BSD Healthcare Industries, Inc. ("BSD") was incorporated in
Florida as Park Avenue Marketing, Inc. on February 7, 1989 to
serve as a "blind pool" or "blank check" company for the purpose
of either merging with or acquiring an operating company. BSD was
initially capitalized by its founders who purchased 68,966 shares
of common stock for $10,000 (share and per share amounts have
been retroactively restated, where appropriate, to reflect a 200
for 1 stock split effected by the Company on June 24, 1997 and a
1 for 14.5 reverse stock split effected by the Company on
February 2, 1998).
BSD did not conduct any operations of a commercial nature or have
any significant activities until February 1, 1998 when it
acquired 100% of the common stock of two commonly-controlled
companies, Respiratory Care Services, Inc. ("RCSI") and RCS
Subacute, Inc. ("Subacute"). RCSI and Subacute are referred to
collectively herein as "RCS," and BSD, RCS and Subacute are
referred to collectively herein as the "Company." As further
explained in Note 3, BSD has accounted for the acquisition of its
100% interest in RCS pursuant to the purchase method of
accounting in its historical consolidated financial statements
effective from February 1, 1998. Accordingly, the Company has not
included any statements of operations, changes in stockholders'
equity and statements of cash flows for the years ended December
31, 1997 and 1996 in the accompanying consolidated financial
statements.
BSD is a holding company. RCSI, which was incorporated on July 1,
1988, provides quality respiratory therapy staff in a variety of
health care settings. Subacute, which was incorporated on October
19, 1995, provides credentialed, licensed therapists experienced
in all phases of skilled and subacute respiratory care. These
services are provided primarily to Medicare patients.
Note 2 - Summary of significant accounting policies:
Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of BSD and RCS and Subacute, its wholly-owned
subsidiaries, from February 1, 1998, the date they were
acquired. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Unaudited financial statements:
In the opinion of management, the accompanying unaudited
consolidated financial statements reflect all adjustments,
consisting of normal recurring accruals, necessary to present
fairly the financial position of the Company as of September
30, 1998 and its results of operations, changes in
stockholders' equity and cash flows for the nine months then
ended. The results of the Company's operations for the nine
months ended September 30, 1998 are not necessarily indicative
of the results of operations for the full year ending December
31, 1998.
F-43
<PAGE>
BSD HEALTHCARE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the
Nine Months then Ended is Unaudited)
Note 2 - Summary of significant accounting policies (concluded):
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could
differ from those estimates.
Revenue recognition:
The Company recognizes revenue at the time staffing services
are provided.
Cash equivalents:
Cash equivalents include all highly liquid investments with a
maturity of three months or less when acquired.
Equipment:
Equipment is carried at cost. Depreciation is provided using
the straight-line method over estimated useful lives ranging
from five to 14 years.
Goodwill:
Goodwill, which is comprised of costs in excess of net assets
of acquired businesses, is being amortized on a straight-line
basis over an estimated useful life of five years. The Company
periodically evaluates the recoverability of its intangible
assets and measures the amount of impairment, if any, by
assessing, among other things, the market and economic
conditions related to, and the current and estimated future
levels of income and cash flows to be generated by, the
acquired businesses.
Advertising:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations were not
material during the nine months ended September 30, 1998.
Income taxes:
The Company accounts for income taxes pursuant to the asset
and liability method which requires deferred income tax assets
and liabilities to be computed annually for temporary
differences between the financial statement and tax bases of
assets and liabilities that will results in taxable or
deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to
the amount expected to be realized. The income tax provision
or credit is the tax payable or refundable for the period plus
or minus the change during the period in deferred tax assets
and liabilities.
F-44
<PAGE>
BSD HEALTHCARE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the
Nine Months then Ended is Unaudited)
Note 2 - Summary of significant accounting policies (concluded):
Earnings per share:
The Company has presented "basic" earnings per share in the
accompanying consolidated statement of income for the nine
months ended September 30, 1998 in accordance with the
provisions of Statement of Financial Accounting Standards No.
128, Earnings per Share ("SFAS 128"). SFAS 128 also requires
the presentation of "diluted" earnings per share if the amount
differs from basic earnings per share. Basic earnings per
share is calculated by dividing net income by the weighted
average number of common shares outstanding during each
period. The calculation of diluted earnings per share is
similar to that of basic earnings per share, except that the
denominator is increased to include the number of additional
common shares that would have been outstanding if all
potentially dilutive common shares, such as those issuable
upon the exercise of stock options and warrants, were issued
during the period. The Company did not have any potentially
dilutive common shares outstanding during the nine months
ended September 30, 1998
Other recent accounting pronouncements:
The Financial Accounting Standards Board (the "FASB") has
issued Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"), which could require the Company to
make additional disclosures in its financial statements no
later than for the year ending December 31, 1999. SFAS 131
requires disclosures for each segment of a business and the
determination of segments based on its internal management
structure. Management is in the process of evaluating whether
SFAS 131 will require the Company to make any additional
disclosures.
The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("ACSEC") has issued
Statement of Position No. 98-1, Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use ("SOP
98-1"), which could require the Company to revise certain
accounting measurements and make additional disclosures in its
financial statements no later than for the year ending
December 31, 1999. SOP 98-1 defines internal use software and
modifies previous standards related to the capitalization,
amortization and write-off of costs related to the development
of such software. Management believes that the Company's
measurements and disclosures already substantially comply with
those required by SOP 98-1.
The FASB and ACSEC had issued certain other pronouncements as
of September 30, 1998 that will become effective in subsequent
periods; however, management does not believe that any of
those pronouncements will effect any financial accounting
measurements or disclosures the Company will be required to
make.
F-45
<PAGE>
BSD HEALTHCARE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the
Nine Months then Ended is Unaudited)
Note 3 - Acquisition of RCS:
The Company acquired its 100% interest in RCS on February 1, 1998
in exchange for total consideration of $2,397,237 which was paid
in cash. The acquisition has been accounted for pursuant to the
purchase method and, accordingly, the results of operations of
RCS have only been included in the accompanying consolidated
statement of income from February 1, 1998.
The cost of acquiring RCS, which exceeded the fair value of the
net assets acquired by $1,779,858, was allocated as follows:
Cash and cash equivalents $ 35,821
Accounts receivable 1,033,594
Goodwill 1,779,858
Other current and noncurrent assets 112,493
Short-term notes payable (311,000)
Other current liabilities (253,529)
----------
Total cost of acquisition $2,397,237
==========
The following unaudited pro forma information (in thousands of
dollars, except for share and per share amounts) shows the
results of operations for the nine months ended September 30,
1998 and the year ended December 31, 1997 as though the
acquisition of RCS had been consummated on January 1, 1997:
1998 1997
------ ------
Revenue $3,345 $4,488
Costs of revenue 1,600 2,394
------ ------
Gross profit 1,745 2,094
Other expenses, net 1,287 1,863
------ ------
Income before income taxes 458 231
Provision for income taxes 183 94
------ ------
Net income $ 275 $ 137
====== ======
Basic earnings per share $ .16 $ .08
====== ======
Weighted average shares outstanding 1,751,005 1,751,005
========= =========
F-46
<PAGE>
BSD HEALTHCARE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the
Nine Months then Ended is Unaudited)
Note 3 - Acquisition of RCS (concluded):
In addition to combining the historical results of operations of
BSD (which, as explained in Note 1, were not significant) and RCS
for each period, the unaudited pro forma results of operations
include adjustments to reflect for the entire period (i) the
amortization of the goodwill recorded in connection with the
acquisition of RCS based on an estimated useful life of five
years, (ii) interest expense on the term loan obtained by the
Company to finance the acquisition (see Note 4), and (iii)
provisions for income taxes at a 40% effective rate based on the
applicable statutory state and Federal income tax rates (no
provision had been made in the historical statements of
operations of RCS because RCSI and Subacute had elected to be
treated as "S" corporations).
