SCHEDULE 14C
(RULE 14C-101)
INFORMATION REQUIRED IN INFORATION STATEMENT
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, For Use of the Commission Only
(as permitted by Rule 14c-5(d)(2))
[ ] Definitive Information Statement
COVENTRY INDUSTRIES CORP.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on the table below per Exchange Act Rules 14c-5(g) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
(2) Aggregate number of securities to which transaction applies:
5,000,000 Shares
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$3.75
(4) Proposed maximum aggregate value of transaction: $18,750,000
(5) Total fee paid: $3,750
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or schedule
and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
INFORMATION STATEMENT
TO THE SHAREHOLDERS OF COVENTRY INDUSTRIES CORP:
The following actions have been approved by a majority of the shareholders
and the board of directors of Coventry Industries Corp:
1. STOCK ISSUANCE AND CHANGE OF CONTROL. An aggregate of 5,000,000
shares of our common stock, $0.01 par value, have been issued in connection with
the acquisition of PeopleFirst Staffing, Ltd. and the associated change of
control of our company.
2. AMENDMENT TO CERTIFICATE OF INCORPORATION. We have approved an
amendment to our Articles of Incorporation that when effective, will increase
the number of authorized shares of our preferred stock from 250,000 shares to
5,000,000 shares and the common stock from 3,125,000 shares to 50,000,000 shares
common stock and to change our name to American Risk Management Group, Inc. The
Certificate of Amendment to be filed with the Secretary of State of the State of
Florida is attached to this document as Annex A.
3. ELECTION OF DIRECTORS. Five directors have been elected to our Board
of Directors until our next annual meeting or until their successors have been
qualified;
4. STOCK OPTION PLAN. Our 1999 Stock Option Plan has been approved. The
1999 Plan is attached to this document as Annex B.
5. APPOINTMENT OF ACCOUNTANTS. We have appointed JH Cohn LLP as our
auditors for the fiscal year ending June 30, 1999.
By the Order of the Board of Directors,
Robert Hausman
President
Boca Raton, Florida
August , 1999
INFORMATION STATEMENT FOR
OF COVENTRY INDUSTRIES CORP.
Our board of directors and Stephen Rosedale and Ronald Wilheim have agreed to a
transaction designed to allow us to commence an administrative services
organization providing services to over 6,000 employees. This agreement requires
us to issue an aggregate 5,000,000 shares of our common stock to Messrs.
Rosedale and Wilheim or a limited liability company owned by them having an
aggregate market value of approximately $18,750,000. Messrs. Rosedale and
Wilheim own PeopleFirst Staffing, Ltd., a limited liability company which has a
letter of intent to provide services to companies affiliated with Messrs.
Rosedale and Wilheim that have over 6,000 employees. Commencing January 1, 2000,
PeopleFirst will become a professional employee organization ("PEO") Following
the issuance, theses persons will own approximately 82.7% of the total
outstanding shares of our common stock.
In order to accomplish this transaction, we needed to increase our
authorized capital by amending our Articles of Incorporation. Messrs. Rosedale
and Wilheim have also been elected to our board of directors.
This document provides you with detailed information about the transaction
and the other matters recently approved by our board of directors and a majority
of our shareholders. We encourage you to read the entire document carefully,
including all of its annexes. We especially encourage you to read the "Risk
Factors" section which begins on page 8. You may obtain additional information
about us from documents we have filed with the SEC.
We expect the shareholder action approving the amendment to become
effective on or about August __, 1999. Our board of directors has fixed the
close of business on July 30, 1999 as the record date for the determination of
shareholders who are entitled to give consent and receive this information
statement. Holders of 576,500 shares of our common stock, representing
approximately 52.8% of our outstanding shares, have approved the above items.
The approval of the amendment will require the written consent of the holders of
a majority of the outstanding shares of our common stock. As of July 30, 1999,
there were 1,149,751 outstanding shares of our common stock and approximately
182 holders of record of our common stock. No meeting of the shareholders is
being held in connection with the approval of the amendment and no proxies or
consents are being solicited in connection with this information statement.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND US A PROXY
The date of this information statement is August _, 1999
We will mail this document to our shareholders beginning on or about August
__, 1999.
We have not authorized anyone to give any information or make any
representation about the matters discussed in this document that differs from or
adds to the information in this document or any of the Annexes attached to this
document. Therefore, if anyone does give you different or additional
information, you should not rely on it. The information contained in this
document speaks only as of its date unless the information specifically
indicates that another date applies.
WHO CAN HELP ANSWER MY QUESTIONS?
If you have more questions about the stock issuance and the associated change in
control, the amendment to our certificate of incorporation, the election of
directors or the other matters to be voted upon, you should contact Mr.
Robert Hausman at:
Coventry Industries Corp.
1900 Corporate Boulevard, Suite 400 East
Boca Raton, Florida 33431
Telephone: (561) 988-2544
Fax: (561) 988-2545
E-mail: rlhausman@directnet1.net
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SUMMARY
This summary highlights selected information contained elsewhere or
incorporated by reference in this document. This summary may not contain all of
the information that is important to you. Where appropriate, we have included
page references to direct you to a more complete description of the topics
presented in this summary.
THE COMPANY
COVENTRY INDUSTRIES CORP.
1900 Corporate Boulevard, Suite 400 East
Boca Raton, Florida 33431
(561) 988-2544
We are a holding company that has owned various businesses. Over the last three
years we have bought and sold several companies. We are in the process of
liquidating our current businesses, which are manufacturing and selling various
products for industrial use and operating a respiratory therapy and respiratory
therapy management business.
OUR REASONS FOR THE TRANSACTION
We intend to develop into a leading national professional employee
organization to service the home healthcare industry and other industries. We
also intend to acquire insurance businesses to expand the range of services that
we will offer to our clients. We see this opportunity as a way to enhance
shareholder value through the potential for long-term growth. We believe that
our shareholders will benefit from the acquisition and resulting investment in
the combined entity because we believe the transaction provides our
shareholders:
- - ownership in a larger entity with the opportunity of further significant
growth;
- - improved market liquidity;
- - an experienced growth-oriented management team; and
- - a means to improve the quality of product and service delivered.
We also considered detriments and uncertainties to the transaction, including:
- - the low operating margins in the employee services business;
- - Coventry's management's limited experience in the employee services
industry; and
- - difficulties in implementing the growth strategy.
To review the background of the acquisition and our reasons for the
transaction in greater detail, as well as related detriments and uncertainties,
please read the discussion under "Stock Issuance and Change of Control" which
begins on page 13, as well as the "Risk Factors" section of this document which
begins on page 8.
THE TERMS OF THE ISSUANCE.
In the transaction, we will issue to a limited liability company owned by
Messrs. Rosedale and Wilheim an aggregate of 5,000,000 shares of our common
stock for all of the outstanding interests of PeopleFirst. Based on our recent
range of daily closing sale prices on the OTC Bulletin Board of $3.00 to $3.75
per share, the aggregate value of the
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shares to be issued to PeopleFirst shareholders would range from approximately
$15.0 million to $18.75 million. Our shareholders will not receive any shares of
common stock in the transaction. PeopleFirst will become our wholly-owned
subsidiary when the transaction is completed.
OWNERSHIP OF COVENTRY AFTER THE TRANSACTION.
We estimate that the shares of our common stock to be issued to PeopleFirst
members in the transaction will represent approximately 82% of the total
outstanding shares of our common stock following the transaction. These persons
currently own an aggregate of 43,250 shares of common stock and will own an
aggregate of 5,043,250 shares or 82.7% of the total outstanding shares of our
common stock after the transaction.
OUR BOARD OF DIRECTORS AND MANAGEMENT FOLLOWING THE TRANSACTION.
In connection with the transaction, five directors have been elected to
serve on our board of directors. Four of the directors, Stephen Rosedale, Ronald
Wilheim, Steve Wilder and Simon Groner, were nominated by PeopleFirst. One
director, Robert Hausman, was nominated by us and has previously served on our
board of directors. For information regarding our directors, see "Management"
which begins on page 35.
After the transaction, our executive officers will be:
- -------------------------------------------------------------------------------
Name Position
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Stephen Rosedale Chairman of the Board
- -------------------------------------------------------------------------------
Robert Hausman President
- -------------------------------------------------------------------------------
Ronald Wilheim Vice Chairman and Chief Executive Officer
- -------------------------------------------------------------------------------
Simon Groner Secretary
- -------------------------------------------------------------------------------
For information regarding our new executive officers and directors, see
page 35.
OTHER INTERESTS OF OFFICERS, DIRECTORS AND DIRECTOR NOMINEES IN THE STOCK
ISSUANCE.
You should be aware of interests which some of our officers and directors
have that are separate from and in addition to the interests of our shareholders
generally. These interests are as follows:
Upon completion of the transaction, Stephen Rosedale and Ronald Wilheim,
who are directors, will own an aggregate of 5,043,250 shares of our common stock
representing 82.7%. Mr. Wilheim is Mr. Rosedale's son.
Robert Hausman, our president and a director, was recently issued 68,750
shares of common stock upon conversion of outstanding preferred stock and 50,000
shares for the cancellation of options and other rights held by him. He
currently owns 211,000 shares of common stock.
Our board of directors and the shareholders were aware of these interests
and took them into account when approving the exchange agreement and the other
resolutions.
ACCOUNTING TREATMENT OF THE TRANSACTION.
The transaction is intended to qualify as a "purchase" for accounting and
financial reporting purposes.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.
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The exchange is intended to qualify as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended. There will
be no tax consequences to persons who are our shareholders prior to the
exchange.
ABSENCE OF APPRAISAL RIGHTS FOR COVENTRY.
Under Florida law, our shareholders do not have appraisal rights with
respect to any of the proposals described in this document.
OPINION OF OUR FINANCIAL ADVISOR
We did not seek the opinion of a financial advisor or obtain a fairness
opinion.
STOCK OWNERSHIP
Prior to the transaction, we had 1,149,751 shares of common stock outstanding.
After the transaction, we will have 6,149,751 shares of common stock
outstanding. The following chart describes the ownership before and after these
transactions:
- -----------------------------------------------------------------------------------------------------
Name Shares owned before % Shares owned after %
- -----------------------------------------------------------------------------------------------------
Robert Hausman 211,000 18.3 211,000 3.4
- -----------------------------------------------------------------------------------------------------
Stephen Rosedale 34,600 3.0 3,034,600 49.3
- -----------------------------------------------------------------------------------------------------
Ronald Wilheim 8,650 0.8 2,008,650 32.7
- -----------------------------------------------------------------------------------------------------
Other directors and officers 102,074 8.8 102,074 1.7
- -----------------------------------------------------------------------------------------------------
Public shareholders 793,427 69.1 793,427 12.9
- -----------------------------------------------------------------------------------------------------
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SUMMARY SELECTED HISTORICAL FINANCIAL DATA
The summary selected historical financial data for Coventry presented
below for each of the two years ended and as of June 30, 1998 and 1997 have been
derived from the audited consolidated financial statements of Coventry. The
summary selected historical financial data for the nine month periods ended
March 31, 1999 and 1998 and as of March 31, 1999 for Coventry and for the three
month period then ended have been derived from their respective unaudited
consolidated financial statements. The data should be read in conjunction with
the consolidated financial statements, related notes, management's discussion
and analysis, and other financial information which are included in this
document for Coventry and PeopleFirst.
COVENTRY Year Nine months
Ended June 30, Ended March 31,
-------------- ---------------
1998 1997 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
Statement of Operations Data:
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) $(1,931,746) $ (936,064)
Dividends on preferred stock .... 114,835 -- --
89,000
Net loss applicable to common
stock
$(6,928,630) $(2,894,751) $(2,196,410) $(2,102,425)
Share data:(1)
Basic loss per share - continuing
operations ...................... $ (21.08) $ (28.65) $ (3.63) $ (7.43)
=========== =========== =========== ===========
Weighted average number
of common shares outstanding .... 328,644 101,053 604.952 283,564
=========== =========== =========== ===========
June 30, March 31,
1998 1999
---- ----
Balance Sheet Data: (unaudited)
Cash...................................... $ 52,188 $ 492,464
Total current assets...................... $ 2,518,576 $ 3,669,630
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
Shareholders' equity...................... $ 4,595,278 $ 3,885,899
- --------------------
(1) As adjusted for the effects of the 1-for-8 reverse split on March 22, 1999.
MARKET PRICE AND DIVIDEND INFORMATION
COVENTRY
On August 26, 1994 Coventry's common stock began trading on the OTC
Bulletin Board under the symbol WFSC. Prior to such date, there had been no
market for Coventry's common stock; thereafter, there has been limited trading.
On April 4, 1997, simultaneous with the one for four stock split of Coventry's
common stock, the common stock began trading under the symbol "WFSY." On
November 12, 1997 Coventry's common stock began trading on the Nasdaq SmallCap
Market under the symbol "COVN." On May 7, 1999 the common stock was delisted
from the Nasdaq SmallCap Market and resumed trading on the OTC Bulletin Board.
The following table sets forth the high and low bid prices of Coventry's common
stock as reported on the OTC Bulletin Board for each quarter from June 30, 1996
through November 11, 1997 and from May 10, 1999 through July 29, 1999. The
quotations provided from November 12, 1997 through May 7, 1999 are as reported
on The Nasdaq SmallCap Market(TM),
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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.
High Bid Low Bid
----------- ----------
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 June 30, 1999 5.375 3.125
FISCAL 2000
July 1, 1999 through August 4, 1999 $3.8438 $3.75
On August 4, 1999, the closing bid price for the common stock as reported
on The OTC Bulletin Board was $3.75. As of February 28, 1999, the approximate
number of record holders of Coventry's common stock was 181. We believe that
there are in excess of 900 beneficial holders of Coventry's common stock.
Dividend Policy
We have not paid any cash dividends on our common stock since our
inception. We presently intend to retain future earnings, if any, to finance the
expansion of our business and do not anticipate that any cash dividends will be
paid in the foreseeable future. Future dividend policy will depend on our
earnings, capital requirements, expansion plans, financial condition and other
relevant factors.
The Series E Cumulative Non-Participating Preferred Stock was recently
converted into common stock. The Series E Cumulative Non-Participating Preferred
Stock paid annual dividends of $77,000.
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".
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RISK FACTORS
The exchange and ownership of our common stock following the
transaction involve the following risks. You should carefully consider these
risks together with all other information contained in this document in
evaluating the proposed exchange and your investment in our common stock.
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.
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 Document or otherwise made by or on our
behalf. For this purpose, any statements contained in this Document 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 document 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 document, 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 from continuing operations applicable to
common stock of $2,196,410 for the nine months ended March 31, 1999 and
$6,928,630 for the fiscal year ended June 30, 1998. 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. We expect to receive a going concern opinion for
the year ended June 30, 1999. Our fire-sprinkler business has been unprofitable
and we are in the process of liquidating this business. Further Lester Gann, the
president of our IFR subsidiary, has informed us that since we were delisted
from Nasdaq, he is considering exercising his right to exchange his Coventry
common stock to reacquire 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.
PeopleFirst commenced operations in July 1999 and is not expect to be fully
operational until August 1999 when it assumes a substantial number of employees.
PeopleFirst has a limited operating history and there is no history upon which
to evaluate its financial situation.
Additional Financing Is Required And We Might Not Be Able to Obtain These Funds
We have experienced significant changes in our business over the last
several years. We currently anticipate we will continue our current plan to
grow both internally and through acquisitions through fiscal 2000 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 Coventry'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 outstanding 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 deficit of $62,356 at March 31, 1999, although
much of our current assets consisted of accounts receivable that we subsequently
sold in July 1999. We cannot assure you that funding will be available at terms
acceptable
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or feasible to Coventry or our shareholders. If we cannot raise funds, then our
continued growth would be restrained.
