Exhibit 99.2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Mederi, Inc. and Subsidiaries
Miami, Florida
We have audited the accompanying consolidated balance sheets of Mederi, Inc. and
Subsidiaries as of June 30, 2006 and 2005, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three years ended June 30, 2006. The consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Mederi,
Inc. and Subsidiaries, as of June 30, 2006 and 2005, and the results of their
operations and cash flows for each of the three years ended June 30, 2006 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 3 of notes to
consolidated financial statements, the Company has reported working capital
deficiency ($4,198,200) and equity deficiency ($3,450,000), and has experienced
a net loss for the year ended June 30, 2006 of $760,800. The Company's current
loss from operations and limited capital resources raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 3 of notes to consolidated
financial statements. The Company's ability to achieve the elements of its
business plan, which may be necessary to permit the realization of assets and
satisfaction of liabilities in the ordinary course of business, is uncertain. To
date the Company has been dependent on a major lender for debt financing. The
Company's principal source of cash flows has been from net borrowings under the
credit facility ($2,378,100). In addition, the Company is in default of it
financing arrangements and its restrictive covenant. There is no assurance that
this debtor would continue as a source of funds. No assurances can be given to
the continued ability to obtain short or long-term borrowings to maintain the
Company's present cash flow requirements. All these conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
/S/ Hixson, Marin, DeSanctis & Company, P.A.
North Miami Beach, Florida
November 7, 2006, except for Note 11, subsequent event, the date is November 16,
2006
ASSETS
2006 2005
---------------- ----------------
Current assets:
Cash and equivalents, less restricted funds of
$530,300in 2006 and $673,300in 2005 $ 185,400 $ 231,600
Patient accounts receivable, less allowances for doubtful
collections and contractural adjustments (2006, $462,500;
2005, $197,700) 3,258,00 3,149,200
Inventory of medical supplies 120,400 97,900
Deferred tax asset 954,400 258,800
Other current assets 119,100 123,000
---------------- ----------------
Total current assets 4,637,300 3,860,500
Cash and equivalents, restricted to notes payable, bank 530,300 673,300
Furniture, fixtures and equipment, net 238,200 236,900
Loan origination fees, net 158,900 -
Security deposits 47,700 40,800
---------------- ----------------
$ 5,612,400 $ 4,811,500
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Credit facility $ 2,378,100 $ -
Current portion of long-term debt 472,700 562,300
Accounts payable 889,600 823,200
Accrued liabilities 1,315,900 1,325,300
Due to Medicare 1,575,200 1,873,600
Deferred tax liability 64,000 69,800
Deferred revenues 2,140,000 1,968,100
---------------- ----------------
Total current liabilities 8,835,500 6,622,300
Long-term debt, less current portion 226,900 328,000
---------------- ----------------
9,062,400 6,950,300
---------------- ----------------
Shareholders' equity (deficit):
Common stock, $1 par; 65,334 shares authorized; 8,900
shares issued and outstanding 8,900 8,900
Capital in excess of par 44,500 44,500
Accumulated deficit (3,503,400) (2,192,200)
---------------- ----------------
(3,450,000) (2,138,800)
---------------- ----------------
$ 5,612,400 $ 4,811,500
================ ================
2006 2005 2004
---------------- ----------------- ----------------
Revenues:
Medicare and private patient care,
net of contractual allowances $ 23,806,600 $ 23,248,200 $ 20,140,100
---------------- ----------------- ----------------
Operating expenses:
Payroll and related benefits 19,038,000 17,284,900 13,739,000
Administrative, general and selling 2,723,700 2,774,100 2,244,900
Contracted therapy services 1,481,300 1,243,800 1,306,200
Rent 788,800 676,100 600,700
Interest 441,500 17,100 7,000
Patient medical supplies 260,400 266,900 210,600
Depreciation and amortization 59,100 27,100 14,000
---------------- ----------------- ----------------
24,792,800 22,290,000 18,122,400
---------------- ----------------- ----------------
(Loss) income from continuing operations, before
provision for income taxes and discontinued operations (986,200) 958,200 2,017,700
---------------- ----------------- ----------------
Provision for income taxes:
Current (5,300) 1,600 13,300
Deferred (512,200) 242,600 462,300
---------------- ----------------- ----------------
(517,500) 244,200 475,600
---------------- ----------------- ----------------
(Loss) income from continuing operations (468,700) 714,000 1,542,100
(Loss) income from discontinued operations, net of tax (292,100) (162,100) 18,700
---------------- ----------------- ----------------
Net (loss) income $ (760,800) $ 551,900 $ 1,560,800
================ ================= ================
Common stock Capital in
---------------------------------- excess of Accumulated
Total Shares Amount par deficit
---------------- ----------------- ---------------- ---------------- -------------
Balance, beginning, July 1, 2003 $ (1,308,000) 8,900 $ 8,900 $ 44,500 $ (1,361,400)
Add (deduct):
Dividends (1,666,500) (1,666,500)
Net income for the year
June 30, 2004 1,560,800 1,560,800
---------------- ----------------- ---------------- ---------------- -------------
Balance, June 30, 2004 (1,413,700) 8,900 8,900 44,500 (1,467,100)
Add (deduct):