The unaudited pro forma results of operations set forth above do
not purport to represent what the combined results of operations
actually would have been if the acquisition of RCS had been
consummated on January 1, 1997 instead of February 1, 1998 or
what the results of operations would be for any future periods.
Note 4 - Notes payable to bank:
During the nine months ended September 30, 1998, the Company
obtained a $2,000,000 revolving credit facility and a $1,500,000
term loan from a bank pursuant to which interest is payable
monthly at 2.5% above the prime rate (an effective rate of 10.75%
at September 30, 1998).
Borrowings under the revolving credit facility, which expires in
February 2000, are limited to 80% of the outstanding balance of
the Company's eligible accounts receivable and are secured by all
of its accounts receivable. Borrowings under the revolving credit
facility totaled $282,079 at September 30, 1998. Since such
borrowings are limited based on accounts receivable balances,
they are classified as a current liability in the accompanying
consolidated balance sheet.
The entire $1,500,000 balance of the term loan is payable in
February 2000 and, accordingly, is classified as a noncurrent
liability in the accompanying consolidated balance sheet.
Borrowings under the term loan are cross-collateralized by the
accounts receivable securing the revolving credit facility and
secured by all of the other available assets of the Company. They
are also collateralized by a pledge by an affiliated company to
contribute $500,000 to the Company's capital under certain
conditions.
F-47
<PAGE>
BSD HEALTHCARE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the
Nine Months then Ended is Unaudited)
Note 5 - Income taxes:
The provision for income taxes for the nine months ended
September 30, 1998 was comprised as follows:
Federal - current $112,400
State - current 19,900
--------
Total $132,300
========
A reconciliation of the Federal statutory income tax rate of 34%
to the effective rate for the provision for income taxes for the
nine months ended September 30, 1998 follows:
Provision at Federal statutory rate 34%
State income taxes, net of Federal income tax effect 6
--
Effective rate 40%
==
Note 6 - Commitments and contingencies:
Leases:
The Company has been utilizing its office space under
month-to-month and other short-term leases while it negotiates
a new lease with its landlord for additional space. Rent
expense charged to operations approximated $45,000 for the
nine months ended September 30, 1998.
Litigation:
In the ordinary course of business, the Company is both a
plaintiff and defendant in various legal proceedings. In the
opinion of management, the resolution of these proceedings
will not have a material adverse effect on the consolidated
financial position or results of operations of the Company in
subsequent years.
Concentrations of credit risk and major customers:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents and accounts receivable. The Company places
its cash and cash equivalents with high quality financial
institutions. At times, balances exceed Federally insured
limits. The Company generally extends credit to its customers,
substantially all of whom are located in the midsection of the
United States. Management of the Company closely monitors the
extension of credit to customers while maintaining allowances
for potential credit losses. During the nine months ended
September 30, 1998, no customer accounted for more than 10% of
the Company's revenue. Generally, the Company does not have a
significant receivable from any single customer and,
accordingly, management does not believe that the Company was
exposed to any significant credit risk at September 30, 1998.
F-48
<PAGE>
BSD HEALTHCARE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the
Nine Months then Ended is Unaudited)
Note 7 - Fair value of financial instruments:
The Company's material financial instruments at September 30,
1998 for which disclosure of estimate fair value is required by
certain accounting standards consisted of cash and cash
equivalents, accounts receivable, accounts payable and notes
payable. In the opinion of management, (i) cash and cash
equivalents, accounts receivable and accounts payable were
carried at values that approximated their fair values because of
their liquidity and/or their short-term maturities and (ii) notes
payable were carried at values that approximated their fair
values because they had interest rates equivalent to those
currently prevailing for financial instruments with similar
characteristics.
Note 8 - Subsequent event:
On December 7, 1998, Coventry Industries Corp., a publicly-traded
company, purchased 80.1% of the common stock of BSD.
* * *
F-49
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Directors and Stockholders
Respiratory Care Services, Inc. and
RCS Subacute, Inc.
We have audited the accompanying combined balance sheets of RESPIRATORY CARE
SERVICES, INC. and RCS SUBACUTE, INC. as of December 31, 1997 and 1996, and the
related combined statements of income, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Respiratory Care
Services, Inc. and RCS Subacute, Inc. as of December 31, 1997 and 1996, and
their results of operations and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
J.H. COHN LLP
Roseland, New Jersey
July 17, 1998
F-50
<PAGE>
RESPIRATORY CARE SERVICES, INC. AND
RCS SUBACUTE, INC.
COMBINED BALANCE SHEETS
JANUARY 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
January December
ASSETS 31, 1998 31, 1997
------ -------- --------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 35,821 $ 17,048
Accounts receivable, net of allowance for doubtful accounts
of $203,765 1,033,594 1,070,402
Other current assets 24,773 15,058
----------- ----------
Total current assets 1,094,188 1,102,508
Equipment, net of accumulated depreciation of $21,065 and
$19,640 87,720 88,123
----------- ----------
Totals $1,181,908 $1,190,631
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable to bank $ 311,000 $ 295,000
Accounts payable 190,174 281,755
Accrued expenses and other liabilities 63,355 57,026
----------- ----------
Total liabilities 564,529 633,781
----------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock:
Respiratory Care Services, Inc., no par value; 1,000 shares
authorized, issued and outstanding 2,205 2,205
RCS Subacute, Inc., no par value; 1,000 shares authorized,
issued and outstanding 1,000 1,000
Retained earnings 789,174 728,645
Treasury stock of RCS Subacute, Inc. - 200 shares, at cost (175,000) (175,000)
----------- ----------
Total stockholders' equity 617,379 556,850
----------- ----------
Totals $1,181,908 $1,190,631
========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-51
<PAGE>
RESPIRATORY CARE SERVICES, INC. AND
RCS SUBACUTE, INC.
