KBL HEALTHCARE ACQUISITION CORP. II (A CORPORATION IN THE DEVELOPMENT STAGE) FINANCIAL STATEMENTS FOR THE PERIODS FROM DECEMBER 9, 2004 (INCEPTION) TO APRIL 27, 2005 AND DECEMBER 9, 2004 (INCEPTION) TO DECEMBER 31, 2004 KBL HEALTHCARE ACQUISITION CORP. II (A CORPORATION IN THE DEVELOPMENT STAGE) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 3 FINANCIAL STATEMENTS Balance Sheets 4 Statements of Operations 5 Statements of Stockholders' Equity 6 Statements of Cash Flows 7 NOTES TO FINANCIAL STATEMENTS 8-11 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors KBL Healthcare Acquisition Corp. II We have audited the accompanying balance sheets of KBL Healthcare Acquisition Corp. II (a corporation in the development stage) as of April 27, 2005 and December 31, 2004, and the related statements of operations, stockholders' equity and cash flows for the periods from December 9, 2004 (inception) to April 27, 2005, January 1, 2005 to April 27, 2005 and December 9, 2004 (inception) to December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of KBL Healthcare Acquisition Corp. II as of April 27, 2005 and December 31, 2004, and the results of its operations and its cash flows for the periods from December 9, 2004 (inception) to April 27, 2005, January 1, 2005 to April 27, 2005 and December 9, 2004 (inception) to December 31, 2004 in conformity with United States generally accepted accounting principles. /s/ Goldstein Golub Kessler LLP Goldstein Golub Kessler LLP New York, New York April 27, 2005 -3- KBL HEALTHCARE ACQUISITION CORP. II (A CORPORATION IN THE DEVELOPMENT STAGE) BALANCE SHEETS ============================================================================== April 27, December 31, 2005 2004 - ---------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash $ 1,467,685 $ -- Cash held in Trust Fund (Note 1) 42,400,000 -- Prepaid expenses 139,995 -- ------------ -------------- Total current assets 44,007,680 -- Deferred offering costs -- 25,000 ------------ -------------- Total assets $ 44,007,680 $ 25,000 ============ ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses (Note 3) $ 224,231 $ 939 Notes payable, stockholder (Note 4) 100,000 -- ------------ -------------- Total current liabilities 324,231 939 ------------ -------------- Common stock, subject to possible conversion, 1,599,200 shares at conversion value 8,475,760 -- ------------ -------------- Commitment (Note 5) Stockholders' equity (Notes 1, 2, 6 and 7) Preferred stock, $.0001 par value, Authorized 1,000,000 shares; none issued Common stock, $.0001 par value Authorized 35,000,000 shares Issued and outstanding 10,000,000 shares (which includes 1,599,200 subject to possible conversion) and 2,000,000, respectively 1,000 200 Additional paid-in capital 35,217,169 24,800 Deficit accumulated during development stage (10,480) (939) ------------ ------------ Total stockholders' equity 35,207,689 24,061 ------------ ------------ Total liabilities and stockholders' equity $ 44,007,680 $ 25,000 ============ ============ See Notes to Financial Statements. -4- KBL HEALTHCARE ACQUISITION CORP. II (A CORPORATION IN THE DEVELOPMENT STAGE) STATEMENTS OF OPERATIONS ============================================================================== Period from Period from Period from December 9, 2004 January 1, 2005 December 9, 2004 (inception) to to (inception) to April 27, 2005 April 27, 2005 December 31, 2004 - --------------------------------------------------------------------------------------------------------------------------------- Formation and operating costs $ (10,480) $ (9,541) $ (939) ------------------ --------------- -------------------- Net loss for the period $ (10,480) $ (9,541) $ (939) ================== =============== ==================== Weighted average shares outstanding 2,057,554 2,068,996 2,000,000 ================== =============== ==================== Net loss per share basic and diluted $ (.01) $ (.00) $ (.00) ================== =============== ==================== See Notes to Financial Statements. -5- KBL HEALTHCARE ACQUISITION CORP. II (A CORPORATION IN THE DEVELOPMENT STAGE) STATEMENTS OF STOCKHOLDERS' EQUITY ============================================================================ Common Stock Additional Deficit accumulated ------------ Paid-In during the Shares Amount Capital development stage Total - ------------------------------------------------------------------------------------------------------------------------------------ Issuance of stock to initial stockholders at $.0125 per share (Note 7) 2,000,000 $ 200 $ 24,800 $ --- $ 25,000 Net loss for the period ---- --- --- (939) (939) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2004 2,000,000 200 24,800 (939) 24,061 Sale of 8,000,000 units, net of underwriters' discount and offering expenses (includes 1,599,200 shares subject to possible conversion) 8,000,000 800 43,668,029 --- 43,668,829 Proceeds subject to possible conversion of 1,599,200 shares --- --- (8,475,760) --- (8,475,760) Proceeds from issuance of option --- --- 100 --- 100 Net loss for the period ---- --- ---- (9,541) (9,541) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, April 27, 2005 10,000,000 $1,000 $35,217,169 $ (10,480) $35,207,689 ========== ====== =========== ========= =========== See Notes to Financial Statements. -6- KBL HEALTHCARE