Dividends (1,277,000) (1,277,000)
Net income for the year
June 30, 2005 551,900 551,900
---------------- ----------------- ---------------- ---------------- -------------
Balance, June 30, 2005 (2,138,800) 8,900 8,900 44,500 (2,192,200)
Add (deduct):
Dividends (550,400) (550,400)
Net (loss) for the year
June 30, 2006 (760,800) (760,800)
---------------- ----------------- ---------------- ---------------- -------------
Balance, June 30, 2006 $ (3,450,000) 8,900 $ 8,900 $ 44,500 $ (3,503,400)
================ ================= ================ ================ =============
2006 2005 2004
---------------- ----------------- ----------------
Cash flows from operating activities:
Sources of cash:
Patient care $ 23,774,800 $ 22,948,800 $ 19,312,000
Interest 15,900 11,100 10,700
Income taxes 5,300 - -
Gain on discontinued operations, net - - 30,500
---------------- ----------------- ----------------
23,796,000 22,959,900 19,353,200
---------------- ----------------- ----------------
Uses of cash:
Direct patient care 1,764,200 1,517,300 1,530,200
Compensation and related benefits 19,027,900 17,144,800 13,589,400
Selling, general and administrative 2,601,900 2,433,400 2,080,300
Rent 788,800 676,100 600,700
Interest 457,400 28,200 17,700
Income taxes - 23,000 -
Loss from discontinued operations, net 475,500 263,900 -
---------------- ----------------- ----------------
25,115,700 22,086,700 17,818,300
---------------- ----------------- ----------------
Cash (used-in) provided by operating activities (1,319,700) 873,200 1,534,900
---------------- ----------------- ----------------
Cash flows used in investing activities:
Source of cash:
Employee advances and security deposits 18,100 - 5,000
---------------- ----------------- ----------------
Uses of cash:
Furniture, equipment and loan origination costs 219,300 211,900 27,500
Employee advances and security deposits 6,900 14,500 -
---------------- ----------------- ----------------
226,200 226,400 27,500
---------------- ----------------- ----------------
Cash used in investing activities (208,100) (226,400) (22,500)
---------------- ----------------- ----------------
Cash flows from financing activities:
Sources of cash:
Borrowings under: -
Credit facility 18,030,800
Long term debt 276,600 696,700 504,100
---------------- ----------------- ----------------
18,307,400 696,700 504,100
---------------- ----------------- ----------------
Uses of cash:
Payment of:
Credit facility 15,652,700
Long-term debt 467,300 444,600 554,000
Dividends 550,400 1,277,000 1,666,500
Medicare 298,400 20,000
---------------- ----------------- ----------------
16,968,800 1,741,600 2,220,500
---------------- ----------------- ----------------
Cash provided by (used-in) financing activities 1,338,600 (1,044,900) (1,716,400)
---------------- ----------------- ----------------
Decrease in cash and equivalents (189,200) (398,100) (204,000)
Cash and equivalents, beginning 904,900 1,303,000 1,507,000
---------------- ----------------- ----------------
Cash and equivalents, ending $ 715,700 $ 904,900 $ 1,303,000
================ ================= ================
Cash and equivalents, current $ 185,400 $ 231,600 $ 751,200
Cash and equivalents, non-current 530,300 673,300 551,800
---------------- ----------------- ----------------
$ 715,700 $ 904,900 $ 1,303,000
================ ================= ================
2006 2005 2004
---------------- ---------------- ---------------
Reconciliation of net (loss) income to cash and
equivalents (used-in) provided by operating activities:
Net (loss) income $ (760,800) $ 551,900 $ 1,560,800
---------------- ---------------- ---------------
Adjustments to reconcile net (loss) income to cash and
equivalents (used-in) provided by operating activities:
Depreciation and amortization 59,100 27,100 14,000
Bad debts 52,000 42,900 39,300
Income and deferred taxes (701,400) 125,100 527,400
Changes in assets and liabilities:
Accounts receivable (178,900) (344,600) (1,170,000)
Inventory (22,500) (6,600) (13,400)
Other current assets 3,900 (18,600) (31,600)
Accounts payable 66,400 316,400 116,800
Accrued liabilities (9,400) (72,100) 149,600
Deferred revenues 171,900 251,700 342,000
---------------- ---------------- ---------------
Total adjustments (558,900) 321,300 (25,900)
---------------- ---------------- ---------------
Cash and equivalents (used-in) provided by operations $ (1,319,700) $ 873,200 $ 1,534,900
================ ================ ===============
Basis of accounting:
Mederi, Inc. and Subsidiaries prepares its consolidated financial statements
in accordance with accounting principles generally accepted in the United
States of America. This basis of accounting involves the application of
accrual accounting; consequently, revenues and gains are recognized when
earned, and expenses and losses are recognized when incurred. Financial
statement items are recorded at historical cost and often involve the
utilization of estimates. Consequently, financial statement items do not
necessarily represent current values.
Management estimates:
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Certain amounts included in the consolidated financial statements are
estimated based on currently available information and management's judgment
as to the outcome of future conditions and circumstances. Changes in the
status of certain facts or circumstances could result in material changes to
the estimates used in the preparation of the consolidated financial
statements and actual results could differ from the estimates and
assumptions. Every effort is made to ensure the integrity of such estimates.