COMBINED STATEMENTS OF INCOME
MONTH ENDED JANUARY 31, 1998 AND
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Month Years Ended
Ended December 31,
January ----------------------------
31, 1998 1997 1996
--------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Revenue $351,052 $4,488,152 $2,534,465
Costs of revenue 180,856 2,394,491 1,484,290
-------- ---------- ----------
Gross profit 170,196 2,093,661 1,050,175
-------- ---------- ----------
Operating expenses:
Selling 10,693 153,434 72,365
General and administrative 96,991 1,193,650 643,034
-------- ---------- ----------
Totals 107,684 1,347,084 715,399
-------- ---------- ----------
Operating income 62,512 746,577 334,776
-------- ---------- ----------
Other income (expense):
Interest expense (1,983) (6,665) (1,381)
Other 1,360 39,312
-------- ---------- ----------
Totals (1,983) (5,305) 37,931
-------- ---------- ----------
Income before provision (credit) for income taxes 60,529 741,272 372,707
Provision (credit) for income taxes (112,811) 149,171
-------- ---------- ----------
Net income $ 60,529 $ 854,083 $ 223,536
======== ========== ==========
Historical income before income taxes $ 60,529 $ 741,272
Unaudited pro forma adjusted to eliminate effects
of "S" corporation election:
Provision for income taxes 24,212 296,064
-------- ----------
Net income $ 36,317 $ 445,208
======== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-52
<PAGE>
RESPIRATORY CARE SERVICES, INC. AND
RCS SUBACUTE, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
MONTH ENDED JANUARY 31, 1998 (Unaudited) AND
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock
-----------------------------------------------------
Respiratory Care Treasury
Services, Inc. RCS Subacute, Inc. Stock of
----------------------- ------------------------ RCS Total
Number of Number of Retained Subacute, Stockholders'
Shares Amount Shares Amount Earnings Inc. Equity
------------- --------- ----------- ----------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 1,000 $2,205 1,000 $1,000 $ 95,701 $ 98,906
Dividends (100,960) (100,960)
Repurchase of 100 shares of
common stock $ (55,000) (55,000)
Net income 223,536 223,536
----- ------ ----- ------ -------- --------- ---------
Balance, December 31, 1996 1,000 2,205 1,000 1,000 218,277 (55,000) 166,482
Dividends (343,715) (343,715)
Repurchase of 100 shares of
common stock (120,000) (120,000)
Net income 854,083 854,083
----- ------ ----- ------ -------- --------- ---------
Balance, December 31, 1997 1,000 2,205 1,000 1,000 728,645 (175,000) 556,850
Net income 60,529 60,529
----- ------ ----- ------ -------- --------- ---------
Balance, January 31, 1998 1,000 $2,205 1,000 $1,000 $789,174 $(175,000) $ 617,379
===== ====== ===== ====== ======== ========= =========
</TABLE>
See Notes to Combined Financial Statements.
F-53
<PAGE>
RESPIRATORY CARE SERVICES, INC. AND
RCS SUBACUTE, INC.
COMBINED STATEMENTS OF CASH FLOWS
MONTH ENDED JANUARY 31, 1998 AND
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Month Years Ended
Ended December 31,
January -------------------------
31, 1998 1997 1996
-------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Operating activities:
Net income $60,529 $854,083 $223,536
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,425 14,593 4,532
Provision for bad debts 190,765 13,000
Deferred income taxes (120,000) 120,000
Changes in operating assets and liabilities:
Accounts receivable 36,808 (778,383) (326,759)
Other current assets (9,715) (6,189) (8,869)
Accounts payable (91,581) 82,576 129,412
Accrued expenses and other liabilities 6,329 (81,112) 64,222
------- -------- --------
Net cash provided by operating activities 3,795 156,333 219,074
------- -------- --------
Investing activities - purchases of equipment (1,022) (21,054) (67,964)
------- -------- --------
Financing activities:
Net proceeds from line of credit borrowings 16,000 295,000
Purchases of treasury stock (120,000)
Dividends (343,715) (100,960)
------- -------- --------
Net cash provided by (used in) financing
activities 16,000 (168,715) (100,960)
------- -------- --------
Net increase (decrease) in cash and cash equivalents 18,773 (33,436) 50,150
Cash and cash equivalents, beginning of year 17,048 50,484 334
------- -------- --------
Cash and cash equivalents, end of year $35,821 $ 17,048 $ 50,484
======= ======== ========
Supplemental disclosure of cash flow data:
Interest paid $ 1,983 $ 6,665 $ 1,381
======= ======== ========
Income taxes paid $ 28,018 $ 1,301
======== ========
</TABLE>
See Notes to Combined Financial Statements.
F-54
<PAGE>
RESPIRATORY CARE SERVICES, INC. AND
RCS SUBACUTE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of January 31, 1998 and for the
Month then Ended is Unaudited)
Note 1 - Description of business and summary of accounting policies:
Business:
Respiratory Care Services, Inc. ("RCS"), which was
incorporated on July 1, 1988, provides quality respiratory
therapy staff in a variety of health care settings. RCS
Subacute, Inc. ("Subacute"), which was incorporated on
October 19, 1995, provides credentialed, licensed therapists
experienced in all phases of skilled and subacute
respiratory care. These services are provided primarily to
Medicare patients.
Principles of combination:
The accompanying combined financial statements include the
accounts of RCS and Subacute which are affiliated by common
ownership. All significant intercompany accounts and
transactions have been eliminated in combination. RCS and
Subacute are referred to together herein as the "Company."
Unaudited financial statements:
In the opinion of management, the accompanying unaudited
condensed financial statements reflect all adjustments,
consisting of normal recurring accruals, necessary to
present fairly the financial position of the Company as of
January 31, 1998 and its results of operations, changes in
stockholders' equity and cash flows for the month then
ended. The results of the Company's operations for the month
ended January 31, 1998 are not necessarily indicative of the
results of operations for the full year ending December 31,
1998.
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
Revenue recognition:
The Company recognizes revenue at the time staffing services
are provided.
Cash equivalents:
Cash equivalents include all highly liquid investments with
a maturity of three months or less when acquired.
Equipment:
Equipment is carried at cost. Depreciation is provided using
the straight-line method over estimated useful lives ranging
from five to 14 years.
F-55
<PAGE>
RESPIRATORY CARE SERVICES, INC. AND
RCS SUBACUTE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of January 31, 1998 and for the
Month then Ended is Unaudited)
Note 1 - Description of business and summary of accounting policies (continued):
Advertising:
The Company expenses the cost of advertising and promotions
as incurred. Advertising costs charged to operations were
not material during the month ended January 31, 1998 and the
years ended December 31, 1997 and 1996.
Income taxes:
Effective January 1, 1997, RCS and Subacute, with the
consent of their stockholders, elected to be treated as "S"
corporations under the applicable sections of the Internal
Revenue Code whereby the income or loss of RCS and Subacute
is allocated to their stockholders for inclusion in their
personal Federal income tax returns. As a result, there are
no provisions for Federal income taxes in the accompanying
historical combined financial statements.
RCS and Subacute have also elected to be treated as "S"
corporations for state income tax purposes. However, certain
states impose a tax on "S" corporation income at a reduced
rate and, accordingly, there are provisions for state income
taxes in certain of the accompanying historical combined
financial statements.
The Company accounts for income taxes pursuant to the asset
and liability method which requires deferred income tax
assets and liabilities to be computed annually for temporary
differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets
to the amount expected to be realized. The income tax
provision or credit is the tax payable or refundable for the
period plus or minus the change during the period in
deferred tax assets and liabilities.
Other recent accounting pronouncements:
The Financial Accounting Standards Board (the "FASB") has
issued Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"), which could require the Company to
make additional disclosures in its financial statements no
later than for the year ending December 31, 1999. SFAS 131
requires disclosures for each segment of a business and the
determination of segments based on its internal management
structure. Management is in the process of evaluating
whether SFAS 131 will require the Company to make any
additional disclosures.