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 shareholders, prospects of general market and economic conditions and
other factors.
Potential Adverse Effects Arising From The Change Of Control Of Coventry
Existing Shareholders Will Lose Control. Following the completion of
the transaction, Stephen Rosedale and his son Ronald Wilheim will together own
82.7% of our stock and our existing shareholders will own 17.3% 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. Although
these individuals have not agreed to vote together on matters submitted to a
vote of our shareholders after the exchange, if they vote together, they could
have the ability to control or substantially influence the outcome of most
matters submitted to a vote of our shareholders, including the election of
directors. In addition, five persons were elected to serve as our directors upon
completion of the transaction. Of those five persons, only Messrs. Hausman,
Weisz and Groner were previously directors of Coventry. The other two persons,
Messrs. Rosedale and Wilheim, were nominees of PeopleFirst. Although there is no
agreement among them, if Messrs. Rosedale, Wilheim and Groner were to act and
vote together as members of our board of directors, they would have the ability
to control most actions submitted to a vote of the board of directors. Our other
shareholders thus may not have the ability to approve certain types of corporate
actions.
Most Of Our Directors And Executive Officers Have Limited Experience
with the Employee Services Industry. Other than Ralph Fain, the president of
PeopleFirst, none of our proposed directors and executive officers have any
significant experience in the employee services industry. We cannot assure you
that the proposed new directors and executive officers of our company will be
successful in the employee services industry.
Risks Relating to the Employee Services Business
PeopleFirst May Not Be Able To Pass Through Certain Costs
Health insurance premiums, state unemployment taxes and workers'
compensation rates are in part determined by PeopleFirst's claims experience and
comprise a significant portion of the direct costs. PeopleFirst will employ risk
management procedures in an attempt to control claims incidences. However,
should we experience a large increase in claims activity, our unemployment
taxes, health insurance premiums or workers' compensation insurance rates may
increase. Our ability to incorporate increases into service fees to clients may
be limited by contractual arrangements with clients and competitive factors. As
a result, if we are unable to pass along increases, our financial condition and
results of operations may be adversely affected.
Most of The Agreements are Short Term and We Can Lose Clients
The standard employee services agreement provides for an initial one-year
term that can be renewed for additional periods. The agreement can be terminated
without cause by the either party upon 30 days' prior written notice. We expect
that there will be terminations and non-renewals from time to time and that we
may not be able to replace all of these clients. Our financial performance could
be damaged by a significant number of terminations or non-renewals.
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We Need to Maintain Adequate Reserves For Workers' Compensation and
Healthcare Claims
A significant part of our business will be maintaining a workers'
compensation insurance plan covering worksite employees. As part of our standard
services agreement, we will assume our clients' financial obligations to pay
workers' compensation claims of worksite employees. We will need to estimate
reserves to cover future claims.
As part of our standard services agreement we also assume the financial
obligation to provide health care coverage for worksite employees. While we have
purchased certain insurance coverage to limit this exposure. We will maintain
reserves for health care claims based on periodic reviews of open claims as well
as past claims experience.
We cannot predict with certainty the ultimate liability associated with
claims, and past claims experience may not be indicative of future results. We
will need to record additional charges if our actual losses are greater than our
reserves.
Risks Associated With Financial Position Of Clients
In providing its services, we enter into a co-employment relationship
with worksite employees and assume the obligations to pay the wages and related
benefit costs and payroll taxes of these employees. Our standard services
agreement will obligate the client to reimburse us for these payments. Our
obligations include responsibility for payroll for worksite employees and
payment of payroll withholding taxes, federal and state unemployment taxes. We
assume these obligations as a principal, not merely as an agent of the client,
and are therefore liable for these obligations even if the client defaults in
paying us. Although we retain the right to terminate immediately the services
agreement with the client, as well as our relationship with the worksite
employees, due to nonpayment by the client, we remain liable to satisfy payroll
obligations for services performed prior to a termination in the event of a
client default. We are unable to guarantee clients would be financially able to
satisfy their obligations.
Goodwill Resulting From Acquisitions May Adversely Affect Our Results
Our goodwill related to acquired businesses at March 31, 1999 was
approximately $2.3 million, which represents approximately 24% of our total
assets of approximately $9.4 million and approximately 59% of total shareholders
equity of approximately $3.9 million. The approximately $15 million of goodwill
from this transaction will result in an annual amortization expense of
approximately $750,000, based upon the amortization of goodwill related to this
transaction, over a useful life of 20 years. Goodwill and related amortization
may increase principally as a result of future healthcare acquisitions, and the
amortization of goodwill and other intangible assets could adversely affect our
financial condition and results of operations. We have considered various
factors, including projected future cash flows, in determining the purchase
prices of our acquired businesses, and we do not believe that any material
portion of the goodwill related to any of these acquisitions will dissipate over
a period shorter than 20 years. However, our earnings in future years could be
significantly adversely affected if management later determines either that the
remaining balance of goodwill is impaired or that a shorter amortization period
is applicable.
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 our 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
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condition and results of operations.
Competition in All of Our Businesses is Intense
Competition in all our business is intense. Competitors include both
large and small national and local companies, many of which have longer
operating histories, and greater financial, marketing, manufacturing and other
resources than Coventry. 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. Mr.
Hausman is a party to a three-year management agreement expiring in July 2000.
Ralph Fain, who is president of PeopleFirst, is important to PeopleFirst's
operations. We would be adversely affected by the loss of the services of
Messrs. Hausman or Fain.
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 Coventry, and that cash dividends will not be paid to
common shareholders. See "Dividend Policy."
Shares of Our Common Stock That May Be Sold In The Future
Of the 1,149,751 shares of Coventry's common stock currently issued and
outstanding, 477,323 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
Coventry and who has held the shares for a two year holding period. Future sales
of shares of common stock by existing shareholders under Rule 144 could
materially adversely affect the market price of our 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 will authorize 5,000,000 shares of
preferred stock, none of which will be issued and outstanding. 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 shareholders. The Board of
Directors is empowered, without shareholder approval, to issue 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. 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.
Shareholders May be Diluted Upon Exercise of Outstanding Warrants
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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 and are not
listed for trading on the Nasdaq system. An issuer must meet certain
quantitative criteria relating to its total assets, its capital and the trading
prices of its securities to be included on the Nasdaq system. In addition, the
Nasdaq staff may consider other factors, such as the issuer's management and the
circumstances surrounding the issuer's operations, when determining whether to
approve an issuer's application for inclusion in the Nasdaq system. Our common
stock was delisted from the Nasdaq Stock Market in May 1999. We intend to
reapply when we again meet the listing criteria. We cannot guarantee you that we
will ever by listed again. As a result, you may find it more difficult to
dispose of, or to obtain adequate quotations as to, the prices of the Units,
Common Stock and Warrants.
SEC "Penny Stock" Regulations
SEC regulations require 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 the common stock is not quoted on Nasdaq, or 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 an annual 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.
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.
RECORD DATE
Our board of directors has fixed the close of business on July 30, 1999 as
the record date for determining holders of our common stock entitled to notice
of this information statement.
COVENTRY VOTING AGREEMENT
All of our directors, executive officers and significant shareholders, who
own approximately 52.8% of the outstanding shares of our common stock, have
entered into a voting agreement and have agreed to vote their shares in favor of
each of the proposals described in this document.
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STOCK ISSUANCE AND CHANGE OF CONTROL
GENERAL
We propose to issue 5,000,000 shares of our common stock to PeopleFirst
shareholders in the exchange. As a result of the stock issuance, PeopleFirst
members together will own approximately 82.7% of the total shares of our common
stock outstanding after the exchange.
BACKGROUND OF THE TRANSACTION
From time to time, our management has reviewed prospects for improving
shareholder liquidity and enhancing our long-term growth potential. In November
1997 our common stock was initially listed on the Nasdaq SmallCap Market. Prior
to that time, we had completed a series of acquisitions in line with our
philosophy and continued to pursue other related potential acquisitions in our
efforts to grow the business. Unfortunately, some of these prior transactions
were not successful and we divested of certain of these businesses during the
fourth quarter of fiscal year 1998 in order to refocus our strategy on making
acquisitions that would strengthen our core businesses and add to shareholder
value.
In June 1998, Coventry became aware of certain attractive healthcare
related employee leasing and distribution businesses that were available and
commenced preliminary negotiations to acquire these two businesses with Stephen
Rosedale and Ronald Wilheim, who were the principal owners. Over the course of
the summer, both Coventry and the PeopleFirst members conducted due diligence on
the other parties and in September 1998 commenced negotiations on an agreement.
In September 1998, our board of directors approved the transactions. On
September 29, 1998, Coventry, BSD Healthcare Industries, Inc., PeopleFirst and
Stephen Rosedale and Ronald Wilheim as the PeopleFirst members and shareholders
of BSD entered into the exchange agreement. The agreement provides that Coventry
would acquire 80.1% of BSD for 19.9% of Coventry's outstanding common stock and
all of the interests of PeopleFirst in exchange for Coventry common stock that
when aggregated with the shares issued to the BSD shareholders, will equal 80.1%
of Coventry's outstanding shares on the closing date. In December 1998 Coventry
completed the acquisition of BSD Healthcare, a respiratory therapy service and
equipment company in exchange for 118,250 shares. In July 1999, we sold
Respiratory Care Services Inc. and RCS Subaccute Inc., subsidiaries of BSD
Healthcare, business back to the sellers for 75,000 shares of our common stock
due to changes in this business as a result of changes in reimbursement rates
and our intention to focus our efforts on the PeopleFirst business.
OUR REASONS FOR THE TRANSACTION; RECOMMENDATIONS OF OUR BOARD OF DIRECTORS
At meetings in September and December, 1998 and July 1999, our board of
directors unanimously approved the terms of the exchange agreement and the
related transactions. The board believes that the terms of the exchange are fair
to, and in the best interests of, our shareholders and unanimously recommends
that you vote in favor of the issuance of our common stock to PeopleFirst
shareholders in connection with the exchange and the associated change in
control.
In the course of evaluating potential transactions, our management sought
businesses which it believed were undervalued and had the ability to grow
rapidly through acquisitions. Due to changes in the healthcare environment, this
industry has seen some consolidation and pressure on pricing. These developments
have led some companies to leave the business and others to restructure
operations. We believe that the employee services business meets these criteria
and that the professional employee organization is a good vehicle to enter this
market. Coventry believes that the management of PeopleFirst will be able to
operate in the current environment and will be able to rapidly grow the business
through both acquisitions and internal growth. The other alternatives analyzed
by our board of directors did not offer the same growth opportunities as the
proposed combination with PeopleFirst.
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Our management believes that the exchange with PeopleFirst will reduce
risks associated with existing operations, including the:
o limited ability to access capital due to our smaller capital base and
operational resources;
o increasing challenge in meeting growth expectations of our
shareholders, and
o Entry into businesses with the potential for significant growth.
Management believes that our shareholders will benefit from the transaction
and resulting investment in a combined Coventry/PeopleFirst entity because the
transaction provides:
o the potential for significantly increasing revenues and profits;
o the opportunity to develop a significant national presence in the
professional employee leasing business starting with a substantial
employee base of over 6,000 employees;
o an experienced, growth oriented management team;
o lowering our financing costs,
o lowering our insurance and related costs;
o integrating administrative operations;
o improved market liquidity and a greater ability to attract market
makers, stock market analysts and institutional investors;
o our shareholders with ownership in a larger entity with significant
growth opportunities;
o the opportunity to diversify our operations into ancillary service
sectors and, as a result, cross market these services to our existing
client base, and
o the opportunity to expand our client base in the PEO and in the
ancillary service sectors through the acquisition of new contracts.
Management also believes that there are some detriments and uncertainties
to the transaction with PeopleFirst, including:
o difficulties in quantifying and ensuring the creation of potential
operational efficiencies and cost savings in the combined entity;
o PeopleFirst's limited operating history;
o low margins in the professional employee organization business;
o difficulties in implementing the growth strategy; and
o excessive demands on our resources resulting from implementing our
growth strategy.
We discuss these detriments and uncertainties in the Risk Factors section
of this document.
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Our board of directors determined that it was in the best interests of our
shareholders to pursue the transaction. In making this determination, the board
considered the positive and negative factors set forth above. In addition, the
board considered the absence of an opportunity for a strategic alliance with
other industry participants either on comparable economic terms or with a
comparable probability of a successful combination. The board took these matters
into account in approving the terms of the transaction. Our legal counsel
advised the board about its fiduciary duties in the evaluation of the proposed
transaction. Our board of directors believes, in light of the decrease in the
market price of our common stock since the announcement of the transaction and
the corresponding decrease in the value of the shares to be issued to
PeopleFirst shareholders, that the terms of the transaction with PeopleFirst
remain fair and in the best interests of our shareholders as of the date of this
document.
The preceding discussion sets forth the material information and factors
considered by our board of directors in determining the fairness to our
shareholders of the stock issuance in connection with the exchange and the
associated change of control. In view of the variety of factors considered in
connection with its evaluation of the exchange, the board did not find it
practicable or necessary to and did not quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination.
Individual members of the board may have given different weights to different
factors.
Opinion of Financial Advisor
Coventry did not seek or receive an opinion from a financial advisor.
PEOPLEFIRST'S REASONS FOR THE TRANSACTION
The PeopleFirst members determined that the transaction was fair to
them from a financial point of view and approved the exchange agreement.
PeopleFirst did not obtain a fairness opinion because the members believed that
they had substantial experience, sophistication and knowledge in these types of
transactions. In reaching its conclusions to pursue the exchange, the members
considered the following factors:
- - The historical, current and projected financial condition and results of
operations of PeopleFirst and our company before and after giving effect to the
transaction. In this regard, PeopleFirst reviewed our Annual Reports on Form
10-KSB, its own financial reports and the pro forma financial information of the
combined entity. There are no historical or pro forma financial statements for
PeopleFirst due to the current status of its business.
- The Coventry/PeopleFirst combination accomplishes several of
PeopleFirst's strategic goals to enhance member value:
-- The exchange values PeopleFirst at an attractive value.
-- The exchange provides a publicly traded currency for future
acquisition transactions, which the member anticipates will create additional
value.
-- The exchange creates liquidity for PeopleFirst members resulting
from exchanging their PeopleFirst interests, which are illiquid and for which no
public market exists, for shares of common stock which are trading on the OTC
Bulletin Board, even though the shares are not being registered.
The PeopleFirst members considered that they could realize these
strategic goals with an initial public offering. However, the members believed
that the exchange could be completed faster, less expensively, less disruptively
to management, and without regard to current market conditions for initial
public offerings, and therefore provided a better alternative.
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- The likelihood that the transaction will afford PeopleFirst members the
opportunity to receive our common stock in a non-taxable transaction for federal
income tax purposes.
In view of the wide variety of factors considered, the PeopleFirst members
did not find it practicable to, and did not quantify or otherwise attempt to
assign relative weights to the specific factors considered in reaching its
conclusions.
CHANGE OF CONTROL
The following is a description of some of the changes that will occur upon
completion of the transaction and related change of control:
Change In Our Ownership Following The Transaction.
Following the exchange, the PeopleFirst members will own approximately
82.7% of our approximately 6.1 million shares of common stock issued and
outstanding.
Change In The Composition Of Our Board Of Directors.