Fair value of financial instruments:
The carrying amounts of cash and equivalents, receivables, accounts payable,
accrued liabilities, loans and notes payable approximate their fair values
because of the short duration of these instruments.
Impairment of long-lived assets:
Long-lived assets used by the Company are reviewed for possible impairment
whenever events or circumstances indicate the carrying amount of an asset
may not be recoverable.
Principals of consolidation:
The consolidated financial statements of the Company include the accounts of
Mederi, Inc. and all material subsidiaries under common control. All
intercompany accounts and transactions have been eliminated in
consolidation.
The Financial Accounting Standards Board (FASB) has issued an interpretation
of FASB 46R, Consolidation of Variable Interest Entities (VIE). The FASB has
re-defined entities which are to be included in a consolidation. Those
additional types of enterprises would include a VIE that has equity that is
insufficient to permit the entity to finance its activities without
additional subordination financial support from other parties, through
either debt or equity. Under this definition, the Company has included all
related entities as part of these consolidated financial statements to
conform with the Interpretation of FASB 46, an interpretation of Accounting
Research Bulletin (ARB) 51.
Revenue recognition:
The Company has agreements with Medicare and other health insurers whereby
services are rendered at established rates. Under the agreements, the
Company is paid through a prospective payment system (PPS) for services
rendered based on an episode or continuing episodes. The PPS episode
includes a sixty-(60) day period, with a split payment at the beginning of
the episode based on anticipated levels of service to be provided, and the
final payment after completion of the episode, adjusted for actual service
provided. The per episode payment rates vary depending on the patient's
clinical severity, functional status and service utilization. Revenues
earned under PPS are recognized ratably over the defined episode period.
Ancillary charges are not earned separately, but are included with the
defined episode. All other revenues are recognized as earned, less
adjustments.
Revenue recognition (continued):
During the cycle of patient care (which includes the sixty (60) day term of
the episode and until the time that the final payment is received), if the
initially anticipated care differs from the actual care provided,
contractual allowances known as Low Utilization Payment Adjustment (LUPA)
are made to both the patient receivable and revenues, based on the
difference between anticipated charges and actual charges.
Subsequent to the sixty (60)-day term of the episode after final patient
reports are submitted, other adjustments may occur, which may result in a
Partial Episode Payment (PEP). PEP's occur when a patient is discharged
before they completed the full episode, and prior to expiration of the sixty
(60)-day episode terms, they are admitted for a new episode. Medicare
detects that the new episode overlaps the prior, and charges back for the
unfulfilled portion of the original episode. Since final payment has already
been made, Medicare offsets the amount of the adjustment against other
payments being made to the client at the time of the PEP, at which point
adjustment is made to revenues to reflect the decrease.
Since PEPs occur after the 60-day episode revenue recognition cycle, annual
provisions are made for anticipated PEPs, based on the historical experience
of the Company.
The Medicare billing process allows for future review and adjustments to
payments due and/or payments made. It is reasonable to expect that Medicare
will make adjustments in subsequent periods, which will have an impact on
revenues. Any adjustments to revenues resulting from these subsequent
reviews by Medicare will be charged or credited to revenues when they occur.
Cash and equivalents:
The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents.
Inventories:
Inventories of medical supplies are stated at the lower of cost (first-in;
first-out) or market.
Furniture, fixtures, equipment and depreciation:
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation. Depreciation is being provided by the use of the straight-line
method over the estimated useful lives of the related assets ranging from
seven (7) to ten (10) years.
Repairs and maintenance are charged to operations as incurred, and
expenditures for significant betterments and renewals are capitalized. The
cost of fixed assets retired or sold, together with the related accumulated
depreciation, are removed from the appropriate asset and depreciation
accounts, and the resulting gain or loss is included in the consolidated
statements of operations and deficit.
Profit sharing plan:
The Company maintains a discretionary profit sharing plan covering all
eligible employees. The Company funds pension costs as accrued.
Advertising:
Costs of advertising are charged to operations as incurred.
Intangible:
Loan origination costs are capitalized and amortized to operations, on the
straight-line method over the life of the loan of five (5) years.
Income taxes:
The Parent Company (Mederi, Inc.) and a majority of its subsidiaries are
regular C type corporations. Accordingly, Mederi, Inc. and a majority of
its subsidiaries account for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards Number 109, "Accounting for
Income Taxes" (SFAS 109). SFAS 109 utilizes an asset and liability
approach, and deferred taxes are determined based on the estimated future
tax effect of differences between the financial reporting and the tax basis
of assets and liabilities using enacted rates. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enacting rate. A valuation allowance is
provided for deferred tax assets when it is more likely than not that the
asset will not be realized.
The Company has other subsidiaries which have elected to be treated as an
`S' corporation under the Internal Revenue Code and, accordingly, the
shareholders have consented to include their pro rata share of income or
loss and any tax credits on their U.S. Individual Income Tax Return. For
income tax purposes, the Company uses accelerated methods of depreciation.
Accounting pronouncements:
The Company has adopted various new standards as promulgated by the
Financial Accounting Standards Board (FASB) through the issuance of
Statements of Financial Accounting Standards (SFAS). The Company also
adopted various new Statements of Position (SOP) issued by the American
Institute of Certified Public Accountants. Except for the impact of FASB 46,
adoption of these various new FASB's and SOP's did not have an impact on the
Company's combined financial statements.