F-56
<PAGE>
RESPIRATORY CARE SERVICES, INC. AND
RCS SUBACUTE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of January 31, 1998 and for the
Month then Ended is Unaudited)
Note 1 - Description of business and summary of accounting policies (concluded):
Other recent accounting pronouncements (concluded):
The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("ACSEC") has
issued Statement of Position No. 98-1, Accounting for the
Cost of Computer Software Developed or Obtained for Internal
Use ("SOP 98-1"), which could require the Company to revise
certain accounting measurements and make additional
disclosures in its financial statements no later than for
the year ending December 31, 1999. SOP 98-1 defines internal
use software and modifies previous standards related to the
capitalization, amortization and write-off of costs related
to the development of such software. Management believes
that the Company's measurements and disclosures already
substantially comply with those required by SOP 98-1.
The FASB and ACSEC had issued certain other pronouncements
as of January 31, 1998 that will become effective in
subsequent periods; however, management does not believe
that any of those pronouncements will effect any financial
accounting measurements or disclosures the Company will be
required to make.
Note 2 - Notes payable to bank:
On September 5, 1997, RCS and Subacute entered into revolving
credit agreements whereby they may borrow up to $100,000 and
$350,000, respectively, against their eligible accounts
receivable through September 1, 1998. Borrowings bear interest,
which is payable monthly, at 2% above a specified prime rate (an
effective rate of 10.5% as of January 31, 1998 and December 31,
1997). Borrowings are cross-guaranteed by RCS and Subacute and
guaranteed by their principal stockholder. The revolving credit
agreements contain certain restrictive covenants which, among
other things, effectively limit the Company's ability to incur
additional bank debt and sell or dispose of certain assets.
As of January 31, 1998 and December 31, 1997, outstanding
borrowings, which arose from loans made to Subacute, totaled
$311,000 and $295,000, respectively, and were secured by
substantially all of the Company's assets.
F-57
<PAGE>
RESPIRATORY CARE SERVICES, INC. AND
RCS SUBACUTE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of January 31, 1998 and for the
Month then Ended is Unaudited)
Note 3 - Income taxes:
The historical provision (credit) for income taxes was comprised
as follows:
Month Years Ended
Ended December 31,
January ---------------------------
31, 1998 1997 1996
-------- -------- -------
Federal:
Current $ 18,763
Deferred $ (97,000) 97,000
--------- --------
Totals (97,000) 115,763
--------- --------
State:
Current 7,189 10,408
Deferred (23,000) 23,000
--------- --------
Totals (15,811) 33,408
--------- --------
Totals $ - $(112,811) $149,171
====== ========= ========
As explained in Note 1, RCS and Subacute elected to be taxed as
"S" corporations for Federal and state income purposes effective
January 1, 1997. Accordingly, the Company was not required to
provide for Federal income taxes, and was required to provide
for state income taxes at reduced rates, during the year ended
December 31, 1997. Prior to making the "S" corporation
elections, the Company accrued deferred tax liabilities as a
result of elections that had been made to utilize a modified
accrual basis of accounting for income tax purposes. As a result
of the "S" corporation elections, the deferred tax liabilities
were reversed and reflected as credits to income taxes in 1997.
The Company's unaudited pro forma provision for income taxes for
the month ended January 31, 1998 and year ended December 31,
1997, assuming RCS and Subacute had not elected to be taxed as
"S" corporations, would have been comprised as follows:
Month
Ended Year Ended
January December
31, 1988 31, 1997
-------- --------
Current:
Federal $20,580 $229,350
State 3,632 66,714
------- --------
Totals $24,212 $296,064
======= ========
F-58
<PAGE>
RESPIRATORY CARE SERVICES, INC. AND
RCS SUBACUTE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of January 31, 1998 and for the
Month then Ended is Unaudited)
Note 3 - Income taxes (concluded):
A reconciliation of the Federal statutory rate of 34% to the
effective rate for the unaudited pro forma provision for income
taxes for the month ended January 31, 1998 and the year ended
December 31, 1997 and the historical provision for income taxes
for the year ended December 31, 1996 follows:
Month Years Ended
Ended December 31,
January --------------
31, 1998 1997 1996
-------- ---- ----
Provision at Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal
income tax effect 6.0 5.9 5.9
Other .1
---- ---- ----
Effective rates 40.0% 39.9% 40.0%
==== ==== ====
Note 4 - Commitments and contingencies:
Leases:
The Company has been utilizing its office space under
month-to-month and other short-term leases while it
negotiates a new lease with its landlord for additional
space. Rent expense charged to operations approximated
$1,800, $22,100 and $18,600 for the month ended January 31,
1998 and the years ended December 31, 1997 and 1996,
respectively.
Litigation:
In the ordinary course of business, the Company is both a
plaintiff and defendant in various legal proceedings. In the
opinion of management, the resolution of these proceedings
will not have a material adverse effect on the combined
financial position or results of operations of the Company
in subsequent years.
F-59
<PAGE>
RESPIRATORY CARE SERVICES, INC. AND
RCS SUBACUTE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of January 31, 1998 and for the
Month then Ended is Unaudited)
Note 4 - Commitments and contingencies (concluded):
Concentrations of credit risk and major customers:
Financial instruments that potentially subject the Company
to concentrations of credit risk consist principally of cash
and cash equivalents and accounts receivable. The Company
places its cash and cash equivalents with high quality
financial institutions. At times, balances exceed Federally
insured limits. The Company generally extends credit to its
customers, substantially all of whom are located in the
midsection of the United States. Management of the Company
closely monitors the extension of credit to customers while
maintaining allowances for potential credit losses. During
the month ended January 31, 1998 and the year ended December
31, 1997, no customer accounted for more than 10% of the
Company's revenue. During the year ended December 31, 1996,
one customer accounted for approximately 12% and another
customer accounted for approximately 11% of the Company's
revenue. Generally, however, the Company does not have a
significant receivable from any single customer and,
accordingly, management does not believe that the Company
was exposed to any significant credit risk at January 31,
1998 and December 31, 1997.
Note 5 - Repurchase of common stock:
Subacute repurchased 100 shares of its outstanding common stock
in the year ended December 31, 1997 for $120,000 which was paid
in cash. It also repurchased 100 shares in the year ended
December 31, 1996 for $55,000 by issuing a noninterest bearing
note payable (this was a noncash transaction and, accordingly,
it was not was not included in the 1996 combined statement of
cash flows).
Note 6 - Fair value of financial instruments:
The Company's material financial instruments at January 31, 1998
and December 31, 1997 for which disclosure of estimated fair
value is required by certain accounting standards consisted of
cash and cash equivalents, accounts receivable, accounts payable
and notes payable. In the opinion of management, (i) cash and
cash equivalents, accounts receivable and accounts payable were
carried at values that approximated their fair values because of
their liquidity and/or their short-term maturities and (ii)
notes payable were carried at values that approximated their
fair values because they had interest rates equivalent to those
currently prevailing for financial instruments with similar
characteristics.
Note 7 - Subsequent event:
On February 1, 1998, BSD Healthcare Industries, Inc., a
newly-formed holding company, purchased 100% of the common stock
of both RCS and Subacute from their respective stockholders.
F-60
<PAGE>
COVENTRY INDUSTRIES CORP.