In connection with the transaction, we have elected five directors to serve
on our board of directors. Three of the directors, Stephen Rosedale, Ronald
Wilheim, Steve Wilder and Simon Groner, were nominated by PeopleFirst. Two
directors, Robert Hausman and Simon Groner, previously served on our board of
directors. As a result of their beneficially owning PeopleFirst common stock,
following the transaction, these directors will own approximately 85.3% of our
total issued and outstanding common stock.
Change In The Composition Of Our Management Team.
Upon completion of the transaction, Mr. Rosedale will become our Chairman
of the Board of Directors. Upon completing the exchange, our new board of
directors will appoint Mr. Wilheim as our Chief Executive Officer and Vice
Chairman and Mr. Hausman as our President. Ralph Fain will serve as the
president of PeopleFirst. This management team will manage our combined
operations following the exchange.
Changes In Business Strategy.
Upon completion of the transaction, we will seek additional employee
services businesses to acquire as well as ancillary businesses, such as
insurance companies and agencies, for which we can provide services to our
clients. We are considering selling or spinning off our manufacturing business
as a separate company.
Accounting Treatment
We intend to account for the exchange as a purchase.
ABSENCE OF APPRAISAL RIGHTS FOR COVENTRY SHAREHOLDERS
Florida law does not provide our shareholders with appraisal rights with
respect to the issuance of our common stock to PeopleFirst shareholders in
connection with the exchange or with respect to any other proposal to be acted
upon at the annual meeting.
STOCK MARKET LISTING
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It is a condition to the exchange that the shares of our common stock
issued to PeopleFirst shareholders in the exchange will be authorized for
quotation on the Nasdaq SmallCap Market, subject only to official notice of
issuance.
This condition has been waived.
THE EXCHANGE AGREEMENT
General
The exchange agreement contemplates the exchange of our outstanding shares
for the interests of PeopleFirst, with PeopleFirst continuing as our
wholly-owned subsidiary. This section of the document describes material
provisions of the exchange agreement. Because the description of the exchange
agreement contained in this document is a summary, it does not contain all the
information that may be important to you. Before you decide how to vote, you
should carefully read the entire copy of the exchange agreement and the
amendment thereto, which has been previously filed with the SEC and is available
on the SEC's website at www.sec.gov.
Share Issuance
In the exchange, we will issue a number of shares so that the PeopleFirst
members will own an aggregate of 82.7% of our outstanding shares, including the
43,750 shares that they currently own.
Closing
The closing of the transaction will take place as promptly as practicable
after the date on which all closing conditions have been satisfied or waived.
The parties have agreed that all of the following conditions have been waived or
satisfied. The parties expect the closing of the transaction to take place on
August __, 1999.
Conditions To The Transaction
PeopleFirst need not complete the exchange unless it is satisfied that we
have met the following principal conditions:
- we have performed the agreements we are required to perform;
- our representations and warranties are true and correct as of and since
the date of the exchange agreement;
- no material changes in our business have taken place; and
- approval by our shareholders of the stock issuance pursuant to the
exchange and the related change of control, the Certificate of Amendment and the
election of directors;
- the conversion or retirement of all outstanding preferred stock.
- our common stock is traded on the Nasdaq SmallCap Market.
We need not complete the exchange unless we are satisfied that PeopleFirst
has met the following principal conditions:
- PeopleFirst has performed the agreements it is required to perform;
- the representations and warranties of PeopleFirst are true and correct as
of and since the date of the exchange agreement; and
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- no material changes in the business of PeopleFirst have taken place.
Representations And Warranties
The exchange agreement contains representations and warranties made by us
and PeopleFirst to each other relating to, among other things:
- organization and similar corporate matters
- capitalization
- authorization, execution, delivery, performance and enforceability of the
exchange agreement and the absence of conflicts with their charter and bylaws as
well as other documents
- accuracy of financial statements as well as the accuracy of information
supplied for use in this document
- required board and shareholder approvals
- the absence of material litigation
- compliance with laws
- absence of material changes or events
- environmental matters
- intellectual property
- real estate
- insurance
- related party transactions
- broker and accounting matters
- taxes
- contracts
- employee benefit plans and labor and employment matters
- ownership of assets
- corporate structure
- outstanding securities
- Year 2000 compliance
-18-
In addition, we have made representations and warranties relating to the
accuracy of our filings with the Securities and Exchange Commission.
Covenants And Conduct Of Business Prior To The Transaction
Both parties have agreed that, prior to the effective time of the
transaction, they will each conduct their operations in the ordinary course of
business and in keeping with past practice. Both parties have also agreed not to
take any action that could be expected to prevent the conditions to the
transaction from being satisfied or would change the nature of their business or
organization.
Both parties have agreed to provide each other reasonable access to their
books and records, financial data, operating data and other similar information
which is reasonably requested. The parties have also agreed to furnish each
other information concerning their business, properties, and personnel. We have
agreed to hold in confidence all documents and information concerning
PeopleFirst furnished in connection with the exchange agreement.
No Solicitations Of A Competing Transaction
Both parties have agreed not to take any action to facilitate a proposal
that is or may lead to a acquisition , transaction or similar transaction with
another party. The parties have agreed to terminate all existing discussions and
negotiations with other persons regarding any significant transaction.
We may participate in discussions or negotiations in connection with an
unsolicited transaction. Before we may respond to an unsolicited transaction,
our board of directors must determine in good faith that a response is likely to
lead to a proposal that would be financially more favorable than the currently
contemplated exchange to our shareholders.
Termination
The parties may terminate the exchange agreement at any time prior to the
effective time of the exchange in the following circumstances:
- Either party may terminate the exchange agreement prior to the effective
time:
(a) by mutual written consent;
(b) if any governmental authority takes any action permanently
prohibiting the exchange, and that action becomes final and cannot be appealed;
or
(c) if the exchange has not been completed by June 1, 1999, other than
due to a delay or default on the part of the party seeking to terminate the
exchange agreement.
If the delay described in (c) results from the absence of the required
shareholder approvals, lack of the necessary approvals from governmental
authorities or other persons, ineffective status of this information statement
or the imposition of a court order or injunction, then the date of termination
of the exchange agreement can be extended to September 1, 1999. The parties have
agreed not to invoke this deadline.
Either party may terminate the exchange agreement prior to the closing if
any of the representations and warranties of the other party fails to be true or
if the other party materially breaches any covenant contained in the exchange
agreement.
Indemnification
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The parties have agreed to indemnify each other for a period of two years
after the closing date. If Coventry is required to indemnify the members, we
will issue them additional shares of common stock based on the market price at
the time and the size of the claim.
Fees And Expenses
Each party will pay all fees and expenses it incurs in connection with the
exchange and the related transactions. If one party terminates the exchange
agreement because of the other party's breach of a material representation,
warranty or covenant, the terminating party may to recover its reasonable
attorney's fees and costs incurred in any action brought to recover its damages
caused by the breach.
Material Federal Income Tax Consequences Of The Transaction
THE DISCUSSION BELOW ADDRESSES THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES
OF GENERAL APPLICATION THAT WE EXPECT TO RESULT FROM THE EXCHANGE. THEREFORE THE
FOLLOWING DISCUSSION IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE
BASED ON THE INDIVIDUAL CIRCUMSTANCES OF EACH PEOPLEFIRST MEMBER. WE URGE
PEOPLEFIRST MEMBERS TO CONSULT THEIR TAX ADVISORS TO DETERMINE THE TAX
CONSEQUENCES OF THE EXCHANGE, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS WITH RESPECT TO THEIR PARTICULAR
CIRCUMSTANCES.
There will not be any federal income tax consequences from the transaction to
our pre-exchange shareholders because they are not exchanging any of their
shares as a result of the transaction. Unless noted otherwise, the discussion
below is based on our belief that for federal income tax purposes the exchange
will be treated as a tax-free reorganization within the meaning of Section
368(a) of the Internal Revenue Code. We have not sought, nor will we seek, a
ruling from the Internal Revenue Service concerning the federal income tax
consequences of the exchange.
We base the following discussion on the provisions of the Internal Revenue
Code, the Treasury Regulations thereunder, administrative rulings and judicial
decisions in effect as of the date of this document, all of which are subject to
change that could apply retroactively. We cannot provide assurance that the
statements we make in this section will not be challenged by the Internal
Revenue Service or will be sustained by a court if challenged. Furthermore, the
statements we make in this section do not bind the Internal Revenue Service or
the courts.
We assume that PeopleFirst members will hold their stock as a capital
asset. The discussion does not address all of the tax consequences that may be
relevant to particular PeopleFirst members in light of their personal
circumstances or to taxpayers subject to annual treatment under the federal
income tax laws. The discussion does not address any aspect of state, local or
foreign tax law.
The transaction is intended to qualify as a reorganization under Section
368(a) of the Internal Revenue Code. If the exchange qualifies as a
reorganization, we, along with PeopleFirst, will be "a party to a
reorganization" within the meaning of Section 368(b) of the Internal Revenue
Code and for federal income tax purposes, no gain or loss will be recognized by
us or PeopleFirst with respect to the exchange of our common stock for
PeopleFirst interests in the exchange. Should the exchange not qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, PeopleFirst shareholders could incur a significant income tax liability
but we should not incur an income tax liability.
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COVENTRY
General
Coventry Industries Corp., formerly known as Workforce Systems Corp.,
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, Coventry has bought and sold several businesses over
the last few years. At this time, our current business is Industrial Fabrication
& Repair, Inc. ("IFR"), which provides 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. IFR is also an authorized factory distributor for many
of the components used in its business. Lester Gann, the president of IFR has
recently informed us that he is considering exercising his contractual rights to
reacquire IFR in exchange for his Coventry common stock.
We are in the process of liquidating our Federal Supply, Inc. and
Federal Fabrication, Inc. subsidiaries (collectively, "Federal"), which has been
losing money in recent periods. We expect to realize our basis from this event.
As discussed above, on September 30, 1998, the Company entered into the
exchange agreement with BSD Healthcare Industries, Inc. ("BSD"), PeopleFirst and
PeopleFirst's members. BSD operated a respiratory therapy and respiratory
therapy management business. Effective July 1, 1999 we sold BSD's business back
to Messrs. Rosedale and Wilheim in exchange for 75,000 shares of our common
stock.
Manufacturing Division
The Manufacturing Division of the Company currently comprises all of
the Company's operations which consist of IFR. 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.
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
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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.
Federal was a fabricator and distributor of custom-designed fire
sprinkler systems and components for use in both commercial and residential
application. Its present customer base was located in South Florida. Federal's
principal products included pipe, valves, screwed and grooved fittings,
sprinkler head and hanger materials.
Proposed Insurance Business
Coventry is seeking to acquire one or more entities to both underwrite
and sell life and health insurance to individuals and companies. Coventry will
offer various insurance products to the employees through voluntary benefit or
payroll deduction programs. We hope to develop a network of company-owned
agencies and independent agents.
Strategy
Our business strategy is to seek growth of our business by
o selectively expanding our product by offering programs such as life and
health insurance and marketing these products and programs through our
distribution network;
o acquiring additional insurance agencies and establishing relationships with
additional independent agents in order to expand our distribution network
to, and market its products and services;
o expanding marketing of insurance products to customers through direct mail,
media advertising and the Internet;
o maintaining a commitment to provide quality service to our insureds and
agents by emphasizing customer service;
o encouraging agents to place a high volume of quality business with us by
providing them with attractive commission structures tied to premium levels
and loss ratios; and
o identifying and reviewing opportunities to acquire insurers.
We are currently exploring various acquisition opportunities, but do not
currently have any understandings, commitments, arrangements or agreements with
respect to any acquisitions.
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. There are no assurances
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that the employee services or insurance businesses will be able to effectively
compete in their markets.
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.
Insurance
Our insurance subsidiary or its designated employees must be licensed
to act as agents by state regulatory authorities in the states in which it
conducts business. Regulations and licensing laws vary in individual states and
are often complex.
The applicable licensing laws and regulations in all states are subject
to amendment or reinterpretation by state regulatory authorities, and such
authorities are vested in most cases with relatively broad discretion as to the
granting, revocation, suspension and renewal of licenses. The possibility exists
that the Company could be excluded or temporarily suspended from carrying on
some or all of its activities in, or otherwise subjected to penalties by, a
particular state.
Employees
As of July 15, 1999, Coventry had approximately 50 employees, all of
whom were full time.
Properties
Coventry 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
$650.
Legal Proceedings
Coventry is not a party to any material legal proceedings.
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PEOPLEFIRST
Coventry is acquiring PeopleFirst to function as an administrative
services organization to provide small-to medium-sized businesses with
comprehensive, fully integrated outsourcing solutions to human resource needs,
including payroll management, workers' compensation risk management, benefits
administration, unemployment services and human resource consulting services.
Our services are designed to enable small and medium-sized businesses to
cost-effectively manage and enhance the employment relationship by: (i)
controlling the risks and costs associated with workers' compensation, workplace
safety and employee-related litigation; (ii) providing employees with high
quality health care coverage and related benefits; (iii) managing the
increasingly complex legal and regulatory environment affecting employment; (iv)
providing payroll and human resource administrative services that are reliable,
accurate and delivered in a friendly and caring way; (v) outsourcing
administrative noncore competency responsibilities and (vi) achieving scale
advantages typically available to larger organizations. As of August 1, 1999, we
will serve over 6,000 employees at more than 80 worksites in 22 states,
primarily in the healthcare industry. These employees work for several clients
engaged in various aspects of the health care industry ranging from nursing
homes to home health care operations.
PeopleFirst was established by Messrs. Rosedale and Wilheim in 1998 and
began operations in July 1999. In August 1999, PeopleFirst signed a letter of
intent with CHS Homecare Services, Ltd. ("CHS") an entity owned by Messrs.
Rosdale and Wilheim to provide services to approximately 6,300 employees of CHS.
A master agreement is being negotiated. The letter of intent is attached as
Annex A to this document. CHS owns Healthforce, which has been in home health
care and staffing business for over 10 years. In order to enable PeopleFirst to
deliver a more comprehensive level of services, the majority of our clients,
including CHS, will convert to a more traditional PEO contract effective January
1, 2000.
A PEO contractually assumes certain administrative, regulatory and
financial employer responsibilities for the worksite employees in a
"co-employment" relationship. PeopleFirst believes its clients benefit from the
PEO's services by:
o improving profitability through lowering or controlling costs associated
with workers' compensation, health insurance, other benefit coverage and
regulatory compliance;
o improving productivity through reducing the time and effort expended by
business owners and executives to deal with the complexities of employment
management, enabling them to focus on their business core competencies and
growth; and
o improving employee satisfaction and performance.
We help our worksite employers improve job satisfaction and performance of
worksite employees by providing improved health care and related benefits,
delivering training programs and delivering dependable payroll and benefits
administration.
As co-employer of worksite employees, the PEO assumes responsibility
for and manages the risks associated with:
o worksite employee payroll;
o employee-related benefits, such as workers' compensation and health care
insurance coverage; and
o compliance with certain employment-related governmental regulations that
can be effectively managed offsite from the client's business.
The client retains responsibility for supervision and direction of the worksite
employees' services in its
-24-
business and generally remains responsible for compliance with other
employment-related governmental regulations that are more closely related to
worksite employee supervision. Our service fee to our clients includes the cost
of certain employment-related taxes, workers' compensation insurance coverage
and risk management services, administrative and field services, wages of
worksite employees and the client's portion of health and retirement benefit
plan costs. We also will provide other value-added services such as temporary
staffing, recruiting, training and human resource consulting.