1. Organization and business:
Mederi, Inc. was organized and incorporated under the laws of the State
of Florida on March 2, 1982. The majority of its subsidiaries were also
incorporated under the laws of the State of Florida in various years
between 1982 and 2004. The Company has other subsidiaries, which were
incorporated in the States of Illinois and Missouri in the years 1984
and 1995. The Company operates under the trade names "Mederi Home Health
Care" and "United Home Health Services". Approximately 81% of the
consolidated revenues are generated within the State of Florida and the
balance between the States of Illinois and Missouri. The Company is a
home health care provider. The Company provides, through employed and
contracted arrangements for the services of Registered Nurses, Licensed
Practical Nurses, Physical Therapists, Speech Language Pathologists,
Occupational Therapists, Medical Social Workers and Home Health Aides.
For financial statement purposes, the Company maintains it books and
records with a fiscal year ending June 30. For income tax purposes,
certain subsidiaries report on a calendar year basis ending on December
31. Accordingly, the Company annually records memorandum entries to
convert the reporting period from December to June.
During the year 2000, the Company and its subsidiaries filed for
reorganization under Chapter 11 of the Bankruptcy Code. The Company
filed, as debtor in possession and through the succeeding months was
successful in its plan of reorganization, and emerged from Chapter 11
during the later part of the year 2000. Through the emergence of the
filing, the Company entered into a Settlement Agreement with the U.S.
Department of Health and Human Services (Medicare) regarding "Determined
Overpayments" made by Medicare to the Company. Total overpayments
claimed by Medicare amounted to approximately $2.415 million. In
addition, any "Additional Overpayments" detected subsequent to the date
of the Settlement Agreement relating to Medicare services provided prior
to October 1, 2000, would also be subject to the Settlement Agreement,
so long as the Additional Overpayments does not exceed a cap of
$2.0million. Under the terms of the Settlement Agreement the Company
agreed to reimburse Medicare $936,000for the first year and
$1,040,000per annum thereafter for the "Determined Overpayments".
The Company has satisfied the Settlement Agreement regarding "Determined
Overpayments" of approximately $2.415 million with final payment being
made in March 2003. In accordance with the Settlement Agreement,
Medicare has subsequently determined "Additional Overpayments" in the
net amount of approximately $1.893 million. On June 20, 2005, the
company began making weekly payments of $10,000(including interest)
towards the Additional Overpayments, and at year end (June 30, 2006) the
obligation had been reduced to approximately $1.575 million. The Company
is presently in negotiations with Medicare to arrive at a discounted
lump-sum payoff amount. Recent memoranda from Medicare indicate
Medicare's willingness to accept a discounted lump-sum payoff amount,
however no final determination of a reduced amount has yet been agreed
upon. Regardless of the possible reduction, the Company recorded
Medicare's determined amount of "Additional Overpayments" at the full
amount of approximately $1.893 million. If a settlement were reached,
operations would be credited for any reduction in the proposed
settlement.
1. Organization and business (continued):
The Company emerged from bankruptcy protection during October 2000. In
the initial settlement of Determined Overpayments of $2.415 million,
which has been fully liquidated in 2003, the Company was not charged the
full interest by Medicare. The amount of any unpaid interest on the
original Determined Overpayments has not been determined or accrued in
the accompanying consolidated balance sheets. Medicare finalized the
final determination of the Additional Overpayments in June 2005. In that
final report, Medicare realized the outstanding balance due from that
date forward. In its report, Medicare did not accrue any interest from
the date of the Additional Overpayments to June 2005, the commencement
date of the new amortization of the Additional Overpayments. From June
2005 interest on the outstanding balance due Medicare has been accrued.
No interest has been accrued to June 2005 in the accompanying
consolidated balance sheets. The Company may be contingently liable for
the outstanding interest in an amount, which has not been determined for
the Determined and Additional Overpayments.
2. Discontinued operations:
During the year ended June 30, 2006, the Company closed a few of its
offices, located in Florida. Due to a proposed sale of the Company
assets (read Note 11 on subsequent event), management has elected to
reflect the closed units as discontinued operations. Below is a table
summarizing the net (loss) income resulting from the discontinued units
for each of the three years ended June 30, 2006:
Years Ended June 30,
-------------------------------------------------------
2006 2005 2004
---------------- ---------------- ---------------
Revenues $ 506,200 $ 588,700 $ 768,300
---------------- ---------------- ---------------
Operating expenses:
Patient medical supplies 11,900 11,300 7,500
Contracted therapy services 30,100 18,100 12,500
Payroll and related benefits 729,100 675,200 611,100
Rent 70,900 47,000 33,500
Administrative, general and selling 139,700 101,000 73,200
---------------- ---------------- ---------------
981,700 852,600 737,800
---------------- ---------------- ---------------
(Loss) income before taxes (475,500) (263,900) 30,500
Provision for income taxes (benefit) (183,400) (101,800) 11,800
---------------- ---------------- ---------------
Net (loss) income from discontinued operations $ (292,100) $ (162,100) $ 18,700
================ ================ ===============
3. Going concern, liquidity/ working capital:
The Company has a working capital deficiency of approximately $4,198,200as
of June 30, 2006, which represented an increase in the working capital
deficiency of $1,436,400from 2005. The working capital deficiency increased
$1,140,400from 2004 to 2005. The working capital deficiency results
primarily from deferred revenues, which are amortized to the succeeding
year. The shareholders' equity deficiency is also impacted by the amount of
deferred revenues and by the amount of dividends and distributions made to
the shareholders. During the year ended June 30, 2006, cash flow used in
operations exceeded $1,319,700. During the years ended June 30, 2005 and
2004, the Company had cash flows from operations of $873,200for 2005 and
$1,534,900for 2004. During the year ended June 30, 2006, the principal
source of cash flows has been through financing activities. As of June 30,
2006, the Company is non-compliant with the fixed charge coverage ratio.