INTRODUCTION TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
On December 7, 1998, Coventry Industries Corp. ("Coventry" or the "Company")
consummated an agreement whereby it acquired 80.1% of the issued and outstanding
shares of common stock of BSD Healthcare Industries, Inc. ("BSD") in exchange
for 118,250 shares of common stock (or approximately 19.95% of Coventry's
outstanding common shares). BSD was incorporated in 1989 as a "blind pool" or
"blank check" company for the purpose of either merging with or acquiring an
operating company. BSD did not conduct any operations of a commercial nature or
have any significant activities until February 1, 1998 when it acquired 100% of
the common stock of two commonly-controlled companies, Respiratory Care
Services, Inc. and RCS Subacute, Inc., which are referred to collectively herein
as "RCS." Conventry will account for the acquisition of its 80.1% interest in
BSD pursuant to the purchase method of accounting in its historical financial
statements effective from December 7, 1998. BSD has accounted for the
acquisition of its 100% interest in RCS pursuant to the purchase method of
accounting in its historical financial statements effective from February 1,
1998.
Conventry uses June 30th for its fiscal year end. BSD and RCS used December 31st
for their fiscal year end. The accompanying unaudited pro forma condensed
statement of operations for the year ended June 30, 1998 combines (i) the
historical audited consolidated statement of operations of Coventry and its
subsidiaries for the year ended June 30, 1998 (excluding the results of
operations that were discontinued by Coventry during 1998) and (ii) the
historical unaudited consolidated statement of operations of BSD for the year
ended June 30, 1998, which includes the results of operations of RCS for the
period from February 1, 1998 (the date of its acquisition) to June 30, 1998, and
the historical unaudited combined statement of operations of RCS for the period
from July 1, 1997 to January 31, 1998 as if the acquisitions of BSD and RCS had
been consummated as of July 1, 1997. The accompanying unaudited pro forma
condensed statement of operations for the nine months ended March 31, 1999
combines the historical unaudited consolidated statement of operations of
Coventry and its subsidiaries for the nine months ended March 31, 1999 and the
unaudited consolidated statement of operations of BSD for the period from July
1, 1998 to December 7, 1998 (including RCS for the entire period) as if the
acquisition of BSD had been consummated as of July 1, 1998.
The accompanying unaudited pro forma condensed combined financial statements are
based on the assumptions and adjustments described in the accompanying notes
which management believes are reasonable. The unaudited pro forma condensed
combined financial statements do not purport to represent what the combined
results of operations actually would have been if the acquisitions referred to
above had occurred as of the dates indicated instead of the actual dates of
consummation or what the financial position and results of operations would be
for any future periods. The unaudited pro forma condensed combined financial
statements and the accompanying notes should be read in conjunction with the
audited and unaudited historical financial statements of Coventry, BSD and RCS
included elsewhere herein.
F-61
<PAGE>
COVENTRY INDUSTRIES CORP.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
Coventry BSD
Pro Forma (July 1, (July 1,
----------------------------- 1997 to 1997 to
June 30, June 30,
Combined Adjustments 1998) 1998)
-------- ----------- ----- -----
<S> <C> <C> <C> <C>
Revenue $12,084,635 $ 7,869,981 $4,214,654
Cost of revenue 8,647,453 6,532,924 2,114,529
------------ ----------- ----------
Gross profit 3,437,182 1,337,057 2,100,125
Operating expenses 9,054,694 $ (78,917)(4) 7,395,558 1,738,053
----------- ---------- ----------- ----------
Operating income (loss) (5,617,512) 78,917 (6,058,501) 362,072
----------- ---------- ----------- ----------
Other income (expense):
Interest expense (398,032) (216,061) (181,971)
Other (724,669) (719,984) (4,685)
----------- ----------- ----------
Totals (1,122,701) (936,045) (186,656)
----------- ----------- ----------
Income (loss) before provision
(credit) for income taxes (6,740,213) 78,917 (6,994,546) 175,416
Provision (credit) for income taxes (180,750) (70,168)(5) (180,750) 70,168
----------- ---------- ----------- ----------
Income (loss) from continuing
operations (6,559,463) 149,085 (6,813,796) 105,248
Dividends paid 114,835 114,835
----------- ---------- ----------- ----------
Income (loss) from continuing operations
applicable to common stock $(6,674,298) $ 149,085 $(6,928,631) $ 105,248
=========== ========== =========== ==========
Basic loss from continuing operations
per share $(14.93) $(21.08)
====== ======
Weighted average shares outstanding 446,894 118,250 (6) 328,644
======= ======= =========
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Historical
---------------------------
BSD RCS
(July 1, (July 1,
1997 to 1997 to
Pro Forma June 30, January
Adjustments 1998) 31, 1998)
----------- ----- ---------
<S> <C> <C> <C>
Revenue $1,773,391 $2,441,263
Cost of revenue 836,750 1,277,779
---------- ----------
Gross profit 936,641 1,163,484
Operating expenses $ 355,971 (1) 529,952 852,130
---------- ---------- ----------
Operating income (loss) (355,971) 406,689 311,354
---------- ---------- ----------
Other income (expense):
Interest expense (96,250) (2) (57,610) (28,111)
Other (22,739) 18,054
---------- ---------- ----------
Totals (96,250) (80,349) (10,057)
---------- ---------- ----------
Income (loss) before provision
(credit) for income taxes (452,221) 326,340 301,297
Provision (credit) for income taxes (60,368) (3) 130,536
---------- ---------- ----------
Income (loss) from continuing
operations (391,853) 195,804 301,297
Dividends paid
---------- ---------- ----------
Income (loss) from continuing operations
applicable to common stock $ (391,853) $ 195,804 $ 301,297
========== ========== ==========
Basic loss from continuing operations
per share
Weighted average shares outstanding
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
F-62
<PAGE>
COVENTRY INDUSTRIES CORP.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Historical
------------------------------- -------------------------------
Coventry BSD
(July 1, 1998 (July 1, 1998
to March to December
Combined Adjustments 31, 1999) 7, 1998)
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 7,954,940 $ 6,413,195 $ 1,541,745
Cost of revenues 5,650,318 4,463,353 1,186,965
----------- ----------- -----------
Gross profit 2,304,622 1,949,842 354,780
Operating expenses 4,485,598 $(86,400)(4) 3,881,588 517,610
----------- -------- ----------- -----------
Operating loss (2,180,976) 86,400 (1,931,746) (162,830)
----------- -------- ----------- -----------
Other income (expense):
Interest (359,412) (235,127) (124,285)
Loss applicable to minority
interest 59,463 59,463
----------- ----------- -----------
Totals (299,949) (175,664) (124,285)
----------- ----------- -----------
Net loss (2,480,925) 86,400 (2,107,410) (287,115)
Preferred stock dividends 89,000 89,000
----------- -------- ----------- -----------
Net loss applicable to common
stock $(2,569,925) $ 86,400 $(2,196,410) $ (287,115)
=========== ======== =========== ===========
Basic net loss per share $ (3.83) $ (3.63)
=========== ===========
Weighted average common shares
outstanding 671,657 66,705(6) 604,952
=========== ======== ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
F-63
<PAGE>
COVENTRY INDUSTRIES CORP.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENTS OF OPERATIONS
Purchase of BSD by Coventry and RCS by BSD:
The accompanying unaudited pro forma condensed combined statements of operations
for the year ended June 30, 1998 and the nine months ended March 31, 1999
reflect the pro forma effects of the acquisition of the 80.1% interest in BSD by
Coventry on December 7, 1998, which was accounted for as a purchase, as if it
had been consummated on July 1, 1997. The cost of the acquisition was $877,750,
including $827,750 attributable to the issuance of 118,250 shares of common
stock by Coventry valued at $64.00 per share (all common and preferred share
numbers and the related per share amounts have been adjusted for the effects of
the 1-for-8 reverse split effected on March 22, 1999). Based on the excess of
the cost over fair value of net assets acquired, Coventry allocated $1,485,270
to goodwill. See Note 3 of the Notes to the unaudited condensed consolidated
financial statements of Coventry included elsewhere herein.