Professional Employer Organization Industry
According to industry analysts, the PEO industry has approximately $22
billion in annual revenues with an historical growth rate over the last five
years of approximately 30% per year. According to the U. S. Small Business
Administration, there are nearly six million businesses in the United States
with fewer than 500 employees, employing over 52 million persons and with $1.2
trillion in aggregate annual payroll. The National Association of Professional
Employer Organizations ("NAPEO") estimates that the PEO industry co-employs
fewer than three million worksite employees, leaving approximately 49 million
employees currently not served by the PEO industry.
The PEO industry is highly fragmented. NAPEO data suggest that there are at
least 2,200 PEOs currently in operation. According to industry analysts, the ten
largest PEOs account for approximately 35% of existing revenues in the industry.
We believe that significant consolidation opportunities exist within the PEO
industry due to increasing industry regulatory complexity and capital
requirements associated with developing larger service delivery infrastructures,
more diversified services and more sophisticated management information systems.
Demand for Services. The PEO industry evolved in the early 1980s in
response to increasing employment and benefit costs, and the complexities of the
legal and regulatory environment for the rapidly expanding small-to medium-sized
business sector. We believe demand for PEO services will continue to increase
as:
o employment-related governmental regulation grows more complex;
o growth continues within the small-to medium-sized business community;
o the need to provide health and retirement benefits in a cost-effective
convenient manner increases; and
o the business and regulatory communities accept and recognize the PEO
industry.
While various service providers, such as payroll processing firms, benefits and
safety consultants and temporary services firms, are available to assist these
businesses with specific tasks, these organizations do not typically provide the
more comprehensive range of services generally offered by PEOs. PEOs enter into
agreements with numerous small-to medium-sized employers, and can therefore,
achieve economies of scale as professional employers and offer benefits packages
and human resource services at a level typically available only to larger
companies which have greater resources to devote to human resources management.
Effectiveness of Services. According to estimates by the U.S. Small
Business Administration, the management of an average small-to medium-sized
business devotes from 7% to 25% of its time to employee-related matters, leaving
management with less time to focus on core competencies. A National Federation
of Independent Business survey of small businesses in 1996 showed that six of
the top 13 major problem areas for small business are issues that can be
addressed by PEOs. These include (with their rank in importance according to the
survey) cost of health insurance (1), workers' compensation costs (3), Federal
paperwork (7), frequent changes in Federal tax laws (9), finding qualified
employees (11) and state/local paperwork (13). Work-related injuries cost
employers over $53 billion in medical
-25-
expenses and lost employee productivity each year, according to industry
estimates. A PEO can manage these costs through effective workers' compensation
injury prevention, medical management, rehabilitation and return to work
programs. Employees are typically attracted to small and medium-sized businesses
that provide employees with human resource benefits and services more
characteristic of large employers. An industry analyst's study indicated that
40% of the companies that outsourced services to a PEO upgraded their employee
benefits offerings and one-fourth of those clients offered health care and other
benefits for the first time.
PeopleFirst believes that the market for its clients will primarily consist of
worksites with 10 to 100 employees, because at these levels it generally is not
economical for companies to have in-house human resource capabilities.
PeopleFirst believes that its success will depend on its ability to demonstrate
to potential clients that it offers cost-effective products and the ability to
eliminate unproductive administrative functions.
Strategy
Our strategy is to be a preferred human resources partner in the healthcare
and other areas by leveraging operational excellence, technology and strategic
alliances to achieve market leadership. This strategy is based on our belief
that:
- PEO services will continue to experience growing demand because of the
trend among small-to medium-sized employers to: (i) outsource non-core
competencies; (ii) reduce employee benefit costs; (iii) avoid employee-related
risks and regulatory complexities; and (iv) attract better employees through
improved benefit plans.
- The market for PEO services, based on analyst reports, is more than 95%
unserved and is expected to grow at the rate of 30% per year for the next five
years.
- The PEO industry is highly fragmented with significant consolidation
opportunities for companies with access to capital, larger service delivery
infrastructures, and sophisticated management information systems.
- PEOs typically take a transaction processing approach to their services
and do not emphasize the improved workforce performance characteristics of
satisfied employees.
- In selecting PEO providers, small-to medium-sized businesses will
increase their emphasis on cost-effectiveness, service excellence and breadth of
services provided.
- Employees are attracted to small and medium-sized businesses that provide
employees with human resources services more characteristic of large employers.
- Strategic alliances will enable PEOs to enhance endorsement
opportunities, expand the distribution channel and broaden the service/product
offering.
PeopleFirst intends to actively seek additional acquisitions in order to achieve
economies of scale.
Services Provided by the PEO
The following is a summary of the services traditionally provided by a
PEO:
Workers Compensation and Risk Management
- ----------------------------------------
- - Provision of coverage - Negotiation of rates
- - Issuing workers compensation certificates - Administration of claims
-26-
- - Maintenance of OSHA logs - Return to work/light duty programs
- - Safety audits/inspections - Maintain claims files
- - Safety training - Develop/implement safety incentive programs
- - Development of client manuals
Health/Benefits
- ---------------
- - Provision of coverage (medical, dental, vision, etc.) - Negotiation of rates
- - COBRA Administration - Provision/administration of Sec 125 program
- - Enrollment/explanation of benefits - Provision/administration of 401k program
- - Other benefits (prepaid legal, credit union, etc)
Human Resources
- ---------------
- - Maintenance of personnel files - I-9 maintenance/compliance - Development of
client specific policies/procedures - Training - Development of employee
handbooks - ADA, FMLA, EEOC, ADEA, etc. compliance - Development of On Site
Supervisor manuals - Unemployment claims administration - Requisite on-site
postings (min. wage, etc.)
Payroll/Tax Compliance
- ----------------------
- - Payroll processing - Quarterly filings
- - Delivery of checks/direct deposit - Annual filings
- - Tax deposits - W-2s, W-4s
- - Certified payrolls - Payroll/labor reporting
- - Garnishments - Child support payments
PEOs have recently started offering additional products and services:
Products
- --------
- - General liability insurance - Commercial auto insurance
- - Employment Practices liability insurance - Various health/life/disability "add-ons
- - Bonding
Services
- --------
- - HR training - HR testing/profiling
- - Compensation structure/planning - Recruiting
- - Discount club memberships - Travel agency services
Revenue Sources
The value of a PEO has resided in its ability to deliver cost-effective
products and services as a result of economies of scale and efficiencies of
size. A significant portion of a PEO's profit is derived from the administrative
fee charged to client companies. This fee has ranged historically from 2-6% and
is currently averaging 2-3% of gross payroll, depending on the method of
calculation. Worker compensation and unemployment taxes are the other two
primary profit centers for PEOs with these percentages varying by type of client
and, again, by method of computation. A fourth profit center for some PEOs has
been benefits; by "bundling" its health care charge in an all inclusive
percentage fee, certain PEOs have been able to convert a "pass through" cost to
a profit center.
Workers' Compensation And Health Care Program
-27-
Historically, the majority of a PEO's controllable direct costs relate to
workers' compensation benefits and health care. Consequently, our ability to
manage these worksite employee costs will be critical to our success and
profitability. To effectively manage our workers' compensation and health care
costs, we will utilize: (i) careful underwriting and selection of new clients;
(ii) effective workers' compensation injury prevention, medical management,
rehabilitation and return to work techniques; and (iii) the health care services
of CHS and other health care provider networks in key markets.
If an injury occurs, our goal will be to take control of the claim within
24 hours after receipt of the injury report, aggressively medically manage the
injury by coordinating with the worksite employer, employee and provider, and
return the employee to work as early as is safe and feasible. This approach
substantially lowers injury-related costs, particularly the most expensive cost
component, lost workdays.
When buying health care coverage for its employees, PeopleFirst believes it
will be in a favorable position with insurers, as a result of the participation
of CHS in local market integrated health care delivery systems as well as the
leverage that PeopleFirst's scale provides. We believe that we will be able to
achieve attractive health care rates by forming strategic partnerships with
national and regional providers in each local market.
Competition
The PEO industry consists of at least 2,200 companies (according to an
estimate by NAPEO), most of which serve a single market or region. According to
industry analysts, the ten largest PEOs account for approximately 35% of the
existing revenues in the industry. PeopleFirst considers its primary competition
to include: (i) traditional in-house human resource departments; (ii) other
PEOs; and (iii) providers of unbundled employment-related services, such as
payroll processing firms, temporary employment firms, commercial insurance
brokers, human resource consultants, workers' compensation insurers, HMOs and
other specialty managed care providers.
Competition in the highly fragmented PEO industry is generally on a local
or regional basis. Management believes that the primary elements of competition
are quality of service, choice and quality of benefits, reputation and price.
PeopleFirst believes that brand recognition, regulatory expertise, financial
resources, risk management, information technology capability, strategic
alliances, and economies of scale can distinguish a large-scale PEO from the
rest of the industry. PeopleFirst believes that will compete favorably in these
areas.
Regulation
PeopleFirst is subject to local, state and Federal regulations, which
include operating, fiscal and licensing requirements. Adding complexity to the
regulatory environment are: (i) uncertainties resulting from the non-traditional
employment relationships created by PEOs; (ii) variations in state regulatory
schemes; and (iii) the ongoing evolution of regulations regarding health care
and workers' compensation.
Many of the Federal and state laws and regulations relating to tax, benefit
and employment matters applicable to employers were enacted prior to the
development of non-traditional employment relationships and, accordingly, do not
specifically address the obligations and responsibilities of PEOs or the
co-employment relationship. PEO services are regulated primarily at the state
level and regulatory requirements regarding the PEO business vary from state to
state, and as we enter new states we will be faced with new regulatory and
licensing environments. We may not be able to satisfy the licensing requirements
or other applicable regulations of any particular state, to provide the full
range of services currently offered or operate profitably within the regulatory
-28-
environment of any state in which we do not obtain regulatory approval. If we
cannot obtain required licenses we would have to restrict the services we offer.
New legislation or new interpretations of current licensing and regulatory
requirements could impose operating or licensing requirements that we may not be
able to satisfy or which could materially adversely affect our business.
Additionally, interpretation of legislation or regulation by regulatory agencies
with broad discretionary powers could require us to materially modify our
existing operations in order to comply with applicable regulations.
The application of many laws to our PEO services will depend on whether we
are considered an employer under the relevant statutes and regulations. The
Internal Revenue Service ("IRS") is currently examining this issue. See
"Employee Benefit Plans" below. In addition, from time to time there have been
proposals to enact a statutory definition of employer for certain purposes of
the Code.
Regulation in the health care and workers' compensation fields continues to
evolve. Numerous reform proposals have been the subject of debate at both the
Federal and state government levels. We cannot predict what effect any proposed
reform will have on its business. New legislation resulting in increased health
care or workers' compensation costs, which comprise a significant portion of our
direct costs could damage our business if we are not able to reflect promptly
these increased costs in our service fees.
PEO Licensing Requirements. A critical aspect of the growth of the PEO
industry has been the increasing recognition and acceptance of PEOs by state
authorities. As the concept of PEO services has become more understood by
regulatory authorities, the regulatory environment has begun to shift from one
of skepticism to one of recognition. During the mid-to late-1980s, legitimate
industry participants were challenged to overcome well publicized failures of
financially unsound and, in some cases, unscrupulous operators.
While many states do not explicitly regulate PEOs, approximately
one-third have licensing or registration requirements for PEOs and several
additional states are considering adopting regulation. Laws vary from state to
state but generally provide for monitoring the fiscal responsibility of PEOs.
State regulation assists in screening insufficiently capitalized PEO operations,
imposes requirements regarding payment of wages, taxes, benefits and workers'
compensation and resolves issues concerning an employee's status for specific
purposes under applicable state law. Because existing regulations are relatively
new, there is limited interpretive or enforcement guidance available. The
development of additional regulations and interpretation of existing regulations
can be expected to evolve over time.
Federal and State Employment Taxes. We assume the responsibility and
liability for the payment of Federal and state employment taxes with respect to
wages and salaries paid to our employees, including worksite employees. There
are essentially three types of Federal employment tax obligations: (i) income
tax withholding requirements; (ii) social security and Medicare obligations
under FICA; and (iii) unemployment obligations under FUTA. Under the applicable
Code sections, the employer has the obligation to remit the employer portion
and, where applicable, to withhold and remit the employee portion of these
taxes.
To date, the IRS has relied extensively on the common law test of
employment in determining employer status and the resulting liability for
failure to withhold. However, the IRS has formed a Market Segment Study Group
for the stated purpose of examining whether PEOs, such as PeopleFirst, are the
employers of the worksite employees under the Code provisions applicable to
Federal employment taxes and, consequently, whether they are exclusively
responsible for payment of employment taxes on wages and salaries paid to such
employees. Another stated purpose of the Market Segment Study Group is to
determine whether owners of client companies can be employees of PEOs under the
Federal employment tax laws.
IRS officials have reported that the Market Segment Study is near
completion and that the issuance of a tax advice memorandum has been delayed
pending the outcome of legislation proposed by the PEO and other staffing
industries. NAPEO, through coordination with other staffing trade associations,
has introduced a bill known as the Staffing Firm Workers Benefit Act of 1997
("HR 1891"). HR 1891 would establish that the PEO is the employer for the
purposes of tax collection, reporting and remittance.
-29-
Further, HR 1891 would clarify and establish that a PEO is an employer and can
sponsor employee benefit plans, including defined contribution plans, such as,
401(k) plans. The staffing industries believe that HR 1891 will become law at
some point in the future.
The interpretive uncertainties raised by the Market Segment Study Group may
affect our ability to report employment taxes on its own account rather than for
the accounts of its clients and would increase administrative burdens on our
payroll service function. In addition, while we believe that we can
contractually assume the client company's withholding obligations, in the event
we fail to meet these obligations, the client company may be held jointly and
severally liable for those obligations.
Employee Benefit Plans. We offer various employee benefit plans to its
worksite employees, including 401(k) plans (a profit-sharing plan with an
employer contribution feature), cafeteria plans, group health plans, group life
insurance plans, group disability insurance plans and employee assistance
programs. Generally, employee benefit plans are subject to provisions of both
the Code and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). In order to qualify for favorable tax treatment under the Code, the
plans must be established and maintained by an employer for the exclusive
benefit of its employees.
The Market Segment Study Group established by the IRS is examining
whether PEOs are the employers of worksite employees under Code provisions
applicable to employee benefit plans and consequently able to offer to worksite
employees benefit plans that qualify for favorable tax treatment. The Market
Segment Study Group is also examining whether client company owners are
employees of PEOs under Code provisions applicable to employee benefit plans. We
are unable to predict the actual timing or nature of the findings of the Market
Segment Study Group or the ultimate outcome of conclusions or findings. If the
IRS study were to conclude that a PEO is not an employer of its worksite
employees for plan purposes, worksite employees might not be able to continue to
make contributions to our 401(k) plans or cafeteria plans. We believe that,
although unfavorable to PeopleFirst, a prospective application by the IRS of an
adverse conclusion would not have a material adverse effect on our financial
position and results of operations. If this conclusion were applied
retroactively, employees' vested account balances would become taxable
immediately, we would lose our tax deduction to the extent the contributions
were not vested, the plans' trusts would become taxable trusts and penalties
could be assessed. In this case, we would face the risk of client
dissatisfaction as well as potential litigation. While we believe that a
retroactive disqualification is unlikely, we do not know the ultimate resolution
of these issues.
In addition to the employer/employee relationship requirement described
above, pension and profit-sharing plans, including our 401(k) plans, must
satisfy certain other requirements under the Code. These other requirements are
generally designed to prevent discrimination in favor of highly compensated
employees to the detriment of non-highly compensated employees with respect to
both the availability of, and the benefits, rights and features offered in,
qualified employee benefit plans. We apply the nondiscrimination requirements of
the Code at both a consolidated and client company level to ensure that its
401(k) plans are in compliance with the requirements of the Code.