The minimum fixed charge coverage ratio is 1.25:1. At June 30, 2006, the
fixed charge coverage ratio was a negative 2.21:1, which included the
credit facility. Therefore, the Company is in default under the Credit
Facility.
Under existing circumstances, there is no assurance that current operations
would improve and there are no assurances that the primary lender would
continue to fund under the current financing agreement. While the lender
has not ceased its funding while in default, during the subsequent period,
there is no assurance that the Credit Facility would not be called and
funding stopped.
Management will institute plans to improve its operating costs in order to
improve its operations. Those plans include closing certain loss locations,
reducing overhead and home office expenses. To date the Company has closed
a few locations. There are no assurances that the plans of management would
be successful.
Under these circumstances, there is substantial doubt about the ability of
the Company to continue as a going concern.
4. Concentration of credit risk and dependency:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
receivables. During the year, the Company's account balance with
financial institutions exceeded federally insured limits of the Federal
Deposit Insurance Corporation and other agencies. While the Company's
cash deposits are in excess of federally insured limits as of June 30,
2006 and 2005, management regularly monitors their balances and attempts
to keep this potential risk to a minimum by maintaining their accounts
with financial institutions they believe are of good quality.
The Company has a concentration of credit risk with respect to patient
receivables, as 95.5% are due from Medicare. The Company is not allowed
to accept any collateral from its customers. The Company maintains an
allowance for uncollectible accounts receivable based upon expected
collectibility of all accounts receivable. In addition, the Company
provides annual provisions for PEP's. During the year ended June 30,
2005, Medicare determined additional PEP adjustments for the years 2005,
2004 and earlier. These catch-up adjustments determined by Medicare have
been recorded in the appropriate periods. It is the opinion of management
that historical PEP adjustments have been recorded and have stabilized.
Based on the historical experience of the Company the provision has not
changed. Therefore, no additional credit losses beyond amounts provided
for collection losses are believed inherent in the Company's accounts
receivable.
4. Concentration of credit risk and dependency (continued):
Revenue concentrations by State, net of contractual allowances for the years ended June 30, 2006, 2005 and 2004 are as follows:
2006 2005 2004
------------------------------ --------------------------------- ------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ---------- ---------------------- ---------- ------------------- ----------
Florida $ 19,621,700 80.7% $ 19,577,200 82.1% $ 17,411,700 83.3%
Missouri 2,801,600 11.5% 2,859,700 12.0% 2,394,300 11.5%
Illinois 1,889,500 7.8% 1,400,000 5.9% 1,102,400 5.3%
------------------- ---------- ---------------------- ---------- ------------------- ----------
$ 24,312,800 100.0% $ 23,836,900 100.0% $ 20,908,400 100.0%
=================== ========== ====================== ========== =================== ==========
Revenue concentrations by program for the years ended June 30, 2006, 2005 and 2004 are as follows:
2006 2005 2004
------------------------------ ----------------------------- ---------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ---------- -------------------- ---------- ---------------------- ----------
Medicare $ 23,987,400 98.7% $ 23,363,400 98.0% $ 20,371,700 97.4%
Medicaid 4,700 0.0% 2,300 0.0% 8,700 0.0%
Private 320,700 1.3% 471,200 2.0% 528,000 2.5%
------------------- ---------- -------------------- ---------- ---------------------- ----------
$ 24,312,800 100.0% $ 23,836,900 100.0% $ 20,908,400 100.0%
=================== ========== ==================== ========== ====================== ==========
5. Details of financial statement components:
Other current assets: 2006 2005
------------------ ---------------------
Employee advances $ - $ 18,100
Prepaid:
Insurance 107,400 94,900
Interest 2,700 1,700
Rent 9,000 8,300
------------------ ---------------------
$ 119,100 $ 123,000
================== =====================
The insurance policies are collateralized to the insurance installment
contract.