ACQUISITION CORP. II (A CORPORATION IN THE DEVELOPMENT STAGE) STATEMENTS OF CASH FLOWS ============================================================================= Period from Period from Period from December 9, 2004 January 1, 2005 December 9, 2004 (inception) to to (inception) to April 27, 2005 April 27, 2005 December 31, 2004 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (10,480) $ (9,541) $ (939) Adjustments to reconcile net loss to net cash used in operating activities: Increase in prepaid expenses (139,995) (139,995) -- Increase in accounts payable and accrued expenses 136,386 135,447 939 -------------- ---------- ------- Net cash used in operating activities (14,089) (14,089) -- -------------- ---------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Cash held in Trust Fund (42,400,000) (42,400,000) -- -------------- ----------- ------- Net cash used in investing activities (42,400,000) (42,400,000) -- -------------- ------------ ------- CASH FLOWS FROM FINANCING ACTIVITIES Gross proceeds 48,000,000 48,000,000 -- Proceeds from notes payable, stockholders 100,000 100,000 -- Proceeds from sale of shares of common stock 25,000 25,000 Proceeds from issuance of option 100 100 -- Payment of costs of public offering (4,243,326) (4,218,326) (25,000) -------------- ------------ ------- Net cash provided by financing activities 43,881,774 43,881,774 -- -------------- ------------ ------- Net increase in cash and cash at end of the period $ 1,467,685 $ 1,467,685 $ -- ============== ============= ======== Non-cash financing activity: Accrual of offering costs $ 87,845 $ 87,845 $ -- ============== ============= ======== See Notes to Financial Statements -7- KBL HEALTHCARE ACQUISITION CORP. II (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS ============================================================================== 1. ORGANIZATION, KBL Healthcare Acquisition Corp. II (the BUSINESS "Company") was incorporated in Delaware on OPERATIONS AND December 9, 2004 as a blank check company SIGNIFICANT whose objective is to acquire an operating ACCOUNTING POLICIES business in the healthcare industry. The Company's initial stockholders purchased 2,000,000 shares of common stock, $.0001 par value, for $25,000 on December 9, 2004 (See Note 7). All activity from December 9, 2004 (inception) through April 27, 2005 relates to the Company's formation and initial public offering described below. The Company has selected December 31 as its fiscal year-end. The registration statement for the Company's initial public offering ("Offering") was declared effective April 21 2005. The Company consummated the offering on April 27, 2005 and received net proceeds of approximately $43,669,000 (Note 2). The Company's management has broad discretion with respect to the specific application of the net proceeds of this Offering, although substantially all of the net proceeds of this Offering are intended to be generally applied toward consummating a business combination with an operating business in the healthcare industry ("Business Combination"). Furthermore, there is no assurance that the Company will be able to successfully effect a Business Combination. An amount of $42,400,000 of the net proceeds is being held in an interest-bearing trust account ("Trust Account") until the earlier of (i) the consummation of a Business Combination or (ii) liquidation of the Company. Under the agreement governing the Trust Account, funds will only be invested in United States government securities (Treasury Bills) with a maturity of 180 days or less. The remaining net proceeds (not held in the Trust Account) may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses. The Company, after signing a definitive agreement for the acquisition of a target business, will submit such transaction for stockholder approval. In the event that stockholders owning 20% or more of the shares sold in the Offering vote against the Business Combination and exercise their conversion rights described below, the Business Combination will not be consummated. -8- KBL HEALTHCARE ACQUISITION CORP. II (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS ============================================================================== All of the Company's stockholders prior to the Offering, including all of the officers and directors of the Company ("Initial Stockholders"), have agreed to vote their 2,000,000 founding shares of common stock in accordance with the vote of the majority in interest of all other stockholders of the Company ("Public Stockholders") with respect to any Business Combination. After consummation of a Business Combination, these voting safeguards will no longer be applicable. With respect to a Business Combination which is approved and consummated, any Public Stockholder who voted against the Business Combination may demand that the Company convert his shares. The per share conversion price will equal the amount in the Trust Account, calculated as of two business days prior to the consummation of the proposed Business Combination, divided by the number of shares of common stock held by Public Stockholders at the consummation of the Proposed Offering. Accordingly, Public Stockholders holding 19.99% of the aggregate number of shares owned by all Public Stockholders may seek conversion of their shares