Employee pension and welfare benefit plans are also governed by ERISA.
ERISA defines the term employer as "any person acting directly as an employer,
or indirectly in the interest of an employer, in relation to an employee benefit
plan." ERISA defines the term employee as "any individual employed by an
employer." The United States Supreme Court has held that the common law test of
employment must be applied to determine whether an individual is an employee or
an independent contractor under ERISA.
A definitive judicial interpretation of employer in the context of a PEO or
employee leasing arrangement has not been established. If PeopleFirst were found
not to be an employer for ERISA purposes, its plans might not comply with ERISA,
the level of services we could offer may be materially adversely affected, and
our plans might not enjoy the preemption of state laws provided by ERISA and
could be subject to varying state laws and regulations, as well as to claims
based upon state common laws.
-30-
Workers' Compensation. Workers' compensation is a state-mandated,
comprehensive insurance program that requires employers to fund or insure
medical expenses, lost wages and other costs resulting from work-related
injuries and illnesses. In exchange for providing workers' compensation coverage
for employees, employers are not subject to litigation by employees for benefits
in excess of those provided by the relevant state statute. In most states, the
extensive benefits coverage (for both medical costs and lost wages) is provided
through the purchase of commercial insurance from private insurance companies,
participation in state-run insurance funds or employer self-insurance. Workers'
compensation benefits and arrangements vary on a state-by-state basis and are
often highly complex. These laws establish the rights of workers to receive
benefits and to appeal benefit denials. Workers' compensation laws also regulate
the methods and procedures that we may employ in its workers' compensation
managed care programs. For example, workers' compensation laws prohibit medical
co-payment and deductible payment by employees. In addition, certain states
restrict employers' rights to direct health care providers and establish maximum
fee levels for treatment of injured workers.
As a creation of state law, workers' compensation is subject to change by
each state's legislature and is influenced by the political processes in each
state. Several states have mandated that employers receive coverage only from
state-operated funds. Florida and other states have adopted legislation
requiring that all workers' compensation injuries be treated through a managed
care program. While such legislation may increase the market for our workers'
compensation managed care services, it may also intensify the competition we
face for these services. In addition, Federal health care reform proposals
include a proposal that may require 24-hour health coverage, in which the
coverage of traditional employer-sponsored health plans is combined with
workers' compensation coverage to provide a single insurance plan for health
problems, whether or not related to work. Incorporating workers' compensation
coverage into conventional health plans may adversely affect the market for our
services and may intensify our competition from HMOs and other health care
providers. Also, because workers' compensation benefits are mandated by law and
are subject to extensive regulation, payers and employers do not have the same
flexibility to alter benefits as they have with other health benefit programs.
Finally, because workers' compensation programs vary from state to state, it is
difficult for payers and multi-state employers to adopt uniform policies to
administer, manage and control the costs of benefits.
Other Employer-Related Requirements. As an employer, we are subject to a
wide variety of Federal, state and local laws and regulations governing
employer-employee relationships, including the Immigration Reform and Control
Act, the Americans with Disabilities Act, the Family and Medical Leave Act, the
Occupational Safety and Health Act, wage and hour regulations, and comprehensive
local, state and Federal civil rights laws and regulations, including those
prohibiting discrimination and sexual harassment. The definition of employer may
be broadly interpreted under these laws.
Responsibility for complying with various state and Federal laws and
regulations is allocated by agreement between PeopleFirst and its clients, or in
some cases is the shared responsibility of both. Because we act as a co-employer
with the client company, it is possible that we could incur a liability for
violations of laws even though we are not contractually or otherwise responsible
for the conduct giving rise to such liability. Our standard client service
agreement generally provides that the client will indemnify us for liability
incurred as a result of an act of negligence of a worksite employee under the
direction and control of the client or to the extent the liability is
attributable to the client's failure to comply with any law or regulation for
which it has specified contractual responsibility. However, we may not be able
to enforce this indemnification and we may ultimately be responsible for
satisfying the liability in question.
Core (Non-Worksite) Employees
At July 1, 1999, PeopleFirst had 12 core employees. None of the core
employees are represented by a collective bargaining agreement. PeopleFirst
considers relations with its core employees to be good.
-31-
Insurance
PeopleFirst believes that it maintains the types and amounts of insurance
customary in the industry, including coverage for general liability, directors
and officers, crime, fiduciary and workers' compensation. PeopleFirst considers
its insurance coverage to be adequate both as to risks and amounts.
-32-
AMENDMENT TO OUR ARTICLES OF INCORPORATION TO INCREASE THE
AUTHORIZED SHARES OF PREFERRED STOCK FROM 250,000 TO 5,000,000
AND COMMON STOCK FROM 3,125,000 TO 50,000,000
Our Board of Directors and a majority of our shareholders has approved an
amendment to our Articles of Incorporation for the purpose of increasing the
number of its authorized shares of Preferred Stock from 200,000 to 5,000,000 and
common stock from 3,125,000 to 50,000,000. A copy of this amendment is attached
to this document as Annex B.
Our shareholders do not have preemptive rights to subscribe for or purchase
any of the additional shares of common stock to be authorized. Additional shares
of common stock could be used for any proper corporate purpose, including
acquisitions, raising of additional equity capital, stock dividends or upon the
exercise of stock options. The future issuance of additional shares of common
stock on other than a pro rata basis may dilute the ownership of the current
shareholders, as well as their proportionate voting rights.
After the amendment to our Articles of Incorporation is effective, no
further approval of the shareholders would be required for the issuance of
shares of common stock as authorized by the amendment and, absent any legal
requirements, it is not contemplated that further approval of the holders of
common stock would be sought for issuance of any shares authorized by the
amendment. Coventry has no present plans to issue any shares of preferred stock.
We will issue 5,000,000 shares in the transaction, and 2,250,000 shares upon the
exercise of the outstanding Class A and Class B Warrants. Other than these
issuances, Coventry has no present plans to issue any additional shares of
common stock.
This amendment could make it more difficult to acquire control of Coventry
and thereby discourage attempts to do so, even though our shareholders may deem
such an acquisition desirable. Issuance of shares of common stock could dilute
the ownership interest and voting power of our shareholders who may seek control
of Coventry. Shares of preferred and common stock could be issued in a private
placement to one or more organizations sympathetic to us and opposed to any
take-over bid, or under other circumstances that could make it more difficult
and thereby discourage attempts to acquire control of Coventry. To the extent
that it impedes any such attempts, the amendment may serve to perpetuate our
management.
Although we have from time to time considered the issuance of additional
securities in connection with a strategic alliance or acquisition, we do not
have any present plans, agreements or arrangements for the issuance of shares of
preferred stock or common stock in excess of the number of such shares presently
authorized in connection with any particular transaction. We do not anticipate
soliciting the vote of our shareholders to authorize the issuance of shares of
the common stock unless otherwise required under the Florida Business
Corporation Act, our articles of incorporation or our bylaws.
Our Board of Directors and a majority of our shareholders has approved of
an amendment to our articles of incorporation to change our name to American
Risk Management Group, Inc. As a result of the exchange, our primary focus is
now in the employee services area and we have changed its name to more
accurately reflect its business.
-33-
ELECTION OF DIRECTORS
Five directors have been elected to serve until the next annual meeting
of shareholders and until their respective successors will have been elected and
will have qualified or until their earlier resignation, removal from office or
death.
The following table sets forth as the names, ages and positions held
with respect to our directors and executive officers:
Name Age Current Position New Position
- ---- --- ---------------- ------------
Robert Hausman 43 Chairman of the Board, President and President and Chief Operating Officer
Chief Executive Officer
Stephen Rosedale 55 Director nominee Chairman of the Board
Ronald Wilheim 30 Director nominee Executive Vice President and Chief
Executive Officer
Steve Wilder (1)(2) 51 Director Director
Simon Groner (1)(2) 57 Director Director and Secretary
(1) Member of Compensation Committee
(2) Member of the Audit Committee
Stephen Rosedale was elected a director in August 1999. Mr. Rosedale founded
Communicare Health Services, Inc. in 1978 and since its inception, Mr. Rosedale
has been Chairman of the Board of Directors and Chief Executive Officer.
Communicare owns, operates and manages long term care facilities, home care and
assisted living companies and communities and rehabilitation facilities.
Ronald Wilheim was elected a director in August 1999. Mr. Wilheim has been
Corporate Counsel of CommuniCare since August 1995. Prior to that time, Mr.
Wilheim attended law school at Benjamin Cardozo School of Law in New York.
Robert Hausman was elected President and a Director 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 our
subsidiaries and is a member of the Audit Committee. Mr. Hausman devotes
substantially all of his time and attention to our business. 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.. 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.
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.
Steve Wilder was elected a director in August 1999. He has been Vice President,
Treasurer and Chief Financial officer of CommuniCare Health Services since 1993.
From 1976 to 1993, he was with the Arther Young & Company (now Ernst & Young),
where he rose from entry level staff accountant to become an audit partner and
leader of the health care group.
-34-
Significant Employees
Ralph Fain has been the President of PeopleFirst since December 1998. He has
over 10 years experience in the PEO business. From 1996 to 1997, he was a
regional vice president of Digital Solutions, Inc., a publicly-traded staffing
and outsourcing company and from 1995 to 1996 he was president of Link Employer
Services, a multi-location staffing company and PEO. From 1989 to 1994 he was
president of The Laxus Group, a PEO.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
To Coventry's knowledge, based solely on a review of the copies of such
reports furnished to Coventry 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 1999.
Meetings and Committees of the Board of Directors
During Fiscal 1999, the Board of Directors held two formal meetings and
took actions by written consent on six occasions. During Fiscal 1998, no
director attended fewer than 75% of the number of meetings of the Board of
Directors held during the period such director served on the Board.
The only standing committees of the Board of Directors are the Audit
Committee and the Compensation Committee. The Board does not have a nominating
or similar committee.
The Audit Committee is presently comprised of Steve Wilder and Simon
Groner. The duties and responsibilities of the Audit Committee include (a)
recommending to the Board of Directors the appointment of our independent
certified public accountants and any termination of engagement, (b) reviewing
the plan and scope of independent audits, (c) reviewing our significant
accounting and reporting policies and operating controls, (d) having general
responsibility for all related auditing matters, and reporting its
recommendations and findings to the full Board of Directors. During Fiscal 1998,
the Audit Committee held two formal meetings and did not take any actions by
written consent.
The Compensation Committee is presently comprised of Stephen Rosedale,
Mark Weisz and Simon Groner. The Compensation Committee reviews and approves the
compensation of our executive officers and administers the 1999 Stock Option
Plan (the "1999 Plan"). During Fiscal 1998, the Compensation Committee held no
formal meetings and did not take any actions by written consent.
Executive Compensation
The following table summarizes all compensation accrued by Coventry in
each of the last three fiscal years for Coventry's Chief Executive Officer and
each other executive officers serving as such whose annual compensation exceeded
$100,000. Directors of Coventry do not receive compensation for serving in such
capacity.
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Long Term
Name and Annual Compensation Compensation
Principal Position Year Salary($) Bonus Other Options
--------------------------------- --------- --------- --------- -------------
Robert Hausman, 1999 129,100 0 18,000
President, CEO, and 1998 120,000 0 87,839(1) 938
Director 1997 0 0 0
Lester Gann, 1999 104,000 0 0
Secretary and 1998 100,000 118,125(2) 0 938
Director 1997 96,000 0 0
(1) 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.
(2) 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.
Employment and Management Agreements
Hausman Agreement. On July 1, 1997 Coventry entered into a Management
Agreement with Robert Hausman, President and Chairman of the Board of Coventry.
This agreement was amended November 1, 1997, December 1, 1998 and July 30, 1999.
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%. Mr. Hausman also receives a car allowance of
$1,500 per month.
In the most recent amendment Coventry also agreed to issue Mr. Hausman
50,000 shares of common stock in exchange for his cancellation of all his
outstanding options and his right to receive a bonus equal to 3% of pretax
income.
During the term of the Management Agreement should there be a change of
control of Coventry, as that term is defined in the Management Agreement,
Coventry 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 Coventry also agreed not
to invoke the "change in control" provisions as a result of the transactions set
forth in the Exchange Agreement.
As of July 30, 1999, Mr. Hausman was owed approximately $400,000
consisting of accrued salary, accrued dividends on the Series E Preferred Stock
and loans to Coventry. In order to repay such amount as promptly as practicable,
Coventry 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 Coventry's common stock at Coventry'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 Coventry's Series E
Preferred Stock (the "Preferred Stock"). In December 1998, Mr. Hausman and
Coventry agreed to exchange the Preferred Stock for 143,750 shares of common
stock, of which 7,500 preferred shares were exchanged simultaneously with the
BSD closing and the remaining 6,875 preferred shares were exchanged in July
1999. Effective on such
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exchange, Mr. Hausman's management fee was increased by $77,000, which amount is
equal to the dividends on the Preferred Stock. Coventry 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 $8.00 per share. Coventry 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 management fee will be reduced pro rata as
Mr. Hausman receives funds from Coventry with respect to the sale of assets or
from the sale of common stock and the interest payments decrease.
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 PeopleFirst. 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 $96,000.
Option Grants in Last Fiscal Year. The following table sets forth information
concerning individual grants of stock options made during the fiscal year ended
June 30, 1999 to each of the Named Executive Officers:
% of Total Options
Number of Shares Granted to Employees Exercise or
Underlying Options in Base Price Expiration
Name Granted(#)(1) Fiscal Year ($/Share) Date
---- ------------- ----------- --------- ----
Robert Hausman 25,000 100 14.00-20.00 12/2003
Lester Gann 0 - $
- -----------
(1) Represents options granted under the 1997 Plan.
Stock Options Held at End of Fiscal 1999. The following table indicates the
total number and value of exercisable and unexercisable stock options held by
each Named Executive Officer as of June 30, 1999. No options were exercised by
the Named Executive Officers during the year ended June 30, 1999.
Number of Unexercised Value of Unexercised
Options at Fiscal Year End In-the-Money Option
at Fiscal Year End
Name Exercisable Unexercisable Exercisable Unexercisable
------ ----------- ------------- ----------- -------------
Robert Hausman 25,938 0 $-0- $0
Lester Gann 0 0 $-0- $0
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PRINCIPAL SHAREHOLDERS
As of July 30, 1999 there were 1,149,751 shares of common stock issued
and outstanding. The following table sets forth, as of the close of business on
July 30, 1999 (a) the name, address and number of shares of each person known by
Coventry to be the beneficial owner of more than 5% of our common stock and (b)
the number of shares owned by each director, each director nominee and all
officers and directors as a group, together with their respective percentage
holdings of such shares before and after the exchange:
Amount and Nature of
Beneficial
Ownership Percentage Of Class
--------- -------------------
Name and Before After Before After
Address of Beneficial Owner Transaction Transaction Transaction Transaction
--------------------------- ----------- ----------- ----------- -----------
Robert Hausman 213,498 213,498 18.6% 3.5%
Steve Wilder 0 0 0 0
Simon Groner(3) 0 0 0 0
Lester Gann 94,125 94,125 8.2% 1.5%
Stephen Rosedale 34,600(3) 3,034,600(4) 3.2% 49.3%
C/o Communicare Health Services
4700 Ashwood Drive
Cincinnati, Ohio 45241
Ronald Wilheim 8,650(3) 2,008,650(4) (2) 32.7%
C/o Communicare Health Services
4700 Ashwood Drive
Cincinnati, Ohio 45241
Wirral Anstan Holdings, Ltd. 100,000(5) 100,000 8.8% 1.6%
Hirzel Court
Guernsey, GY1, 2NN
Channel Islands
All Officers and Directors as a Group (six 350,873 5,350,873 30.5% 87.0%
persons) (1)
(1) Includes 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 to be issued in the transaction.