Furniture, fixtures and equipment:
Furniture, fixtures and equipment $ 650,200 $ 616,900
Vehicles 50,600 50,600
------------------- ---------------------
700,800 667,500
Less accumulated depreciation 462,600 430,600
------------------- ---------------------
$ 238,200 $ 236,900
5. Details of financial statement components (continued):
Accrued liabilities: 2006 2005
------------------- ------------------
Compensation $ 629,700 $ 619,600
Employee benefit programs 536,200 555,700
PEP Reserves 150,000 150,000
------------------- ------------------
$ 1,315,900 $ 1,325,300
=================== ==================
6. Credit facility:
On October 18, 2005, the Company and all of its subsidiaries and affiliates
entered into a financing commitment with a financial institution. Under the
terms of the agreement, the Company entered into a Revolving Line of Credit
(Credit Facility) of $4 million. The Credit Facility has a term of five (5)
years from closing maturing in October 2010. The Credit Facility is
collateralized by a first priority perfected security interest in all the
accounts and other collateral of the Company. No liens, other than those
approved by the lender will be permitted on the collateral. Interest under
the Credit Facility is the Wall Street Journal Prime (8.25% at June 30,
2006) plus two and one half percent (2.5%). If any event of default occurs
and continues an additional default rate of 3% shall be added to the
interest rate until the event of default is cured or waived. The effective
rate will be adjusted weekly in accordance with changes in the prime. Total
interest charged to operations amounted to $205,800for the year ended June
30, 2006. The effective interest rate charged during the current period,
which includes the default rate and unused line fee was about 14.7% on an
annualized basis. No waivers have been granted.
During the first year, interest shall be computed based on a floor of $1.5
million advance or the actual amount outstanding over the floor; for the
second year the floor lowers to $1.0million advance and thereafter it will
be computed on the actual amount outstanding. Additional interest for the
Unused Credit Facility line fee of one-half of one percent (1/2%) will be
charged on a monthly basis. The Unused Credit Facility is the difference
between the Revolving Loan Commitment and the greater of (i) the average
daily outstanding balance during each month, or (ii) the minimum balance of
$1.5 million. Unused Credit Facility line fee charged to operations for the
year ended June 30, 2006 was about $7,200.
Should the Credit Facility be terminated by the Company or the lender after
the occurrence of an Event of Default, the Company shall unconditionally
pay a termination fee of 3% of the Revolving Loan Commitment ($4 million),
if the early termination occurs on or prior to the first anniversary
(October 18, 2006); 2% for the second anniversary date and 1/2% thereafter.
While the Company is in default of the Credit Facility, the lender has not
terminated the Facility due to the Event of Default and the Termination Fee
of $120,000has not been accrued for the year ended June 30, 2006.
Subsequent to the balance sheet date, the lender continues to fund under
the terms of the Credit Facility.
Proceeds from the Credit Facility should have been used to terminate all
credit facilities secured by any of the collateral. Thereafter, the
Facility will be used for working capital and general corporate purposes.
The borrowing minimum base is $1.5 million, with a maximum of $4.0 million.
Collections of all receivables shall be made to a demand deposit bank
account and swept daily to the lender (lock box). The lending base amount
is determined at eighty-five percent (85%) of qualified receivables. The
Company has paid a commitment fee of 1% ($40,000) in addition to various
other costs. Total origination costs of the Credit Facility amounted to
approximately $186,900. The borrower will reimburse the lender all costs
associated with annual verifications of the collateral.
6. Credit facility (continued):
The Company will be required to meet various affirmative and negative
covenants. Financial covenants will include the following:
1. Fixed charge coverage ratio. On a quarterly basis, the fixed
charge coverage ratio shall not be less than 1.25:1.00. Fixed
charge coverage ratio is defined as the ratio of EBITDA less
withdrawals over the sum of interest, current maturities of
long-term debt and capitalized leases. This ratio shall commence
with the quarter ending December 31, 2005. Each quarter thereafter
shall be rolling with the preceding quarter until the September
2006 when the measurement period will be on a four quarter rolling
basis. EBITDA is equal to the sum of net income (loss) plus
interest, income taxes (excluding deferred taxes), depreciation
and amortization. Withdrawals include dividends, distributions,
payments of subordinated debt and advances and loans to officers
and affiliates.
2. Other covenants shall include:
A. Prohibition on the change of business;
B. Prohibition on the change of shareholders;
C. Prohibition of additional liens without lender approval;
D. Prohibition on declaring or paying withdrawals, which
would result in an event of default;
E. Cross collateralization to all indebtedness;
F. Limitation on additional debt, including contingencies,
without approval of the lender;
G. Restrictions on mergers and acquisitions without lender
approval;
H. Restrictions on any asset disposition, other than in the
normal course of business;
I. Annual reviewed financial statements no later than October
31 of each year in accordance with generally accepted
principles of accounting. This would include quarterly
compiled financial statements and annual projected
financial statements.
3. The shareholders shall enter into a subordination agreement.
7. Due to Medicare:
Under the previous Medicare program, which ended in 2000, the Company was
entitled to reimbursements of reasonable costs as defined in the applicable
regulations and contract of services rendered to patients. At June 30, 2005,
cumulative payments received from Medicare exceeded prior cost
reimbursements submitted in accordance with those regulations and agreements
in existence in the past. It is management's opinion that the amounts
reflected in the accompanying consolidated balance sheets would not be
materially different from those finally determined, with the exception of a
possible lump sum payoff discount. The amounts due the Medicare Program are
still outstanding and are being repaid under an approved repayment plan of
$10,000 per week, which includes interest at approximately 12.0%. Total
principal payments to Medicare amount to $298,400for the year ended June 30,
2006 and $20,000 for the year ended June 30, 2005. Interest charged to
operations as a result of the Medicare payments amounted to $211,600 for the
year ended June 30, 2006. There was no interest charged to operations for
Medicare payments for the year ended June 30, 2005. Amounts due Medicare are
deemed current, irrespective of any payment plan presently existing. As
disclosed in Note 1, the Company may be contingently liable for possible
outstanding interest in an amount, which has not been determined for
Determined Overpayments to 2003 and for Additional Overpayments from 2003 to
2005.
