SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December, 1998
COVENTRY INDUSTRIES CORP.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 0-22653 65-0353816
--------------- ----------- -------------------
State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
7777 Glades Road, Boca Raton, Florida 33434
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (561) 448-4802
N/A
-------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
Items 1 and 2. Changes in Control of Registrant and Acquisition or Disposition
---------------------------------------------------------------
of Assets.
---------
On September 29, 1998 Coventry Industries, Corp. (the "Company")
entered into an Exchange Agreement (the Exchange Agreement") dated as of
September 29, 1998 with, BSD Healthcare Industries, Inc. ("BSD"), Stephen
Rosedale and Ronald Wilheim certain shareholders of BSD (the "BSD
Shareholders"), People First Staffing, LLC ("PF") and Stephen Rosedale and
Ronald Wilheim as the members of PF (the "Members").
The Exchange Agreement provides that the Company will acquire 80.1% of
BSD's outstanding capital stock from the BSD Shareholders 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 from the Members in exchange for Common Stock
of the Company that when aggregated with the shares issued to the BSD
Shareholders, will equal 80.1% of the Company's outstanding shares on the
closing date. Messrs. Rosedale and Wilheim continue to beneficially own
approximately 10% of the outstanding BSD capital stock and are the sole members
of PF.
The Exchange Agreement provides that the parties had a 60-day period
ending on November 30, 1998 to conduct due diligence and terminate the agreement
without any liability. On November 30, 1998, the BSD Shareholders informed the
Company that they had completed their due diligence and intended to close the
transaction upon satisfaction of the closing conditions set forth in the
Exchange Agreement. The closing occurred on December 7, 1998. At the BSD
closing, Mr. Rosedale was issued 756,800 shares of the Company's Common Stock
and Ronald Wilheim was issued 189,200 shares of the Company's Common Stock.
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.
The closing of the PF acquisition is subject to the following
conditions: (i) the conversion of all of the Company's 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.
BSD provides 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. Many patients are now treated in a skilled nursing
facility instead of the hospital due to the current reimbursement system.
The services are provided by RCS's pool of over 3,000 respiratory
therapists. RCS provides a comprehensive program that includes (i) skilled
medical respiratory care programs, (ii) ventilator and complex medical programs,
(iii) distribution and inventory management of disposable pulmonary medical
products and (iv) medical gases. These respiratory therapists perform a wide
variety of procedures, including oxygen therapy, bronchial hygiene, nebulizer
and aerosol treatments, tracheostomy care, ventilator management, patient
respiratory education and transportation of mechanically ventilated patients.
The Company also provides respiratory equipment and supplies to its clients.
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 over 6,300
employees that will be leased to health care customers in over 24 states. The
completion of the PF acquisition will require approval by the Company's
shareholders. As of December 15, 1998, PF does not have any assets or
operations.
Upon the closing of the PF transaction, Stephen Rosedale and Ronald
Wilheim, the BSD Shareholders and Members, will together beneficially own 80.1%
of the outstanding common stock of the Company. Mr. Rosedale is Mr. Wilheim's
stepfather. Messrs. Rosedale and Wilheim will be deemed to control the Company.
At the BSD closing, Robert Hausman, Lester Gann, Ronald Wilheim,
Stephen Rosedale, Yucatan Holdings, Connie Steinmetz, Strategic Capital
Holdings, Inc. and Arizona Development Corporation (collectively, the
"Shareholders") entered into a Voting Agreement (the "Voting Agreement")
pursuant to which they agreed to vote the 3,777,961 shares of Coventry's common
stock beneficially owned by them for approval and adoption of the Exchange
Agreement (as amended from time to time), the PF transaction, the other
transactions contemplated by the Exchange Agreement and any other transactions
or items recommended by Coventry's Board of Directors, with such agreement to
vote to apply also to any adjournment of the Shareholder Meeting. Such shares
represent approximately 50.1% of the outstanding shares of the Company.