(4) Shares owned by a limited liability company in which Messrs. Rosedale
and Wilheim are the sole members.
(5) Excludes 800,000 shares that may be issued upon exercise of Warrants
that are not currently exercisable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In conjunction with the acquisition of Federal in May 1997, Federal
delivered a promissory note
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to Robert Hausman, Coventry's president, and Barbara Hausman, his wife, in the
principal amount of $1,079,024. Mr. Hausman was a 90% shareholder in Federal
prior to its acquisition by Coventry. In October, 1997 Robert Hausman and
Barbara Hausman converted the principal and any accrued but unpaid interest
thereon into 14,375 shares of Coventry'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 Coventry having general voting power with
the common stock concerning any matter being voted upon by Coventry's
shareholders, (c) is not convertible into any other class of capital stock of
Coventry and (d) is redeemable at the option of Coventry 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, Coventry 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 and Ronna Newman Rutstein, the wife of C. Lawrence Rutstein, then a
director of Coventry, each received 2,498 shares of Coventry'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.
In September 1997 Coventry 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 Coventry'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 Coventry 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 Coventry as a result of this transaction. C. Lawrence Rutstein served
as President of Regenesis at the time of the transaction. Robert Hausman served
as a director of Regenesis at the time of the transaction.
On June 29, 1998,Coventry sold its investment in LPS to American Group,
Inc., a Nevada corporation ("American")for a 23.8% ownership in American.
In February 1999, Coventry 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 Coventry transferring the 120,000 shares of
American owned by it and the assumption by Coventry of $100,000 of notes held by
Mr. Hausman.
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ADOPTION OF 1999 STOCK OPTION PLAN
Our Board of Directors and a majority of our shareholders have adopted
the 1999 Plan to authorize 1,000,000 shares of common stock for issuance under
the 1999 Plan.
1999 Plan Description
The statements in this document concerning the terms and provisions of
the 1999 Plan are summaries only and do not purport to be complete. All such
statements are qualified in their entirety by reference to the full text of the
1999 Plan, which is attached as Annex C to this document.
The purpose of the 1999 Plan is to advance Coventry's interests by
providing an additional incentive to attract and retain qualified and competent
persons as employees, upon whose efforts and judgment our success is largely
dependent, through the encouragement of stock ownership by these persons.
The 1999 Plan was effective as of July 30, 1999, and unless sooner
terminated by our board of directors in accordance with the terms of the 1999
Plan, will terminate on July 30, 2009. Certain employees, who are selected by
the stock option committee, or if there is no stock option committee by the
Board of Directors, may participate in the 1999 Plan; however, no incentive
stock option, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code" or "Internal Revenue Code") will be granted to a consultant
who is not also our employee.
The 1999 Plan provides for the issuance of incentive stock options
("Incentive Stock Options") and nonqualified stock options ("Nonqualified Stock
Options"). An Incentive Stock Option is an option to purchase common stock that
meets the definition of "incentive stock option" set forth in Section 422 of the
Code. A Nonqualified Stock Option is an option to purchase common stock that
meets certain requirements in the Plan but does not meet the definition of an
"incentive stock option" set forth in Section 422 of the Code. Nonqualified
Stock Options and Incentive Stock Options are sometimes referred to herein as
"Options."
The 1,000,000 shares of common stock may be issued pursuant to Options
granted under the 1999 Plan. If any Option granted pursuant to the 1999 Plan
terminates, expires, or is canceled or surrendered, in whole or in part, shares
subject to the unexercised portion may again be issued pursuant to the exercise
of Options granted under the 1999 Plan. The shares acquired upon exercise of
Options granted under the 1999 Plan will be authorized and unissued shares of
common stock.
The 1999 Plan is administered by a committee of two or more directors
(the "Committee") or, if a Committee is not designated by the Board of
Directors, by the Board of Directors as a whole. The Board has authorized the
Compensation Committee to administer the 1999 Plan. The Committee has the right
to determine, among other things, the persons to whom Options are granted, the
number of shares of common stock subject to Options, the exercise price of
Options and the term thereof.
All of our employees, including officers and directors and consultants,
are eligible to receive grants of Options under the 1999 Plan; however, no
Incentive Stock Option may be granted to a consultant who is not also an
employee of the Coventry or any of our subsidiaries. Upon receiving grants of
Options, each holder of the Options (the "Optionee") will enter into an option
agreement with that contains the terms and conditions deemed necessary by the
Committee.
Terms and Conditions of Options
Option Price
-40-
For any Option granted under the 1999 Plan, the option price per share of
common stock may be any price not less than par value per share as determined by
the Committee; however, the option price per share of any Incentive Stock Option
may not be less than the Fair Market Value (defined below) of the common stock
on the date such Incentive Stock Option is granted. On July 29, 1999, the
closing price of our common stock as reported by the OTC Bulletin Board Market
was $3.8125 per share.
Under the 1999 Plan, the "Fair Market Value" is the closing price of
shares on the business day immediately preceding the date of grant; however, if
the shares are not publicly traded, then the Fair Market Value will be as the
Committee will in its sole and absolute discretion determine in a fair and
uniform manner.
Exercise of Options
Each Option is exercisable in such amounts, at such intervals and upon
such terms as the Committee may determine; however, Incentive Stock Options must
vest in three annual installments commencing one year from the date of grant. In
no event may an Option be exercisable after ten years from the date of grant.
Unless otherwise provided in an Option, each outstanding Option may, in the sole
discretion of the Committee, become immediately fully exercisable (i) if there
occurs any transaction (which will include a series of transactions occurring
within 60 days or occurring pursuant to a plan), that has the result that our
shareholders immediately before such transaction cease to own at least 51
percent of our voting stock or of any entity that results from our participation
in a reorganization, consolidation, transaction, liquidation or any other form
of corporate transaction; (ii) if our shareholders approve a plan of
transaction, consolidation, reorganization, liquidation or dissolution in which
we do not survive; or (iii) if our shareholders approve a plan for the sale,
lease, exchange or other disposition of all or substantially all our property
and assets. The Committee may in its sole discretion accelerate the date on
which any Option may be exercised and may accelerate the vesting of any shares
subject to any Option or previously acquired by the exercise of any Option.
Options granted to the officers and directors under the 1999 Plan may not be
exercised unless otherwise expressly provided in any Option, until six months
following the date of grant and if and only if the Optionee is in the employ of
Coventry on such date.
Unless further limited by the Committee in any Option, shares of common
stock purchased upon the exercise of Options must be paid for in cash, by
certified or official bank check, by money order, with already owned shares of
common stock, or a combination of the above. The Committee, in its sole
discretion, may accept a personal check in full or partial payment. If paid in
whole or in part with shares of already owned common stock, the value of the
shares surrendered is deemed to be their Fair Market Value on the date the
Option is exercised. Proceeds from the sale of common stock pursuant to the
exercise of Options will be added to the general funds of Coventry to be used
for general corporate purposes. Under the 1999 Plan, we may also lend money to
an Optionee to exercise all or a portion of an Option granted under the 1999
Plan. If the exercise price is paid in whole or in part with Optionee's
promissory note, such note will (i) provide for full recourse to the maker, (ii)
be collateralized by the pledge of shares purchased by Optionee upon exercise of
such Option, (iii) bears interest at a rate of interest no less than the rate of
interest payable by us to our principal lender, and (iv) contain such other
terms as the Committee in its sole discretion will require.
Nontransferability
Options granted under the 1999 Plan are not transferable by an Optionee
other than to a family member or by will or the laws of descent and
distribution, and Options are exercisable during an Optionee's lifetime only by
the Optionee.
-41-
Termination of Options
The expiration date of an Option is determined by the Committee at the
time of the grant and is set forth in the applicable stock option agreement. In
no event may an Option be exercisable after ten years from the date it is
granted.
The 1999 P1an provides that if an Optionee's employment is terminated for
any reason other than for cause, an improper termination, mental or physical
disability or death, then the unexercised portion of the Optionee's Options will
terminate three months after the such termination. If an Optionee's employment
is terminated for cause or if there is an improper termination of Optionee's
employment, the unexercised portion of the Optionee's Options will terminate
immediately upon this termination. If an Optionee's employment is terminated by
reason of the Optionee's mental or physical disability, the unexercised portion
of the Optionee's Options will terminate 12 months after such termination. If an
Optionee's employment is terminated by reason of the Optionee's death, the
unexercised portion of the Optionee's Options will terminate 12 months after the
Optionee's death.
The Committee in its sole discretion may by giving written notice cancel,
effective upon the date of the consummation of certain corporate transactions
that would result in an Option becoming fully exercisable, cancel any Option
that remains unexercised on such date. Such notice will be given a reasonable
period of time prior to the proposed date of such cancellation and may be given
either before or after Shareholder approval of such corporate transaction.
Outstanding Options
As of the Record Date, no Options had been granted pursuant to the 1999
Plan.
Federal Income Tax Effects
The 1999 Plan is not qualified under the provisions of Section 401(a) of
the Code, nor is it subject to any of the provisions of the Employee Retirement
Income Security Act of 1974, as amended.
Incentive Stock Options
Incentive Stock Options are "incentive stock options" as defined in
Section 422 of the Internal Revenue Code. Under the Code, an Optionee generally
is not subject to ordinary income tax upon the grant or exercise of an Incentive
Stock Option. However, an employee who exercises an Incentive Stock Option by
delivering shares of common stock previously acquired pursuant to the exercise
of an Incentive Stock Option is treated as making a Disqualifying Disposition
(defined below) of these shares if the employee delivers the shares before the
expiration of the holding period applicable to these shares. The applicable
holding period is the longer of two years from the date of grant or one year
from the date of exercise. The effect of this provision is to prevent
"pyramiding" the exercise of an Incentive Stock Option (i.e., the exercise of
the Incentive Stock Option for one share and the use of that share to make
successive exercise of the Incentive Stock Option until it is completely
exercised) without the imposition of current income tax.
The amount by which the fair market value of the shares acquired at the
time of exercise of an Incentive Stock Option exceeds the purchase price of the
shares under such Option will be treated as an adjustment to the Optionee's
alternative minimum taxable income for purposes of the alternative minimum tax.
If, however, there is a Disqualifying Disposition in the year in which the
Option is exercised, the maximum amount of the item of adjustment for such year
is the gain on the disposition
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of the shares. If there is Disqualifying Disposition in a year other than the
year of exercise, the dispositions will not result in an adjustment for the
other year.
If, subsequent to the exercise of an Incentive Stock Option (whether paid
for in cash or in shares), the Optionee holds the shares received upon exercise
for a period that exceeds (a) two years from the date such Incentive Stock
Option was granted or, if later, (b) one year from the date of exercise (the
"Required Holding Period"), the difference (if any) between the amount realized
from the sale of such shares and their tax basis to the holder will be taxed as
long-term capital gain or loss. If the holder is subject to the alternative
minimum tax in the year of disposition, the holder's tax basis in his or her
shares will be increased for purposes of determining his alternative minimum tax
for that year, by the amount of the item of adjustment recognized with respect
to such shares in the year the Option was exercised.
In general, if, after exercising an Incentive Stock Option, an employee
disposes of the acquired shares before the end of the Required Holding Period (a
"Disqualifying Disposition"), an Optionee would be deemed to receive ordinary
income in the year of the Disqualifying Disposition, in an amount equal to the
excess of the fair market value of the shares at the date the Incentive Stock
Option was exercised over the exercise price. If the Disqualifying Disposition
is a sale or exchange which would permit a loss to be recognized under the Code
(were a loss in fact to be sustained), and the sales proceeds are less than the
fair market value of the shares on the date of exercise, the Optionee's ordinary
income would be limited to the gain (if any) from the sale. If the amount
realized upon disposition exceeds the fair market value of the shares on the
date of exercise, the excess would be treated as short-term or long-term capital
gain, depending on whether the holding period for such shares exceeded one year.
We are not allowed an income tax deduction for the grant or exercise of an
Incentive Stock Option or the disposition, after the Required Holding Period, of
shares acquired upon exercise. In the event of a Disqualifying Disposition, we
will be allowed to deduct an amount equal to the ordinary income to be
recognized by the Optionee, provided that such amount is an ordinary and
necessary business expense to us and is reasonable, and we satisfy our
withholding obligation for this income.
Nonqualified Stock Options
An Optionee granted a Nonqualified Stock Option under the 1999 Plan will
generally recognize, at the date of exercise of such Nonqualified Stock Option,
ordinary income equal to the difference between the exercise price and the fair
market value of the shares of common stock subject to the Nonqualified Stock
Option. This taxable ordinary income will be subject to Federal income tax
withholding. We will be allowed to deduct an amount equal to the ordinary income
to be recognized by the Optionee, provided that such amount is an ordinary and
necessary business expense to us and is reasonable, and we satisfy our
withholding obligation for this income.
If an Optionee exercises a Nonqualified Stock Option by delivering other
shares, the Optionee will not recognize gain or loss with respect to the
exchange of such shares, even if their then fair market value is different from
the Optionee's tax basis. The Optionee, however, will be taxed as described
above with respect to the exercise of the Nonqualified Stock
-43-
Option as if he had paid the exercise price in cash, and we likewise generally
will be entitled to an equivalent tax deduction. Provided a separate
identifiable stock certificate is issued therefor, the Optionee's tax basis in
that number of shares received on such exercise which is equal to the number of
shares surrendered on such exercise will be equal to his tax basis in the shares
surrendered and his holding period for such number of shares received will
include his holding period for the shares surrendered. The Optionee's tax basis
and holding period for the additional shares received on exercise of a
Nonqualified Stock Option paid for, in whole or in part, with shares will be the
same as if the Optionee had exercised the Nonqualified Stock Option solely for
cash.
The above discussion is only a summary of the potential tax consequences
relevant to the Optionees or to the Coventry, and may not describe tax
consequences based on particular circumstances. It is based on federal income
tax law and interpretational authorities as of the date of this document, which
are subject to change at any time.
RATIFICATION OF SELECTION OF AUDITORS
The firm of Sweeney Gates & Co. served as Coventry's independent
certified public accountants for Fiscal 1998. The Board of Directors has
selected JH Cohn LLP as Coventry's auditors for the fiscal year ending June 30,
1999.
OTHER MATTERS
The information contained in this document is to our best knowledge, and
the information contained herein with respect to the directors, nominees for
director, executive officers and principal shareholders is based upon
information, which these individuals have provided to us.
SHAREHOLDER PROPOSALS
Any proposals of shareholders to be presented at the 2000 Annual
Meeting of Shareholders must be received by Coventry no later than December 31,
1999 for inclusion in Coventry's proxy statement relating to such meeting,
subject to the rules and regulations of the Commission.
By Order Of The Board Of Directors,
Secretary
Boca Raton, Florida
July __, 1999
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Annex A
PEOPLE FIRST STAFFING LLC
August 1, 1999
CHS Homecare Services, Ltd.
4700 Ashwood Drive, Suite 200
Cincinnati, Ohio 45241
Attention: Steve Wilder
Re: Proposal to Provide Employment Services
Dear Mr. Wilder:
The purpose of this letter (the "Letter") is to set forth the intent of
People First Staffing LLC, an Ohio limited liability company ("PFS"), and CHS
Homecare Services, Ltd., an Ohio limited liability company ("CHS"), to have PFS
provide to CHS (i) payroll administration, benefits administration and risk
management services, and (ii) employees on a leased basis on the terms set forth
below.