8. Long-term debt:
2006 2005
Notes payable, pre-petition, interest at Wall Street Journal Prime (3.25%)
unsecured.
maturing December 31, 2005. $ - $ 13,700
Installment contract payable, interest at
4.6%, collateralized by insurance policies
in force, maturing in 2007 and 2006. 81,500 50,700
Notes payable, bank, interest ranging from
6.0% to 6.5%, collateralized by equipment,
maturing in 2007 and 2008. 87,800 152,600
Notes payable, bank, interest at the certificate of deposit rate(1.45%)
plus 2.0%; collateralized by the Company's certificates of deposits of
$700,000, maturing in varying years ranging
from 2006 to 2008. 530,300 673,300
------------------ ------------------
699,600 890,300
Less current portion of long-term debt 472,700 562,300
------------------ ------------------
$ 226,900 $ 328,000
================== ==================
Maturities of long-term debt subsequent to June 30, 2006 are as follows:
Years Ended
June 30, Amount
2007 $ 472,700
2008 226,900
------------------
$ 699,600
==================
9. Income taxes:
The Company files a consolidated tax return of all "C" type corporations. The
accompanying provisions and allowances for income taxes, both current and
deferred, are based upon the operations of the "C" type corporations only. No
provisions or allowance for income taxes are determined on those "S" type
corporations, as the shareholders have consented to include those gains on
their personal income tax returns.
At June 30, 2006, the Company had available federal net operating loss
carryforwards available to reduce future taxable income of approximately
$2,474,100, which expires in 2021. These net operating loss carryforwards can
only and are only being utilized by the "C" type corporations. A valuation
allowance would have been provided when it is more likely than not that the
tax benefit may not be realized. As disclosed under subsequent event, the
pending sale of assets would result in the full utilization of the deferred
tax asset; therefore, a valuation allowance is not required.
9. Income taxes (continued):
2006 2005 2004
------------------- ------------------ ------------------
(Loss) income from continuing operations $ (986,200) $ 958,200 $ 2,017,700
Income from S corporations 346,600 121,200 572,800
------------------- ------------------ ------------------
Income subject to corporate income tax rates $ (1,332,800) $ 837,000 $ 1,444,900
=================== ================== ==================
Current tax expense:
Federal $ (466,500) $ 293,000 $ 505,700
State (73,300) 46,000 79,500
Deferred and other 22,300 (94,800) (109,600)
------------------- ------------------ ------------------
$ (517,500) $ 244,200 $ 475,600
=================== ================== ==================
Deferred tax asset:
Net operating loss benefit, beginning $ 258,800 $ 443,800 $ 848,900
Add (deduct) amount (utilized) generated 695,600 (185,000) (405,100)
------------------- ------------------ ------------------
$ 954,400 $ 258,800 $ 443,800
=================== ================== ==================
The difference in income taxes provided and the amounts determined by
applying the statutory rate to income before income taxes result from the
following:
Federal statutory rate at 35.0% $ (466,500) $ 293,000 $ 505,700
State income tax rate, net of federal effect (47,600) 29,900 51,700
Deferred and other (3,400) (98,700) (81,800)
------------------- ------------------ -------------------
$ (517,500) $ 224,200 $ 475,600
=================== ================== ===================
Reflected in the accompanying statements of operations and accumulated
deficit for the years ended June 30, 2006, 2005 and 2004 as follows:
Continuing operations $ (512,200) $ 224,200 $ 475,600
Discontinued operations (183,400) (101,800) 11,800
------------------- ------------------ -------------------
$ (695,600) $ 122,400 $ 487,400
=================== ================== ===================
10. Profit sharing plan:
The Company maintains qualified retirement plans known as the Mederi Small
Corp Profit Sharing Plan, Mederi of Palm Beach City Profit Sharing Plan,
and Mederi of Broward Profit Sharing Plan. The employer contributes to the
plan annually, on a discretionary basis. Qualified employees may
participate after completion of one (1) year of service (defined as
1,000hours), with vesting occurring between 3 and 7 years of service on a
graduating rate from 20% after year 3 to 100% after year 7. Annual
contributions are allocated among participants eligible to share in the
contribution for that plan year. The last contribution made by the employer
was on June 30, 1998. The plan assets are held by a financial institution,
in three accounts under the names of each plan. Total plan assets at June
30, 2006 are approximately $3,839,600and the total plan assets at June 30,
2005 were $3,747,800, and are invested in various securities in the bank's
pooled asset funds. There are presently 218 present and former employees
covered by the plans. There were no contributions to the plan for the years
2006, 2005 and 2004. For the year ended June 30, 2006, the Plans earned
$277,400, incurred investment and administrative fee of $32,700and made
distributions of $152,900. The Plan assets are not included in the
accompanying consolidated balance sheets.