Mr. Hausman is the Company's President and Chief Executive Officer, Mr.
Gann is a director of the Company and president of the Company's Industrial
Fabrication and Repair subsidiary ("IFR"), Messrs. Rosedale and Wilheim were BSD
shareholders and are members of PF.
Item 5. Other Events
------------
Nasdaq Listing. On November 19, 1998, the Company received a letter
from the Nasdaq SmallCap Market stating that the Company's stock price has
failed to maintain a closing bid price of at least $1.00 for 30 days. The letter
stated that the Company had until February 19, 1999 to regain compliance with
this requirement or that the Common Stock would be subject to delisting. The
Company is considering various alternatives to bring it into compliance with the
Nasdaq maintenance standards prior to February 19, 1999 and expects to comply
prior to that date.
Gann Agreement. Effective November 9, 1998, the Company, IFR and Lester
Gann entered into an amendment to Mr. Gann's employment agreement pursuant to
which he serves as president of IFR. The Agreement was amended to provide that
the term would extend to November 9, 2001 as compared to May 1, 2001, that the
70,000 shares of the original signing bonus would be paid as of the PF closing,
and that Mr. Gann would be issued 665,000 shares of Common Stock in exchange for
waiving the "change of control" provisions of his agreement in connection with
the transactions described above and for modifying his ability to reacquire IFR
from the Company in certain cases.
2
Hausman Agreement. Effective December 1, 1998, the Company and Robert
Hausman, the Company's President and Chief Executive Officer, entered into an
amendment to his Management Agreement pursuant to which his management fee was
raised to $131,000; 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 200,000 shares of common stock of the Company at an exercise
prices of $5.00 and $4.00 per share to options to purchase 50,000 shares each
with exercise prices of $1.75, $2.00, $2.25 and $2.50 per share.
As of December 1, 1998, 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 own 115,000 shares of the Company's Series E
Preferred Stock (the "Preferred Stock"). Mr. Hausman and the Company have agreed
that the Preferred Stock will be exchanged for 1,150,000 shares of Common Stock,
of which 600,000 shares were exchanged simultaneously with the closing of the
BSD closing and the remaining 550,000 shares will be exchanged prior to the
closing of 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 the 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.
Mr. Hausman and the Company also agreed not to invoke the "change in
control" provisions of Section 4 as a result of the transactions set forth in
the Exchange Agreement.
Other. In October 1998, the Company also issued 100,667 shares for
payment of legal fees to the Company's former law firm.
In addition, in November 1998, the Company issued an aggregate of
883,333 shares to 11 persons for consulting services, as compensation and as
settlement of certain obligations. Some of these shares were issued pursuant to
consulting agreements that are filed hereto as exhibits.
In December 1998, the Company entered into an agreement with Barron
Chase Securities to terminate the Investment Banking Agreement between the
Company and Barron Chase. As consideration for this release, the Company agreed
to reduce the exercise price of the 300,000 warrants to $.75 per warrant. Barron
Chase may have been entitled to receive a fee in connection with the
transactions described above.
3
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
------------------------------------------------------------------
See the Index to Historical and Pro Forma Financial Statements on
Pages F-1 and F-2
(c) Exhibits.
2.8 Exchange Agreement dated as of September 29, 1998 by and among
Coventry Industries, Inc. ("Coventry"), BSD Healthcare Industries,
Inc. ("BSD"), certain shareholders of BSD, People First LLC ("PF")
and the members of PF (the Exchange Agreement")
4.2 Termination and Amendment Agreement dated December 9, 1998 between
the Company and Barron Chase Securities, Inc.
4
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
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.
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.
10.16 Consulting Agreement between the Company and Connie Steinmetz dated
as of November 2, 1998.
10.17 Consulting Agreement between the Company and Strategic Development
dated as of November 9, 1998.
5
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
COVENTRY INDUSTRIES CORP.