1. Basic Transaction. PFS and CHS will enter into a Master Agreement
pursuant to which PFS (i) will provide payroll administration, benefits
administration and risk management services to CHS until December 31, 1999, and
(ii) on and after Janaury 1, 2000, will lease approximately 6,300 employees to
CHS to perform these and other services. The parties intend that the Master
Agreement would be signed on or before September 1, 1999 with an effective date
of October 1, 1999.
2. Proposed Form of Master Agreement. PFS and CHS intent to promptly begin
negotiating a written Master Agreement, which Master Agreement will be subject
to the approval of the Board of Managers of each of PFS and CHS and will contain
representations, warranties, and indemnities by each of PFS and CHS.
3. Conditions to Proposed Transaction. The parties do not intend to be
bound until the execution and delivery of the Master Agreement, which, if
successfully negotiated, would provide that the proposed transaction would be
subject to customary terms and conditions, including the following:
a. completion of the transfer of all of the membership interests in PFS
by Steve Rosedale and Ron Wilheim in exchange for more than 80% of the
voting securities of Coventry Industries, Inc.;
A-1
CHS Homecare Services, Ltd.
Attention: Steve Wilder
August 1, 1999
Page 2
b. absence of pending or threatened litigation regarding the Master
Agreement or the transactions to be contemplated thereby; and
c. receipt of any consent or approvals that may be required by the
regulatory agencies of any state.
4. Disclosure. Except as and to the extent required by law, without the
prior written consent of the other party, neither PFS nor CHS shall, directly or
indirectly, make any public comment, statement or communication with respect to,
or otherwise disclose or permit the disclosure of the existence of discussions
regarding, a possible transaction between PFS and CHS or any of the terms,
conditions or other aspects of the transaction proposed in this Letter.
5. Costs. Each of PFS and CHS shall be responsible for and bear all of its
own costs and expenses (including any broker's or finder's fees) incurred in
connection with the proposed transaction, including expenses of its agents and
representatives, incurred at any time in connection with pursuing or
consummating the proposed transaction.
6. Termination. Negotiations with respect to the proposed transaction may
be terminated:
a. by mutual written consent of PFS and CHS; or
b. upon written notice by any party to the other party if the Master
Agreement has not been executed by November 1, 1999.
7. Enforceability. This Letter does not create or constitute any legally
binding obligations between PFS and CHS, and neither PFS nor CHS shall have any
liability to the other with respect to this Letter until the Master Agreement,
if one is successfully negotiated, is executed and delivered by and between PFS
and CHS. If the Master Agreement is not prepared, authorized, executed or
delivered for any reason, neither PFS nor CHS shall have any liability to the
other based upon, arising from, or relating to this Letter.
Please sign and date this Letter in the space provided below to confirm the
mutual agreements set forth in this Letter and return a signed copy to the
undersigned. PFS looks forward to completing this transaction with CHS very
promptly.
Very truly yours,
PEOPLE FIRST STAFFING LLC
By: /s/ Ron Wilheim
-------------------------
Name: Ron Wilheim
Title: Member
Acknowledged and agreed:
CHS HOMECARE SERVICES, LTD.
By: /s/ Steve Wilder
--------------------
Name: Steve Wilder
Title: Vice President
A-2
Annex B
ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION
OF
COVENTRY INDUSTRIES CORP.
The undersigned, Robert L. Hausman, President of Coventry Industries
Corp., a Florida corporation organized and existing under and by virtue of the
Florida Business Corporation Act (the "Corporation"), does hereby certify:
1. The name of the Corporation is Coventry Industries Corp .
2. The following provisions of the Articles of Incorporation of the
Corporation are amended in the following particulars:
Article I is deleted and replaced with the following:
ARTICLE I
CORPORATE NAME
The name of this Corporation Shall be American Risk Management Group, Inc.
Article IV is deleted and replaced with the following:
ARTICLE IV
CAPITAL STOCK
The maximum number of shares that this Corporation shall be authorized to issue
and have outstanding at any one time shall be fifty five million (55,000,000)
shares which are to be divided into two classes as follows:
55,000,000 shares of common stock with a par value of $.001 per share;
and
5,000,000 shares of preferred stock, with a par value of $.001 per
share.
Series of preferred stock may be created and issued from time to time,
with such designations, preferences, conversion rights, cumulative, relative,
participating, optional or other rights, including voting right, qualifications,
limitations or restrictions thereof as shall be stated and expressed in the
resolution or resolutions providing for the creation and issuance of such series
of preferred stock as adopted by the Board of Directors pursuant to the
authority in this paragraph given.
3. The foregoing amendments were adopted by a majority of the
shareholders by written consent dated July 30, 1999 and by the directors of the
Corporation by unanimous written consent dated July 30, 1999.
IN WITNESS WHEREOF, the undersigned President of the Corporation has
executed these Articles of Amendment this ____ day of August, 1999.
COVENTRY INDUSTRIES CORP.
By:
------------------------
Robert L. Hausman, President
B-1
Annex C
COVENTRY INDUSTRIES CORP.
1999 STOCK OPTION PLAN
As Approved by the Board of Directors on July 30, 1999
1. Purpose. The purpose of the Coventry Industries Corp. 1999 Stock
Option Plan (the "Plan") is to advance the interests of Coventry Industries
Corp., a Florida corporation (the "Company"), by providing an additional
incentive to attract, retain and motivate highly qualified and competent persons
who are key to the Company, and upon whose efforts and judgment the success of
the Company and its Subsidiaries is largely dependent, including key employees,
consultants, independent contractors, advisory board members, Officers and
Directors, by authorizing the grant of options to purchase Common Stock of the
Company to persons who are eligible to participate hereunder, thereby
encouraging stock ownership in the Company by such persons, all upon and subject
to the terms and conditions of this Plan.
2. Definitions. As used herein, the following terms shall have the
meanings indicated:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Cause" shall mean any of the following:
(i) a determination by the Company that there has been a willful,
reckless or grossly negligent failure by the Optionee to
perform his or her duties as an employee of the Company;
(ii) a determination by the Company that there has been a willful
breach by the Optionee of any of the material terms or
provisions of any employment agreement between such Optionee
and the Company;
(iii) any conduct by the Optionee that either results in his or her
conviction of a felony under the laws of the United States of
America or any state thereof, or of an equivalent crime under
the laws of any other jurisdiction;
(iv) a determination by the Company that the Optionee has committed
an act or acts involving fraud, embezzlement,
misappropriation, theft, breach of fiduciary duty or material
dishonesty against the Company, its properties or its
personnel;
(v) any act by the Optionee that the Company determines to be in
willful or wanton disregard of the Company's best interests,
or which results, or is intended to result, directly or
indirectly, in improper gain or personal enrichment of the
Optionee at the expense of the Company;
(vi) a determination by the Company that there has been a willful,
reckless or grossly negligent failure by the Optionee to
comply with any rules, regulations, policies
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or procedures of the Company, or that the Optionee has engaged
in any act, behavior or conduct demonstrating a deliberate and
material violation or disregard of standards of behavior that
the Company has a right to expect of its employees; or
(vii) if the Optionee, while employed by the Company and for two
years thereafter (or such shorter period as may be stated in
any employment, confidentiality or noncompete agreement with
the Optionee), violates a confidentiality and/or noncompete
agreement with the Company, or fails to safeguard, divulges,
communicates, uses to the detriment of the Company or for the
benefit of any person or persons, or misuses in any way, any
Confidential Information; provided, however, that, if the
Optionee has entered into a written employment agreement with
the Company which remains effective and which expressly
provides for a termination of such Optionee's employment for
"cause," the term "Cause" for purposes of this Plan shall have
the meaning as set forth in the Optionee's employment
agreement in lieu of the definition of "Cause" set forth in
this Section 2(b).
(c) "Change of Control" shall mean the acquisition by any person
or group (as that term is defined in the Securities Exchange
Act of 1934 (the "Exchange Act"), and the rules promulgated
pursuant to that act) in a single transaction or a series of
transactions of 35% or more in voting power of the outstanding
stock of the Company and a change of the composition of the
Board of Directors so that, within two years after the
acquisition took place, a majority of the members of the Board
of Directors of the Company, or of any corporation with which
the Company may be consolidated or merged, are persons who
were not directors or officers of the Company or one of its
Subsidiaries immediately prior to the acquisition, or to the
first of a series of transactions which resulted in the
acquisition of 35% or more in voting power of the outstanding
stock of the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) "Committee" shall mean the stock option or compensation
committee appointed by the Board or, if not appointed, the
Board.
(f) "Common Stock" shall mean the Company's Common Stock, par
value $.01 per share.
(g) "Confidential Information" shall mean any and all information
pertaining to the Company's financial condition, clients,
customers, prospects, sources of prospects, customer lists,
trademarks, trade names, service marks, service names,
"know-how," trade secrets, products, services, details of
client or consulting contracts, management agreements, pricing
policies, operational methods, site selection, results of
operations, costs and methods of doing business, owners and
ownership structure, marketing practices, marketing plans or
strategies, product development techniques or plans,
procurement and sales activities, promotion and
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pricing techniques, credit and financial data concerning
customers and business acquisition plans, that is not
generally available to the public.
(h) "Director" shall mean a member of the Board.
(i) "Employee" shall mean any person, including Officers,
Directors, consultants and independent contractors, who is
either employed or engaged by the Company or any parent or
Subsidiary of the Company within the meaning of Code Section
3401(c) or the regulations promulgated thereunder.
(j) "Fair Market Value" of a Share on any date of reference shall
be the Closing Price of a share of Common Stock on the
business day immediately preceding such date, unless the
Committee in its sole discretion shall determine otherwise in
a fair and uniform manner. For this purpose, the "Closing
Price" of the Common Stock on any business day shall be (i) if
the Common Stock is listed or admitted for trading on any
United States national securities exchange, or if actual
transactions are otherwise reported on a consolidated
transaction reporting system, the last reported sale price of
the Common Stock on such exchange or reporting system, as
reported in any newspaper of general circulation, (ii) if the
Common Stock is quoted on the National Association of
Securities Dealers Automated Quotations System ("Nasdaq), or
any similar system of automated dissemination of quotations of
securities prices in common use, the closing sales price or,
if not available the mean between the closing high bid and low
asked quotations for such day of the Common Stock on such
system, or (iii) if neither clause (i) nor (ii) is applicable,
the mean between the high bid and low asked quotations for the
Common Stock as reported by the National Quotation Bureau,
Incorporated if at least two securities dealers have inserted
both bid and asked quotations for the Common Stock on at least
five of the 10 preceding days. If the information set forth in
clauses (i) through (iii) above is unavailable or inapplicable
to the Company (e.g., if the Company's Common Stock is not
then publicly traded or quoted), then the "Fair Market Value"
of a Share shall be the fair market value (i.e., the price at
which a willing seller would sell a Share to a willing buyer
when neither is acting under compulsion and when both have
reasonable knowledge of all relevant facts) of a share of the
Common Stock on the business day immediately preceding such
date as the Committee in its sole and absolute discretion
shall determine in a fair and uniform manner.
(k) "Incentive Stock Option" shall mean an incentive stock option
as defined in Section 422 of the Code.
(l) "Non-Employee Directors" shall have the meaning set forth in
Rule 16b-3(b)(3)(i) (17 C.F.R. ss.240.16(b)-3(b)(3)(i)) under
the Securities Exchange Act of 1934, as amended.
(m) "Non-Statutory Stock Option" or "Nonqualified Stock Option"
shall mean an Option which is not an Incentive Stock Option.
C-3
(n) "Officer" shall mean the Company's Chairman, chief executive
officer, president, principal financial officer, principal
accounting officer (or, if there is no such accounting
officer, the controller), any vice-president of the Company in
charge of a principal business unit, division or function
(such as sales, administration or finance), any other officer
who performs a policy-making function, or any other person who
performs similar policy-making functions for the Company.
Officers of Subsidiaries shall be deemed Officers of the
Company if they perform such policy-making functions for the
Company. As used in this paragraph, the phrase "policy-making
function" does not include policy-making functions that are
not significant. Unless specified otherwise in a resolution by
the Board, an "executive officer" pursuant to Item 401(b) of
Regulation S-K (17 C.F.R.ss.229.401(b)) shall be only such
person designated as an "Officer" pursuant to the foregoing
provisions of this paragraph.
(o) "Option" (when capitalized) shall mean any stock option
granted under this Plan.
(p) "Optionee" shall mean a person to whom an Option is granted
under this Plan or any person who succeeds to the rights of
such person under this Plan by reason of the death of such
person.
(q) "Plan" shall mean this 1999 Stock Option Plan of the Company,
which Plan shall be effective upon approval by the Board,
subject to approval, within 12 months of the date thereof by
holders of a majority of the Company's issued and outstanding
Common Stock of the Company.
(r) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(s) "Securities Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
(t) "Share" or "Shares" shall mean a share or shares, as the case
may be, of the Common Stock, as adjusted in accordance with
Section 10 of this Plan.
(u) "Subsidiary" shall mean any corporation (other than the
Company) in any unbroken chain of corporations beginning with
the Company if, at the time of the granting of the Option,
each of the corporations other than the last corporation in
the unbroken chain owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of
the other corporations in such chain.
3. Shares and Options. Subject to adjustment in accordance with Section
10 hereof, the Company may grant to Optionees from time to time Options to
purchase an aggregate of up to 1,000,000 Shares from Shares held in the
Company's treasury or from authorized and unissued Shares. If any Option granted
under this Plan shall terminate, expire, or be canceled, forfeited or
surrendered as to any Shares, the Shares relating to such lapsed Option shall be
available for issuance pursuant to new Options subsequently granted under this
Plan. Upon the grant of any Option hereunder, the authorized and unissued Shares
to which such Option relates shall be reserved for issuance to permit exercise
under this Plan. Subject to the provisions of Section 14 hereof, an Option
granted hereunder shall be either an Incentive Stock Option or a
C-4
Non-Statutory Stock Option as determined by the Committee at the time of grant
of such Option and shall clearly state whether it is an Incentive Stock Option
or Non-Statutory Stock Option.
4. Limitations. Options otherwise qualifying as Incentive Stock Options
hereunder will not be treated as Incentive Stock Options to the extent that the
aggregate Fair Market Value (determined at the time the Option is granted) of
the Shares, with respect to which Options meeting the requirements of Code
Section 422(b) are exercisable for the first time by any individual during any
calendar year (under all stock option or similar plans of the Company and any
Subsidiary), exceeds $100,000.
5. Conditions for Grant of Options.
(a) Each Option shall be evidenced by an option agreement that may contain
any term deemed necessary or desirable by the Committee, provided such
terms are not inconsistent with this Plan or any applicable law.
Optionees shall be those persons selected by the Committee from the
class of all regular Employees of the Company or its Subsidiaries,
including Employee Directors and Officers who are regular or former
regular employees of the Company, as well as consultants to the
Company. Any person who files with the Committee, in a form
satisfactory to the Committee, a written waiver of eligibility to
receive any Option under this Plan shall not be eligible to receive any
Option under this Plan for the duration of such waiver.
(b) In granting Options, the Committee shall take into consideration the
contribution the person has made, or is expected to make, to the
success of the Company or its Subsidiaries and such other factors as
the Committee shall determine. The Committee shall also have the
authority to consult with and receive recommendations from Officers and
other personnel of the Company and its Subsidiaries with regard to
these matters. The Committee may from time to time in granting Options
under this Plan prescribe such terms and conditions concerning such
Options as it deems appropriate, including, without limitation, (i) the
exercise price or prices of the Option or any installments thereof,
(ii) prescribing the date or dates on which the Option becomes and/or
remains exercisable, (iii) providing that the Option vests or becomes
exercisable in installments over a period of time, and/or upon the
attainment of certain stated standards, specifications or goals, (iv)
relating an Option to the continued employment of the Optionee for a
specified period of time, or (v) conditions or termination events with
respect to the exercisability of any Option, provided that such terms
and conditions are not more favorable to an Optionee than those
expressly permitted herein; provided, however, that to the extent not
canceled pursuant to Section 9(b) hereof, upon a Change of Control, any
Options that have not vested shall vest upon such Change in Control.