The accompanying unaudited pro forma condensed combined statement of operations
for the year ended June 30, 1998 reflects the pro forma effects of the
acquisition of the 100% interest in RCS by BSD on February 1, 1998, which was
accounted for as a purchase, as if it had also been consummated on July 1, 1997.
The cost of the acquisition was $2,397,237. Based on the excess of the cost over
fair value of net assets acquired, BSD allocated $1,779,858 to goodwill. See
Note 3 of the Notes to the consolidated financial statements of BSD included
elsewhere herein.
Pro Forma Adjustments to the Unaudited Condensed Combined Statements of
Operations:
(1) To record the amortization of $1,779,858 allocated by BSD to goodwill in
connection with the acquisition of RCS for the period from July 1, 1997 to
January 31, 1998.
(2) To record the interest at 2.5% above the prime rate on notes payable of
$1,500,000 issued by BSD to a bank in connection with the acquisition of RCS
for the period from July 1, 1997 to January 31, 1998.
(3) To adjust BSD's pro forma provision for income tax for the period from July
1, 1997 to June 30, 1998 to reflect a 40% effective rate based on the
applicable statutory state and Federal income tax rates. No provision was
made in the historical statement of operations of RCS for the period from
July 1, 1997 to January 31, 1998 because Respiratory Care Services, Inc. and
RCS Subacute, Inc. had elected to be treated as "S" corporations.
(4) To adjust Coventry's pro forma combined depreciation and amortization for
the net effect of the elimination of the historical net carrying value of
BSD's goodwill of $1,542,544 and the allocation of $1,485,270 to goodwill as
a result of Coventry's acquisition of BSD. The goodwill resulting from the
acquisition of BSD will be amortized over a period of five years.
(5) To eliminate the provision for income taxes applicable to BSD for the year
ended June 30, 1998 resulting from the offset of BSD's pre-tax income
against Coventry's pre-tax net loss. A credit for income taxes based on the
pro forma pre-tax loss for the year ended June 30, 1998 and the nine months
ended March 31, 1999 has not been recorded due to the uncertainties related
to the extent and timing of future taxable income.
(6) To increase the weighted average number of Coventry's common shares
outstanding based on the assumption that the 118,250 shares issued by
Coventry to acquire BSD would have been outstanding during the year ended
June 30, 1998 and the nine months ended March 31, 1999.
F-64
<PAGE>
COVENTRY INDUSTRIES CORP.
Common Stock
Class A Warrants
Class B Warrants
--------------------------
PROSPECTUS
--------------------------
You should rely only on the information contained in this prospectus. No dealer,
salesperson or any other person is authorized to give information that is not
contained in this Prospectus. This prospectus is not an offer to sell nor is it
seeking an offer to buy these securities in any jurisdiction where the offer and
sale is not permitted. The information contained in this prospectus is correct
only as of the date of this prospectus, regardless of the time of the delivery
of this prospectus or any sale of these securities.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Company has authority under Section 607.0850 of the Florida
Business Corporation Act (the "FBCA") to indemnify its directors and officers to
the extent provided for in the FBCA. The Company's Amended and Restated Articles
of Incorporation provide that the Company shall indemnify and may insure its
officers and directors to the fullest extent permitted by law. The Company has
also entered into agreements with each of its directors and executive officers
wherein it has agreed to indemnify each of them to the fullest extent permitted
by law.
The provisions of the FBCA that authorize indemnification do not
eliminate the duty of care of a director, and in appropriate circumstances
equitable remedies such as injunctive or other forms of nonmonetary relief will
remain available under Florida law. In addition, each director will continue to
be subject to liability for (a) violations of criminal laws, unless the director
had reasonable cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful, (b) deriving an improper personal
benefit from a transaction, (c) voting for or assenting to an unlawful
distribution, and (d) willful misconduct or conscious disregard for the best
interests of the Company in a proceeding by or in the right of the Company to
procure a judgment in its favor or in a proceeding by or in the right of a
shareholder. The statute does not affect a director's responsibilities under any
other law, such as the federal securities laws. The effect of the foregoing is
to require the Company to indemnify the officers and directors of the Company
for any claim arising against such persons in their official capacities if such
person acted in good faith and in a manner that he reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Pursuant to certain registration rights agreements, each of the Company
and the Selling Shareholders has agreed to indemnify the others and their
directors, officers, agents and representatives (and with respect to the
indemnification by the Company, any underwriters) against certain civil
liabilities that may be incurred in connection with this offering, including
certain liabilities under the Securities Act.
The Articles of Incorporation of the Company provide that every
director and every officer of the corporation, every former director and former
officer of the corporation, and every person who may have served at the request
of the corporation as a director or officer of another corporation in which the
corporation owns shares of capital stock or of which it is a creditor, and the
heirs, executors, administrators, and assignors of all of the above persons
shall be indemnified by the corporation for expenses actually and necessarily
incurred by him in connection with the defense of any action, suit, or
proceeding to which he may be a party by reason of his being or having been a
director or officer of the corporation or of such other corporation regardless
of whether or not he continues to be a director or officer at the time of
incurring such expenses, except with respect to matters as to which he shall be
finally adjudged in such action, suit, or proceeding to be liable for negligence
or misconduct in the performance of his duty. The rights of indemnification set
forth in the Articles of Incorporation shall not be exclusive of any other
rights to which such person may be entitled by law or otherwise.
<PAGE>
The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of the director and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available under Florida law. In addition, each
director will continue to be subject to liability for: (a) violations of
criminal laws, unless the director had reasonable cause to believe his conduct
was lawful or had no reasonable cause to believe his conduct was unlawful; (b)
deriving an improper personal benefit from a transaction; (c) voting for, or
assenting to, an unlawful distribution; and (d) willful misconduct or conscious
disregard for the best interests of the Company in a proceeding by, or in the
right of, the Company to procure a judgment in its favor or in a proceeding by,
or in the right of, a shareholder. The statute does not effect the director's
responsibilities under any other law.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Item 25. Other Expenses of Issuance and Distribution.
The Company estimates that its expenses in connection with this
registration statement will be as follows:
Securities and Exchange Commission registration fee $ 4,525
Legal fees and expenses 20,000
Accounting fees and expenses 10,000
Printing 3,000
Miscellaneous 2,475
-------
Total $40,000
=======
<PAGE>
Item 26 Recent Sales of Unregistered Securities
Fiscal 1996
In June 1996 the Company sold an aggregate of 688 shares of its Common
Stock to two institutional investors and two accredited investors, all of whom
are sophisticated within the meaning of the Act, in a series of private
transactions exempt from registration under the Act pursuant to Regulation D,
Section 506. An aggregate of 5,625 shares were sold at $132.00 per share and the
balance of 1,313 shares at $153.60 per share. In November 1996 the Company sold
an additional 1,042 shares of Common Stock to two accredited investors, both of
whom are sophisticated within the meaning of the Act, in a private transaction
exempt from registration under the Act in reliance upon Regulation D, Section
506 thereof.