By:/s/ Robert Hausman
-------------------------------------
Robert Hausman,
President and Chief Executive Officer
Dated: December 18, 1998
6
INDEX TO HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS
(Item 7)
PAGE
----
BSD HEALTHCARE INDUSTRIES, INC.:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-3
CONSOLIDATED:
BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 F-4
STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) F-5
STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) F-6
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) F-7
NOTES TO FINANCIAL STATEMENTS F-8/14
RESPIRATORY CARE SERVICES, INC. AND RCS SUBACUTE, INC.:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-15
COMBINED:
BALANCE SHEETS
JANUARY 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997 F-16
STATEMENTS OF INCOME
MONTH ENDED JANUARY 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997 AND 1996 F-17
STATEMENTS OF STOCKHOLDERS' EQUITY
MONTH ENDED JANUARY 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997 AND 1996 F-18
STATEMENTS OF CASH FLOWS
MONTH ENDED JANUARY 31, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997 AND 1996 F-19
NOTES TO FINANCIAL STATEMENTS F-20/25
F-1
INDEX TO HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS (Concluded)
(Item 7)
PAGE
----
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS:
INTRODUCTION TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS F-26
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998 (Unaudited) F-27
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998 (Unaudited) F-28
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 (Unaudited) F-29
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS (Unaudited) F-30/31
* * *
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Directors and Stockholders
BSD Healthcare Industries, Inc.
We have audited the accompanying combined balance sheet of BSD HEALTHCARE
INDUSTRIES, INC. as of December 31, 1997. This combined 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 combined 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-3
BSD HEALTHCARE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
September December
ASSETS 30, 1998 31, 1997
------- ----------- --------
(Unaudited)
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 $ --
=========== ============
See Notes to Consolidated Financial Statements.
F-4
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-5
BSD HEALTHCARE INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
Common Stock Addi-
------------ tional
Number Paid-in Retained
of Shares Amount Capital Earnings Total
--------- ------ ------- -------- -----
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
========= ====== ======== ======== ==========
See Notes to Consolidated Financial Statements.
F-6
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-7
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-8
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-9
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-10
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-11
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-12
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-13
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-14
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-15
RESPIRATORY CARE SERVICES, INC. AND
RCS SUBACUTE, INC.
COMBINED BALANCE SHEETS
JANUARY 31, 1998 AND DECEMBER 31, 1997
January December
ASSETS 31, 1998 31, 1997
------ -------- --------
(Unaudited)
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
========== ==========
See Notes to Combined Financial Statements.
F-16
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
Month Years Ended
Ended December 31,
January ----------------------------
31, 1998 1997 1996
--------- ---------- ----------
(Unaudited)
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
======== ==========
See Notes to Combined Financial Statements.
F-17
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
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
------------- --------- ----------- ----------- -------- ---------- ------------
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
===== ====== ===== ====== ======== ========= =========
See Notes to Combined Financial Statements.
F-18
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
Month Years Ended
Ended December 31,
January -------------------------
31, 1998 1997 1996
-------- -------- --------
(Unaudited)
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
======== ========
See Notes to Combined Financial Statements.
F-19
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-20
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-21
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-22
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-23
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-24
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-25
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 946,000 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
balance sheet combines the historical unaudited consolidated balance sheet of
Coventry and its subsidiaries as of September 30, 1998 and the historical
unaudited consolidated balance sheet of BSD and its subsidiaries as of September
30, 1998 as if the acquisition of the 80.1% interest in BSD had been consummated
on that date. 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 three months ended September 30, 1998 combines
the historical unaudited consolidated statement of operations of Coventry and
its subsidiaries and BSD for the three months ended September 30, 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
financial position and 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
BSD and RCS included elsewhere herein and the audited and unaudited historical
financial statements of Coventry included in its annual report on Form 10-KSB
for the year ended June 30, 1998 and its quarterly report on Form 10-QSB for the
three months ended September 30, 1998 previously filed with the Securities and
Exchange Commission which are incorporated herein by reference.