(c) The Options granted to employees under this Plan shall be in addition
to regular salaries, pension, life insurance or other benefits related
to their employment with the Company or its Subsidiaries. Neither this
Plan nor any Option granted under
C-5
this Plan shall confer upon any person any right to employment or
continuance of employment (or related salary and benefits) by the
Company or its Subsidiaries.
6. Exercise Price. The exercise price per Share of any Option shall be
any price determined by the Committee but shall not be less than the par value
per Share; provided, however, that in no event shall the exercise price per
Share of any Incentive Stock Option be less than the Fair Market Value of the
Shares underlying such Option on the date such Option is granted and, in the
case of an Incentive Stock Option granted to a 10% shareholder, the per Share
exercise price will not be less than 110% of the Fair Market Value in accordance
with Section 14 of this Plan. Re-granted Options, or Options which are canceled
and then re-granted covering such canceled Options, will, for purposes of this
Section 6, be deemed to have been granted on the date of the re-granting.
C-6
7. Exercise of Options.
(a) An Option shall be deemed exercised when (i) the Company has received
written notice of such exercise in accordance with the terms of the
Option, (ii) full payment of the aggregate option price of the Shares
as to which the Option is exercised has been made, (iii) the Optionee
has agreed to be bound by the terms, provisions and conditions of any
applicable shareholders' agreement, and (iv) arrangements that are
satisfactory to the Committee in its sole discretion have been made for
the Optionee's payment to the Company of the amount that is necessary
for the Company or the Subsidiary employing the Optionee to withhold in
accordance with applicable Federal or state tax withholding
requirements. Unless further limited by the Committee in any Option,
the exercise price of any Shares purchased pursuant to the exercise of
such Option shall be paid in cash, by certified or official bank check,
by money order, with Shares or by a combination of the above; provided,
however, that the Committee in its sole discretion may accept a
personal check in full or partial payment of any Shares. If the
exercise price is paid in whole or in part with Shares, the value of
the Shares surrendered shall be their Fair Market Value on the date the
Option is exercised. The Company in its sole discretion may, on an
individual basis or pursuant to a general program established by the
Committee in connection with this Plan, lend money to an Optionee to
exercise all or a portion of the Option granted hereunder. If the
exercise price is paid in whole or part with the Optionee's promissory
note, such note shall (i) provide for full recourse to the maker, (ii)
be collateralized by the pledge of the Shares that the Optionee
purchases upon exercise of such Option, (iii) bear interest at a rate
no less than the rate of interest payable by the Company to its
principal lender, and (iv) contain such other terms as the Committee in
its sole discretion shall require. Additionally, any Option may be
exercised pursuant to a "cashless" or "net issue" exercise provision
set forth therein. No Optionee shall be deemed to be a holder of any
shares subject to an Option unless and until a stock certificate or
certificates for such shares are issued to the person(s) under the
terms of this Plan. No adjustments shall be made for dividends
(ordinary or extraordinary, whether in cash, securities or property) or
distributions or other rights for which the record date is prior to the
date such stock certificate is issued, except as expressly provided in
Section 10 hereof.
(b) No Optionee shall be deemed to be a holder of any Shares subject to an
Option unless and until a stock certificate or certificates for such
Shares are issued to such person(s) under the terms of this Plan. No
adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or
other rights for which the record date is prior to the date such stock
certificate is issued, except as expressly provided in Section 10
hereof.
8. Exercisability of Options. Any Option shall become exercisable in
such amounts, at such intervals, upon such events or occurrences and upon such
other terms and conditions as shall be provided in an individual Option
agreement evidencing such Option, except as otherwise provided in Section 5(b)
or this Section 8.
C-7
(a) The expiration date(s) of an Option shall be determined by the
Committee at the time of grant, but in no event shall an
Option be exercisable after the expiration of 10 years from
the date of grant of the Option.
(b) Unless otherwise expressly provided in any Option as approved
by the Committee, notwithstanding the exercise schedule set
forth in any Option, each outstanding Option, may, in the sole
discretion of the Committee, become fully exercisable upon the
date of the occurrence of any Change of Control, but, unless
otherwise expressly provided in any Option, no earlier than
six months after the date of grant, and if and only if
Optionee is in the employ of the Company on such date.
(c) The Committee may in its sole discretion accelerate the date
on which any Option may be exercised and may accelerate the
vesting of any Shares subject to any Option or previously
acquired by the exercise of any Option.
9. Termination of Option Period.
(a) Unless otherwise expressly provided in any Option, the
unexercised portion of any Option shall automatically and
without notice immediately terminate and become forfeited,
null and void at the time of the earliest to occur of the
following:
(i) three months after the date on which the Optionee's employment
is terminated for any reason other than by reason of (A)
Cause, (B) the termination of the Optionee's employment with
the Company by such Optionee following less than 30 days'
prior written notice to the Company of such termination (an
"Improper Termination"), (C) a mental or physical disability
(within the meaning of Section 22(e) of the Code) as
determined by a medical doctor satisfactory to the Committee,
or (D) death;
(ii) immediately upon (A) the termination by the Company of the
Optionee's employment for Cause, or (B) an Improper
Termination;
(iii) one year after the date on which the Optionee's employment is
terminated by reason of a mental or physical disability
(within the meaning of Code Section 22(e)) as determined by a
medical doctor satisfactory to the Committee; or
(iv) the later of (A) 12 months after the date of termination of
the Optionee's employment by reason of death of the employee,
or (B) three months after the date on which the Optionee shall
die if such death shall occur during the one-year period
specified in Subsection 9(a)(iii) hereof.
(b) The Committee in its sole discretion may, by giving written
notice ("cancellation notice"), cancel effective upon the date
of the consummation of any corporate transaction described in
Subsection 10(d) hereof, any Option that remains unexercised
on such date. Such cancellation notice shall be given a
reasonable
C-8
period of time prior to the proposed date of such
cancellation and may be given either before or after approval
of such corporate transaction.
(c) Upon Optionee's termination of employment as described in this
Section 9, or otherwise, any Option (or portion thereof) not
previously vested or not yet exercisable pursuant to Section 8
of this Plan or the vesting schedule set forth in such Option
shall be immediately canceled.
10. Adjustment of Shares.
(a) If at any time while this Plan is in effect or unexercised
Options are outstanding, there shall be any increase or
decrease in the number of issued and outstanding Shares
through the declaration of a stock dividend or through any
recapitalization resulting in a stock split, combination or
exchange of Shares (other than any such exchange or issuance
of Shares through which Shares are issued to effect an
acquisition of another business or entity or the Company's
purchase of Shares pursuant to a plan of repurchase approved
by the Board or to exercise a "call" purchase option), then
and in such event:
(i) appropriate adjustment shall be made in the maximum number of
Shares available for grant under this Plan, so that the same
percentage of the Company's issued and outstanding Shares
shall continue to be subject to being so optioned;
(ii) appropriate adjustment shall be made in the number of Shares
and the exercise price per Share thereof then subject to any
outstanding Option, so that the same percentage of the
Company's issued and outstanding Shares shall remain subject
to purchase at the same aggregate exercise price; and
(iii) such adjustments shall be made by the Committee, whose
determination in that respect shall be final, binding and
conclusive.
(b) Subject to the specific terms of any Option, the Committee may
change the terms of Options outstanding under this Plan, with
respect to the option price or the number of Shares subject to
the Options, or both, when, in the Committee's sole
discretion, such adjustments become appropriate by reason of a
corporate transaction described in Subsection 10(d) hereof, or
otherwise.
(c) Except as otherwise expressly provided herein, the issuance by
the Company of shares of its capital stock of any class, or
securities convertible into or exchangeable for shares of its
capital stock of any class, either in connection with a direct
or underwritten sale or upon the exercise of rights or
warrants to subscribe therefor or purchase such Shares, or
upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not
affect, and no adjustment by reason thereof shall be made with
respect to, the number of or exercise price of Shares then
subject to outstanding Options granted under this Plan.
C-9
(d) Without limiting the generality of the foregoing, the
existence of outstanding Options granted under this Plan shall
not affect in any manner the right or power of the Company to
make, authorize or consummate (i) any or all adjustments,
reclassifications, recapitalizations, reorganizations or other
changes in the Company's capital structure or its business;
(ii) any merger or consolidation of the Company or to which
the Company is a party; (iii) any issuance by the Company of
debt securities, or preferred or preference stock that would
rank senior to or above the Shares subject to outstanding
Options; (iv) any purchase or issuance by the Company of
Shares or other classes of Common Stock or common equity
securities; (v) the dissolution or liquidation of the Company;
(vi) any sale, transfer, encumbrance, pledge or assignment of
all or any part of the assets or business of the Company; or
(vii) any other corporate act or proceeding, whether of a
similar character or otherwise.
(e) The Optionee shall receive written notice within a reasonable
time prior to the consummation of such action advising the
Optionee of any of the foregoing. The Committee may, in the
exercise of its sole discretion, in such instances declare
that any Option shall terminate as of a date fixed by the
Board and give each Optionee the right to exercise his or her
Option.
11. Transferability of Options. No Option granted hereunder shall be
sold, pledged, assigned, hypothecated, disposed or otherwise transferred by the
Optionee other than by will, the laws of descent and distribution or to a family
member or trust for the Optionee or a member of Optionee's family, unless
otherwise authorized by the Board, and no Option shall be exercisable during the
Optionee's lifetime by any person other than the Optionee.
12. Issuance of Shares. As a condition of any sale or issuance of
Shares upon exercise of any Option, the Committee may require such agreements or
undertakings, if any, as the Committee may deem necessary or advisable to assure
compliance with any such law or regulation including, but not limited to, the
following:
(i) a representation and warranty by the Optionee to the Company,
at the time any Option is exercised, that he is acquiring the
Shares to be issued to him for investment and not with a view
to, or for sale in connection with, the distribution of any
such Shares; and
(ii) (A) an agreement and undertaking to comply with all of the
terms, restrictions and provisions set forth in any then
applicable shareholders' or other agreement relating to the
Shares, including, without limitation, any restrictions on
sale or transferability, any rights of first refusal and any
option of the Company to "call" or purchase such Shares under
then applicable agreements; and
(B) any restrictive legend or legends,
to be embossed or imprinted on Share certificates, that are, in the discretion
of the Committee, necessary or appropriate to comply with the provisions of any
securities law or other restriction applicable to the issuance of the Shares.
13. Administration of this Plan.
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(a) This Plan shall be administered by a Committee which shall
consist of not less than two Non-Employee Directors. The
Committee shall have all of the powers of the Board with
respect to this Plan. Any member of the Committee may be
removed at any time, with or without cause, by resolution of
the Board and any vacancy occurring in the membership of the
Committee may be filled by appointment by the Board.
(b) Subject to the provisions of this Plan, the Committee shall
have the authority, in its sole discretion, to: (i) grant
Options, (ii) determine the exercise price per Share at which
Options may be exercised, (iii) determine the Optionees to
whom, and time or times at which, Options shall be granted,
(iv) determine the number of Shares to be represented by each
Option, (v) determine the terms, conditions and provisions of
each Option granted (which need not be identical) and, with
the consent of the holder thereof, modify or amend each
Option, (vi) defer (with the consent of the Optionee) or
accelerate the exercise date of any Option, and (vii) make all
other determinations deemed necessary or advisable for the
administration of this Plan, including repricing, canceling
and regranting Options.
(c) The Committee, from time to time, may adopt rules and
regulations for carrying out the purposes of this Plan. The
Committee's determinations and its interpretation and
construction of any provision of this Plan shall be final,
conclusive and binding upon all Optionees and any holders of
any Options granted under this Plan.
(d) Any and all decisions or determinations of the Committee shall
be made either (i) by a majority vote of the members of the
Committee at a meeting of the Committee or (ii) without a
meeting by the unanimous written approval of the members of
the Committee.
(e) No member of the Committee, or any Officer or Director of the
Company or its Subsidiaries, shall be personally liable for
any act or omission made in good faith in connection with this
Plan.
14. Incentive Options for 10% Shareholders. Notwithstanding any other
provisions of this Plan to the contrary, an Incentive Stock Option shall not be
granted to any person owning directly or indirectly (through attribution under
Section 424(d) of the Code) at the date of grant, stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company (or of
its Subsidiary) at the date of grant unless the exercise price of such Option is
at least 110% of the Fair Market Value of the Shares subject to such Option on
the date the Option is granted, and such Option by its terms is not exercisable
after the expiration of 10 years from the date such Option is granted.
15. Interpretation.
(a) This Plan shall be administered and interpreted so that all
Incentive Stock Options granted under this Plan will qualify
as Incentive Stock Options under Section 422 of the Code. If
any provision of this Plan should be held invalid for the
granting of Incentive Stock Options or illegal for any reason,
such determination shall not affect the remaining provisions
hereof, and this Plan shall be construed and enforced as if
such provision had never been included in this Plan.
(b) This Plan shall be governed by the laws of the State of Florida.
(c) Headings contained in this Plan are for convenience only and
shall in no manner be construed as part of this Plan or affect
the meaning or interpretation of any part of this Plan.
(d) Any reference to the masculine, feminine, or neuter gender
shall be a reference to such other gender as is appropriate.
(e) Time shall be of the essence with respect to all time periods
specified for the giving of notices to the Company hereunder,
as well as all time periods for the expiration and termination
of Options in accordance with Section 9 hereof (or as
otherwise set forth in an option agreement).
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(f) It is intended that this Plan shall be administered in accordance
with the disinterested administration requirements of Rule 16b-3 promulgated by
the Securities and Exchange Commission ("Rule 16b-3"), or any successor rule
thereto. To the extent any provision of this Plan or action by the Committee
fails to so comply, it shall be deemed null and void, to the extent permitted by
law and deemed advisable by the Committee. Notwithstanding the above, it shall
be the responsibility of each Optionee, not of the Company or the Committee, to
comply with the requirements of Section 16 of the Securities Exchange Act; and
neither the Company nor the Committee shall be liable if this Plan or any
transaction under this Plan fails to comply with the applicable conditions of
Rule 16b-3 or any successor rule thereto, or if any such person incurs any
liability under Section 16 of the Securities Exchange Act.
Market Standoff or Lock-Up Agreements. Each Optionee, if so requested by the
Company or any representative of the underwriters in connection with any
registration of the offering of any securities of the Company under the
Securities Act, shall not sell or otherwise transfer any shares of Common Stock
acquired upon exercise of Options during the period as may be agreed to by the
Company and such underwriters (the "Lock-Up Period) following the effective date
of such registration. The Company may impose stop-transfer instructions with
respect to securities subject to the foregoing restriction until the end of such
Lock-Up Period.
16. Amendment and Discontinuation of this Plan. Either the Board or the
Committee may from time to time amend this Plan or any Option without the
consent or approval of the shareholders of the Company; provided, however, that,
except to the extent provided in Section 9, no amendment or suspension of this
Plan or any Option issued hereunder shall substantially impair any Option
previously granted to any Optionee without the consent of such Optionee.
17. Termination Date. This Plan shall terminate 10 years after the date
of adoption by the Board of Directors.
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