11. Subsequent event, commitments and contingencies: Sale of Company assets:
On November 15, 2006, the Company entered into an Asset Purchase Agreement
with Almost Family, Inc. for the sale of all the assets of the Company used
in its business (the purchased assets). They include, but are not limited
to certain assumed leases, tangible personal property, goodwill, all
accounts receivable and unbilled work in process and other various types of
intangibles. Certain leases within the State of Florida will not be assumed
which leases will be terminated by January 31, 2007. From the date of
closing to January 31, 2007 the purchaser, will reimburse the Company the
cost of occupancy. The sale price ranges from $19 million to about $24.5
million. Under the terms of the Asset Purchase Agreement, the Company will
receive cash at closing of $12.2 million; a promissory note of $4 million
and 100,000common shares of Almost Family, Inc. The Promissory Note will
consist of two (2) notes. One for $1 million and the second for $3 million.
The Notes bear interest at 6%, with interest payable quarterly. The
principal amounts and all accrued interest shall be paid in full on May 15,
2009. Almost Family, Inc. is the guarantor to the Promissory Notes. The
shares shall be unregistered shares, shall be restricted securities under
Rule 144, and must satisfy the Rule 144 holding period requirement of
twelve (12) months before being tradable upon satisfaction of all Rule 144
requirements. The market value of the restricted shares on November 15,
2006 the closing price of $27.22 per share or a fair value of $2,722,000.
The number of common shares to be issued, at closing, shall be adjusted as
follows: (a) if the price of the shares fall between $22 and $26 then
100,000common shares will be issued; (b) if the common share price falls
below $22 then 109,091 shares will be issued; (c) if the price of the
shares is greater than $26 then 92,308 shares will be issued. Share value
will be determined based on the average closing for the five trading days
preceding the announcement of the transaction. In addition, the Company
will be entitled to contingent consideration with respect to three (3)
separate earn out categories based on the satisfaction of certain
benchmarks. The total contingent consideration could range in the area of
$5,475,000. The benchmarks for the contingent consideration include (1) a
one year integration, (2) a one year employee retention and (3) revenue
earn outs for the years 2007 and 2008, with 2006 calendar year as the base
for 2007 and 2007 as the base for 2008. The closing is scheduled for
December 3, 2006.
Third party rate adjustments:
Current laws and regulations governing the Medicare program are extremely
complex and subject to interpretation. As a result, there is at least a
reasonable possibility that recorded estimates may change by material
amounts in the near future. These changes result from detected differences
in billing amounts based on anticipated services as compared to the actual
services provided (Medicare adjustments); subsequent review and
re-evaluation of charges to detect the possible under/over billings by the
Company to Medicare (internal procedures). In the opinion of management,
the Company has adequately provided for these third party adjustments.
11. Subsequent event, commitments and contingencies (continued): Commitments:
The Company leases various facilities in Florida, Illinois and Missouri
under non-cancelable operating leases having terms expiring between 2006
and 2011. The facilities have renewal options, exercisable at the option of
the Company and do not contain provisions for contingent rentals based upon
a percentage of gross revenues. The basic rent is adjusted annually for the
increase in the Consumer Price Index for all Urban Consumers for certain
leases. The Company also leases various equipment, which are
non-capitalized leases and are on a month-to-month basis. Future minimum
lease payments on the non-cancelable leases, excluding sales tax, for the
years subsequent to 2006 are as follows:
Years Ending Other
June 30, Total Florida States
---------------------------------------------------------------------------
2007 $ 611,600 $ 518,500 $ 93,100
2008 343,400 255,800 87,600
2009 198,700 155,900 42,800
2010 50,600 48,300 2,300
2011 15,000 15,000 -
-----------------------------------------------------
$ 1,219,300 $ 993,500 $ 225,800
=====================================================
Litigation:
From time to time, the Company is a defendant in proceedings concerning
various medical and employment matters. Management considers these types
of actions as being incidental to the Companies' business and is of the
opinion that the financial exposure to these actions will not materially
affect the financial position of the Company.
12. Segment data and home office overhead:
The Company has reportable segments, which have been identified based on
regional areas: Segment data:
2006 2005 2004
---------------------------- ---------------------------- ----------------------------
Regions: Amount Ratio Amount Ratio Amount Ratio
---------------- ----------- ---------------- ----------- ---------------- -----------
South $ 19,621,700 80.71% $ 19,577,200 82.13% $ 17,411,700 83.28%
North 4,691,100 19.29% 4,259,700 17.87% 3,496,700 16.72%
---------------- ----------- ---------------- ----------- ---------------- -----------
$ 24,312,800 100.00% $ 23,836,900 100.00% $ 20,908,400 100.00%
================ =========== ================ =========== ================ ===========
Summary of home office overhead:
2006 2005 2004
---------------- ---------------- ---------------
Home office:
Administrative, general and selling $ 681,600 $ 679,300 $ 595,500
Interest 457,400 28,200 17,700
Other operating 185,600 168,200 54,800
Payroll and related benefits 2,125,700 1,408,100 1,000,000
Rent 112,700 109,100 108,800
---------------- ---------------- ---------------
$ 3,563,000 $ 2,392,900 $ 1,776,800
================ ================ ===============