Fiscal 1997
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 the Act pursuant to Section 4(2) thereof in exchange for
13,750 shares of the Company's Common Stock.
Fiscal 1998
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 33,750 shares of the Company's Common Stock and the assumption of
all liabilities from LPS' shareholders in a private transaction exempt from
registration under the Act pursuant to Section 4(2) thereof. The Company also
issued 11,363 warrants with an exercise price of $14.00, which warrants were
subsequently converted, as payment of acquisition fees. The Company also issued
30,625 shares in connection with the disposition of LPS.
During the fiscal year ended June 30, 1998 the Company issued an
aggregate of 97,357 shares of Common Stock for consulting, management and
marketing services. All of such recipients were accredited investors and the
transactions were exempt from registration under the Securities Act of 1933
pursuant to section 4(2) thereof
On September 1, 1997, the Company acquired 100% of the assets of Apollo
Pipe & Valve ("Apollo") in exchange for an aggregate of $100,000 and 3,125
shares of the Company's common stock in a private transaction exempt from
registration under the Securities Act of 1933 pursuant to section 4(2) thereof.
On October 7, 1997 Robert Hausman and Barbara Hausman converted the
principal and any accrued but unpaid interest thereon into 14,375 shares of the
Company's Series E Cumulative Non-Participating Preferred Stock.
<PAGE>
On January 16, 1998 the Company sold 1,750 shares of its 5% Preferred
Stock, at a purchase price of $1,000 per share, to an unaffiliated third party
in a private transaction exempt from registration under the Securities Act.
Fiscal 1999
In November 1998, the Company issued an aggregate of 120,042 shares of
Common Stock as follows:
- --------------------------------------------------------------------------------
Name Amount Purpose
- --------------------------------------------------------------------------------
Atlas Pearlman 8,000 Legal fees
- --------------------------------------------------------------------------------
Ella Chesnutt 4,167 Severance
- --------------------------------------------------------------------------------
Santa Fe Properties 6,875 Lease termination
- --------------------------------------------------------------------------------
M Wachs 7,500 Public relations fees
- --------------------------------------------------------------------------------
Mark Weisz 3,125 Director fees
- --------------------------------------------------------------------------------
Tim Hart 3,125 Accounting services
- --------------------------------------------------------------------------------
Meredith Metier 1,250 Accounting services
- --------------------------------------------------------------------------------
Greg Hoehn 1,250 Bonus
- --------------------------------------------------------------------------------
Manny Shulman 4,125 Consulting fees
- --------------------------------------------------------------------------------
Connie Steinmetz 18,125 Consulting fees
- --------------------------------------------------------------------------------
Strategic Capital Holdings 31,250 Consulting fees
- --------------------------------------------------------------------------------
Yucatan Holding 31,250 Interest and forbearance
- --------------------------------------------------------------------------------
Also in November 1998, the Company issued Lester Gann, a director of
the Company and president of a subsidiary, 83,125 shares of Common Stock in
exchange for his cancelling certain rights under his employment agreement.
In December 1998, the Company issued an aggregate of 118,250 shares of
Common Stock to Stephen Rosedale and Ronald Wilheim as consideration for the BSD
Healthcare acquisition. Also in December 1998, the Company issued and an
aggregate of 75,000 shares of Common Stock to Robert Hausman, the Company's
president, in exchange for 7,500 shares of Series E Preferred Stock
In March 1999, the Company issued an aggregate of 250,000 shares of
Common Stock, 1,000,000 Class A Warrants and 1,000,000 Class B Warrants to four
accredited investors for $1,000,000 in cash.
All of these issuances were in private transactions exempt from
registration under the Securities Act of 1933 pursuant to section 4(2) thereof
and all persons had an existing business relationship with the Company.
Item 27. Exhibits.
(a) Exhibits
Exhibit No. Description
- ----------- -----------
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
<PAGE>
2.7 Agreement dated as of May 29, 1998 by and between Coventry
Industries Corp. and American Group, Inc. is incorporated by
reference to the Report on Form 8-K as filed with the
Securities and Exchange Commission on June 30, 1998
2.8 Exchange Agreement among Coventry Industries Corp., BSD
Healthcare Industries, Inc., its shareholders, People First
LLC and its members dated September 30, 1998.
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
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
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.
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
<PAGE>
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.
3.10 Articles of Amendment to the Articles of Incorporation
setting forth the designations, rights and preferences of the
Series F Cumulative Non-Participating Preferred Stock are
hereby incorporated by reference to the Annual Report on Form
10-QSB for the quarter ended September 30,1997.
3.11 Articles of Amendment to the Articles of Incorporation
Changing the name of the corporation to Coventry Industries
Corp. are hereby incorporated by reference to the Report on
Form 10-QSB for the quarter ended September 30,1997.
3.12 Articles of Amendment to the Articles of Incorporation
setting forth the designations, rights and preferences of the
5% Series Convertible Preferred Stock are hereby incorporated
by reference to the report on Form 8-K filed with the
Securities and Exchange Commission on January 29, 1998.
3.13 Articles of Amendment to the Articles of Incorporation
decreasing the number of authorized common stock and
effecting a one-for-eight split.*
4.1 Investment Banking Warrant Agreement between Coventry
Industries Corp. and Barron Chase Securities, Inc. is hereby
incorporated by reference to the report on Form 10-QSB for
the quarter ended December 31, 1997.
4.2 Termination and Amendment Agreement dated December 9, 1998
between the Company and Barron Chase Securities, Inc. is
hereby incorporated to the Current Report on Form 8-K filed
December 22, 1998
<PAGE>
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 America 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.
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.
10.8 Conversion Agreement dated September 25, 1997 between
Workforce Systems Corp., LPS Acquisition Corp, and Eric and
Adrienne Deckinger is hereby incorporated by reference to the
Company's to the Report on Form 10-QSB for the quarter ended
September 30,1997 as filed with the Securities and Exchange
Commission on November 7, 1997
<PAGE>
10.9 Financial Advisory Agreement between Coventry Industries
Corp. and Barron Chase Securities, Inc. is hereby
incorporated by reference to the report on Form 10-QSB for
the quarter ended December 31, 1997 as filed with the
Securities and Exchange Commission on February 23, 1998.
10.10 Employment Agreement between Industrial Fabrication & Repair,
Inc. and Lester E. Gann is hereby attached as an exhibit to
the Report on Form 10-KSB for the fiscal year ended June 30,
1998.
10.11 Amendment to the Management Agreement between Coventry
Industries Corp. and Robert Hausman is hereby attached as an
exhibit to the Report on Form 10-KSB for the fiscal year
ended June 30, 1998.
10.12 Intentionally deleted.
10.13 Amendment dated November 9, 1998 to Employment Agreement
Dated May 1, 1998 Between Industrial Fabrication and Repair,
Coventry Industries Corp., and Lester Gann is hereby
incorporated to the Current Report on Form 8-K filed December
22, 1998.