F-26
COVENTRY INDUSTRIES CORP.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(Unaudited)
Coventry Historical
Pro Forma Pro Forma -----------------------------
ASSETS Combined Adjustments Coventry BSD
------ -------- ----------- -------- ---
Current assets:
Cash and cash equivalents $ 238,886 $ 141,910 $ 96,976
Accounts receivable, net 2,527,398 1,107,846 1,419,552
Inventory 866,550 866,550
Other current assets 354,024 196,581 157,443
----------- ------------ ----------
Total current assets 3,986,858 2,312,887 1,673,971
Property, plant and equipment, net of
accumulated depreciation 2,820,927 2,731,698 89,229
Goodwill, net of accumulated amortization 2,859,424 $ (57,274) (A) 1,374,154 1,542,544
Other assets 633,868 633,868
----------- ------------ ------------ ----------
Totals $10,301,077 $ (57,274) $ 7,052,607 $3,305,744
=========== ============ ============= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Current liabilities:
Current portion of long-term debt $ 431,095 $ 431,095
Notes payable 779,386 497,307 $ 282,079
Accounts payable and accrued expenses 1,722,195 1,256,554 465,641
Note payable to former stockholder 151,524 151,524
----------- ------------ ----------
Total current liabilities 3,084,200 2,336,480 747,720
Long-term debt, net of current portion 1,835,048 335,048 1,500,000
Minority interest 123,000 $ 123,000 (B)
----------- ---------- ------------ ----------
Total liabilities 5,042,248 123,000 2,671,528 2,247,720
----------- ---------- ------------ ----------
Stockholders' equity:
Preferred stock 146 146
Common stock:
Coventry (3,032,797 shares out-
standing; 3,978,797 shares
to be outstanding) 3,979 946 (C) 3,033
BSD (1,751) (C) 1,751
Additional paid-in capital 22,275,791 8,920 (C) 21,398,987 867,884
Unearned compensation and advertising
fees (2,311,292) (2,311,292)
Accumulated deficit (14,709,795) (188,389) (C) (14,709,795) 188,389
----------- ---------- ------------ ----------
Total stockholders' equity 5,258,829 (180,274) 4,381,079 1,058,024
----------- ---------- ------------ ----------
Totals $10,301,077 $ (57,274) $ 7,052,607 $3,305,744
=========== ========== ============ ==========
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
F-27
COVENTRY INDUSTRIES CORP.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
(Unaudited)
Historical Pro Forma
Coventry BSD
Pro Forma (July 1, (July 1,
----------------------------- 1997 to 1997 to
June 30, June 30,
Combined Adjustments 1998) 1998)
-------- ----------- ----- -----
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
------------ ----------- ----------
Selling, general and administrative expenses 4,664,658 3,282,576 1,382,082
Marketing and public relations 3,710,714 3,710,714
Depreciation and amortization 679,322 $ (78,917) (4) 402,268 355,971
------------ ---------- ----------- ----------
Totals 9,054,694 (78,917) 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 (79,015) 31,567 (5) (180,750) 70,168
------------ ---------- ----------- ----------
Income (loss) from continuing
operations (6,661,198) 47,350 (6,813,796) 105,248
Dividends paid 114,835 114,835
------------ ---------- ----------- ----------
Income (loss) from continuing operations
applicable to common stock $ (6,776,033) $ 47,350 $(6,928,631) $ 105,248
============ ========== =========== ===========
Basic loss from continuing operations
per share $(1.90) $(2.64)
====== ======
Weighted average shares outstanding 3,575,148 946,000 (6) 2,629,148
========= ======= =========
(RESTUBBED TABLE)
Historical
----------------------------
BSD RCS
(July 1, (July 1,
1997 to 1997 to
Pro Forma June 30, January
Adjustments 1998) 31, 1998)
----------- ----- ---------
Revenue $1,773,391 $2,441,263
Cost of revenue 836,750 1,277,779
---------- ----------
Gross profit 936,641 1,163,484
---------- ----------
Selling, general and administrative expenses 529,952 852,130
Marketing and public relations
Depreciation and amortization $ 355,971 (1)
---------- ---------- ----------