in the event of a Business Combination. Such Public Stockholders are entitled to receive their per share interest in the Trust Account computed without regard to the shares held by Initial Stockholders. Accordingly, a portion of the net proceeds from the offering (19.99% of the amount held in the Trust Account) has been classified as common stock subject to possible conversion in the accompanying April 27, 2005 balance sheet. The Company's Amended and Restated Certificate of Incorporation provides for mandatory liquidation of the Company in the event that the Company does not consummate a Business Combination within 18 months from the date of the consummation of the Offering, or 24 months from the consummation of the Offering if certain extension criteria have been satisfied. In the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per share in the Offering due to costs related to the Offering and since no value would be attributed to the Warrants contained in the Units sold (Note 2). Deferred income taxes are provided for the differences between the bases of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company recorded a deferred income tax asset for the tax effect of net operating loss carryforwards and temporary differences, aggregating approximately $3,560 and $320 at April 27, 2005 and December 31, -9- KBL HEALTHCARE ACQUISITION CORP. II (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS ============================================================================== 2004, respectively. In recognition of the uncertainty regarding the ultimate amount of income tax benefits to be derived, the Company has recorded a full valuation allowance at April 27, 2005 and December 31, 2004, respectively. The effective tax rate differs from the statutory rate of 34% due to the increase in the valuation allowance. Loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements. 2. INITIAL PUBLIC OFFERING On April 27, 2005, the Company sold 8,000,000 units ("Units") in the Offering. Each Unit consists of one share of the Company's common stock, $.0001 par value, and two Redeemable Common Stock Purchase Warrants ("Warrants"). Each Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.00 commencing the later of the completion of a Business Combination or one year from the effective date of the Offering and expiring four years from the effective date of the Offering. The Warrants will be redeemable, upon prior written consent of EarlyBirdCapital, Inc., at a price of $.01 per Warrant upon 30 days' notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given. In connection with this Offering, the Company issued an option, for $100, to the representative of the underwriters to purchase 400,000 Units at an exercise price of $7.50 per Unit. In addition, the warrants underlying such Units are exercisable at $6.25 per share. 3. ACCOUNTS PAYABLE Accounts payable and accrued expenses AND ACCRUED consists of: EXPENSES: April 27, 2005 December 31, 2004 -------------- ----------------- Accrued insurance $ 110,000 $ -- Accrued offering costs 87,845 -- Accrued subscription 16,995 -- Other 9,391 939 --------- ----- $ 224,231 $ 939 ========= ===== 4. NOTES PAYABLE, The Company issued an aggregate of $100,000 STOCKHOLDER unsecured promissory notes to an Initial Stockholder, who is also an officer, in January and March 2005. The notes are non interest-bearing and will be paid -10- KBL HEALTHCARE ACQUISITION CORP. II (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS ============================================================================== following the consummation of the Offering from the net proceeds of such Offering. 5. COMMITMENT The Company presently occupies office space provided by an affiliate of three Initial Stockholders, who are also officers. Such affiliate has agreed that, until the acquisition of a target business by the Company, it will make such office space, as well as certain office and secretarial services, available to the Company, as may be required by the Company from time to time. The Company has agreed to pay such affiliate $7,500 per month for such services commencing on the effective date of the Offering. The statement of operations for the period ended April 27, 2005 includes $1,750 related to this agreement. 6. PREFERRED STOCK The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. 7. COMMON STOCK Effective January 26, 2005 and March 24, 2005, the Company's Board of Directors authorized a stock dividend of 0.428571 shares of common stock and 0.6 shares of common stock, respectively, for each outstanding share of common stock. On February 8, 2005, the Company's Board of Directors approved an amendment to the Company's Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 15,000,000 to 30,000,000 shares of common stock. In addition, on March 24, 2005 the Company's certificate of incorporation was amended to increase the authorized shares of common stock to 35,000,000 shares. All references in the accompanying financial statements to the number of shares of common stock have been retroactively restated to reflect these transactions. At April 27, 2005, 17,200,000 shares of common stock were reserved for issuance upon exercise of redeemable warrants and underwriters' unit purchase option. -11-
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