10.14 Amendment dated as of December 1, 1998 to Management
Agreement dated July 1, 1997 and amended November 1, 1997
between the Company and Robert Hausman is hereby incorporated
to the Current Report on Form 8-K filed December 22, 1998.
10.15 Voting Agreement dated December 3, 1998 among Robert Hausman,
Lester Gann, Ronald Wilheim, Stephen Rosedale, Yucatan
Holdings, Connie Steinmetz, Strategic Capital Holdings, Inc.
and Arizona Development Corporation is hereby incorporated to
the Current Report on Form 8-K filed December 22, 1998.
10.16 Consulting Agreement between the Company and Connie Steinmetz
dated as of November 2, 1998 is hereby incorporated to the
Current Report on Form 8-K filed December 22, 1998.
10.18 Exchange Agreement dated February 3, 1999 between the Company
and ProFutures Special Equities Fund, L.P. is hereby
incorporated by reference to the report on Form 10-QSB for
the quarter ended December 31, 1998
10.19 Settlement Agreement dated February 4, 1999 among the
Company, M. Shulman & Associates and Robert Hausman is hereby
incorporated by reference to the report on Form 10-QSB for
the quarter ended December 31, 1998.
<PAGE>
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, 1998.
5.1 Opinion of Broad and Cassel.
23.1 Consent of Broad and Cassel (included in Exhibit 5.1 hereto).
23.2 Consent of Sweeney Gates & Co.
23.3 Consent of Reel and Swafford
23.4 Consent of BDO Seidman LLP
23.5 Consent of J.H. Cohn LLP
23.6 Consent of J.H. Cohn LLP
24.1 Power of Attorney (see page II-10 of the Registration
Statement).
- ----------
*Previously filed.
<PAGE>
Item 17. Undertakings.
(a) Rule 415 Offering. The undersigned Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act.
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(b) Request for Acceleration of Effective Date. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Boca
Raton, State of Florida, on May 26, 1999.
COVENTRY INDUSTRIES CORP.
By: /s/ Robert Hausman
------------------------
Robert Hausman
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert Hausman Chairman of the Board May 26, 1999
--------------------------- and President
Robert L. Hausman Chief Executive Officer
and Principal Financial
and Accounting Officer
/s/ Lester Gann Director and Secretary May 26, 1999
---------------------------
Lester Gann
/s/ Simon Groner Director May 26, 1999
---------------------------
Simon Groner
/s/ Mark Weisz Director May 26, 1999
--------------
Mark Weisz
<PAGE>
Broad and Cassel
BROAD AND CASSEL
ATTORNEYS AT LAW
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7777 GLADES ROAD
SUITE 300
BOCA RATON, FL 33434
(561) 483-7000
FAX (561) 483-7321
May 25, 1999
Coventry Industries Corp.
1900 Corporate Boulevard
Suite 400
Boca Raton, Florida 33431
Re: Coventry Industries Corp. (the "Company")
Registration Statement on Form SB-2
Ladies and Gentlemen:
You have requested our opinion with respect to the shares of the
Company's common stock, par value $.008 per share (the "Common Stock") and
warrants to Purchase Common Stock (the "Warrants"), included in the Registration
Statement on Form SB-2 (the "Form SB-2") filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Securities
Act").
As counsel to the Company, we have examined the original or certified
copies of such records of the Company, and such agreements, certificates of
public officials, certificates of officers or representatives of the Company and
others, and such other documents as we deem relevant and necessary for the
opinions expressed in this letter. In such examination, we have assumed the
genuineness of all signatures on original documents, and the conformity to
original documents of all copies submitted to us as conformed or photostatic
copies. As to various questions of fact material to such opinions, we have
relied upon statements or certificates of officials and representatives of the
Company and others.
Based on, and subject to the foregoing, we are of the opinion that (i)
the shares of Common Stock being registered in the Form SB-2 are duly and
validly issued and fully paid and nonassessable, and (ii) the shares that are
issuable upon exercise of outstanding warrants and conversion of outstanding
notes of the Company's (together, the "Convertible Securities"), as the case may
be, shall, upon such issuance as described in the Form SB-2, be duly and validly
issued and fully paid and nonassessable.
In rendering this opinion, we advise you that members of this Firm are
members of the Bar of the State of Florida, and we express no opinion herein
concerning the applicability or effect of any laws of any other jurisdiction,
except the securities laws of the United States of America referred to herein.
This opinion has been prepared and is to be construed in accordance
with the Report on Standards for Florida Opinions, dated April 8, 1991, as
amended and supplemented, issued by the Business Law Section of The Florida Bar
(the "Report"). The Report is incorporated by reference into this opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Form SB-2. We also consent to the use of our name under the caption "Legal
Matters" in the Prospectus constituting part of the Form SB-2. In giving such
consent, we do not thereby admit that we are included within the category of
persons whose consent is required under Section 7 of the Securities Act, or the
rules and regulations promulgated thereunder.
Very truly yours,
/s/ Broad and Cassel
-----------------------------
BROAD AND CASSEL
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
Coventry Industries Corp.
Boca Raton, Florida
We hereby consent to the use in the prospectus constituting a part of
this Registration Statement on Amendment No. 1 to Form SB-2 of our report dated
September 28, 1998, relating to the consolidated financial statements of
Coventry Industries Corp. which is contained in that Prospectus.
We also consent to the reference to our firm under the caption
"Experts" in the Prospectus.
SWEENEY, GATES & CO.
Fort Lauderdale, Florida
May 26, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
Coventry Industries Corp.
Boca Raton, Florida
We hereby consent to the use in the prospectus constituting a part of
this Registration Statement of our report dated September 11, 1998, relating to
the consolidated financial statement of Industrial Fabrication and Repair, Inc.
which are not presented separately in that Prospectus.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
REEL & SWAFFORD, PLLC
Knoxville, Tennessee
May 26, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT
CERTIFIED ACCOUNTANTS
Coventry Industries Corp.
Boca Raton, Florida
We hereby consent to the use in the prospectus constituting a part of
this Registration Statement of our report dated October 7, 1997, relating to the
consolidated financial statements of Coventry Industries Corp. (formerly
Workforce System Corp.) which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
BDO SEIDMAN, LLP
Miami, Florida
May 26, 1999
<PAGE>
Exhibit 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in the Prospectus of this Amendment No. 1 to the
Registration Statement (No. 333-76675) on Form SB-2 being filed by Coventry
Industries Corp. of our report dated July 17, 1998 (except as noted therein) on
the consolidated balance sheet of BSD Healthcare Industries, Inc. as of December
31, 1997. We also consent to the related reference to our firm under the caption
"Experts" in the Prospectus of this Registration Statement.
J.H. COHN LLP
Roseland, New Jersey
May 27, 1999
<PAGE>
Exhibit 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in the Prospectus of this Amendment No. 1 to the
Registration Statement (No. 333-76675) on Form SB-2 being filed by Coventry
Industries Corp. of our report dated July 17, 1998 on the combined financial
statements of Respiratory Care Services, Inc. and RCS Subacute, Inc. as of
December 31, 1997 and 1996 and for the years then ended. We also consent to the
related reference to our firm under the caption "Experts" in the Prospectus of
this Registration Statement.
J.H. COHN LLP
Roseland, New Jersey
May 27, 1999