Totals 355,971 529,952 852,130
---------- ---------- ----------
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
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
F-28
COVENTRY INDUSTRIES CORP.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
Coventry Historical
Pro Forma Pro Forma ----------------------------
Combined Adjustments Coventry BSD
-------- ----------- -------- ---
Revenue $2,836,156 $1,615,595 $1,220,561
Cost of revenue 1,733,137 1,150,620 582,517
---------- ---------- ----------
Gross profit 1,103,019 464,975 638,044
---------- ---------- ----------
Operating expenses:
Selling, general and administrative
expenses 838,344 516,804 321,540
Depreciation and amortization 153,659 $ (19,729) (4) 84,395 88,993
---------- ---------- ---------- ----------
Totals 992,003 (19,729) 601,199 410,533
---------- ---------- ---------- ----------
Operating income (loss) 111,016 19,729 (136,224) 227,511
---------- ---------- ---------- ----------
Other expense:
Interest 95,659 43,100 52,559
Other 22,283 22,283
---------- ---------- ----------
Totals 117,942 43,100 74,842
---------- ---------- ----------
Income (loss) before provision for
income taxes (6,926) 19,729 (179,324) 152,669
Provision for income taxes (61,800) (5) 61,800
---------- ---------- ---------- ----------
Net income (loss) (6,926) 81,529 (179,324) 90,869
Preferred stock dividends (34,875) (34,875)
---------- ---------- ---------- ----------
Net income (loss) applicable to
common stock $ (41,801) $ 81,529 $ (214,199) $ 90,869
========== ========== ========== ==========
Basic net income (loss) per share $ (.01) $(.07)
======= =====
Weighted average common shares
outstanding 3,978,797 946,000 (6) 3,032,797
========= ======= =========
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
F-29
COVENTRY INDUSTRIES CORP.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
Purchase of BSD by Coventry:
Information with respect to the cost incurred by Coventry to acquire BSD on
December 7, 1998 and the expected allocation of such estimated costs in
accordance with the purchase method of accounting follows:
Issuance of 946,000 shares of common stock with an
estimated fair value of $.875 per share based on
the market value of Coventry's shares at the
date of acquisition $ 827,750
Estimated legal, accounting and other costs related to
the purchase 50,000
---------
Total cost to be allocated $ 877,750
=========
Historical carrying value of assets acquired 3,305,744
Less carrying value of goodwill (1,542,544)
---------
Cost allocated to fair value of assets acquired 1,763,200
Fair value of liabilities assumed (2,247,720)
Minority interest (123,000)
Excess of cost over fair value of net assets acquired allocated
to goodwill 1,485,270
---------
Total purchase price allocated $ 877,750
=========
Pro Forma Adjustments to the Unaudited Condensed Combined Balance Sheet as of
September 30, 1998:
(A) To record 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.
(B) To record the 19.9% minority interest in BSD.
(C) To record the issuance of 946,000 shares of Coventry common stock issued
to acquire 80.1% of the outstanding common stock of BSD at $827,750 based
on the market value of Coventry's shares at the date of acquisition and
eliminate the historical equity accounts of BSD.
F-30
COVENTRY INDUSTRIES CORP.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
Pro Forma Adjustments to the Unaudited Condensed Combined Statements of
Operations for the Year Ended June 30, 1998 and the Three Months Ended September
30, 1998:
(1) To record the amortization of $1,770,858 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 adjust Coventry'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.
(6) To increase the weighted average number of Coventry's shares outstanding
based on the assumption that the 946,000 shares issued by Coventry to
acquire BSD would have been outstanding during the year ended June 30, 1998
and the three months ended September 30, 1998.
F-31