SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): April 1, 1996
-------------
ROTECH MEDICAL CORPORATION
--------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED ON ITS CHARTER)
Florida 59-2115892
- ------------------------------ -------------------
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4506 L.B. McLeod Road, Suite F, Orlando, Florida 32811
- ------------------------------------------------ ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 841-2115
- --------------------------------------------------- --------------
Not Applicable
- --------------
(former name or former address, if changed since last report)
The undersigned Registrant hereby amends the following item, financial
statements, exhibits or other portions of its Current Report on Form 8-K, filed
April 1, 1996, relating to the acquisition of an aggregate of individually
insignificant businesses acquired during the period November 15, 1995 to April
1, 1996.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
- ---------------------------------------------------------------------------
(a) 1. Financial Statement of Businesses Acquired.
---------------------------------------------------
Physicians Management Group
----------------------------
Report of Independent Certified Public Accountants
Balance Sheet at December 31, 1994
Statement of Income for the Year Ended December 31, 1994
Statement of Changes in Stockholders' Equity for the Year Ended
December 31, 1994
Statement of Cash Flows for the Year Ended December 31, 1994
Notes to Financial Statements
Interim Balance Sheet at October 31, 1995 (unaudited)
Interim Statement of Income for the Ten Months Ended October 31,
1995 (unaudited)
Interim Statement of Stockholder's Equity for the Ten Months Ended
October 31, 1995 (unaudited)
Interim Statement of Cash Flows for the Ten Months Ended October 31,
1995 (unaudited)
Notes to Interim Financial Statements as of October 31, 1995
(unaudited)
Preferred Medical Equipment Company, Inc.
-----------------------------------------
Report of Independent Certified Public Accountants
Balance Sheet at December 31, 1995
Statement of Income for the Year Ending December 31, 1995
Statement of Changes in Stockholders' Equity for the Year Ending
December 31, 1995
Statement of Cash Flows for the Year Ending December 31, 1995
Notes to Financial Statements
G&G Medical, Inc.
-----------------
Report of Independent Auditors
Balance Sheet at March 31, 1995
Statement of Income and Retained Earnings for the Year Ended
March 31, 1995
Statement of Cash Flows for the Year Ended March 31, 1995
Notes to Financial Statements
Interim Balance Sheet at December 31, 1995 (unaudited)
Interim Statement of Operations for the Nine Months Ended December 31,
1995 (unaudited)
Interim Statement of Stockholders' Equity for the Nine Months Ended
December 31, 1995 (unaudited)
Interim Statement of Cash Flows for the Nine Months Ended December 31,
1995 (unaudited)
Notes to Interim Financial Statements as of December 31, 1995 (unaudited)
Rhema, Inc.
-----------
Independent Auditors' Report
Balance Sheet at December 31, 1995
Statement of Income for the Year Ending December 31, 1995
Statement of Stockholders' Equity for the Year Ending December 31, 1995
Statement of Cash Flows for the Year Ending December 31, 1995
Notes to Financial Statements
Respiratory Home Care, Inc.
---------------------------
Report of Independent Certified Public Accountants
Balance Sheet at December 31, 1995
Statement of Income for the Year Ending December 31, 1995
Statement of Stockholders' Equity for the Year Ending December 31, 1995
Statement of Cash Flows for the Year Ending December 31, 1995
Notes to Financial Statements
CP02, Inc.
----------
Report of Independent Certified Public Accountants
Balance Sheet at December 31, 1995
Statement of Income for the Year Ending December 31, 1995
Statement of Stockholders' Equity for the Year Ending December 31, 1995
Statement of Cash Flows for the Year Ending December 31, 1995
Notes to Financial Statements
National Home Care Services, Inc.
---------------------------------
Independent Auditors' Report
Balance Sheet at December 31, 1995
Statement of Income for the Year Ending December 31, 1995
Statement of Shareholder's Equity for the Year Ending December 31, 1995
Statement of Cash Flows for the Year Ending December 31, 1995
Notes to Financial Statements
Roth Medical, Inc. And Murray Medical, Inc.
-------------------------------------------
Report of Independent Public Accountants
Combined Balance Sheet as of May 31, 1995
Combined Statement of Income for the Year Ended May 31, 1995
Combined Statement of Shareholders' Equity for the Year Ended May 31,
1995
Combined Statement of Cash Flows for the Year Ended March 31, 1995
Notes to Combined Financial Statements
Interim Combined Balance Sheet at January 31, 1996 (unaudited)
Interim Combined Statement of Income for the Eight Months Ended January
31, 1995 (unaudited)
Interim Combined Statement of Stockholders' Equity for the Eight Months
Ended January 31, 1995 (unaudited)
Interim Combined Statement of Cash Flows for the Eight Months Ended
January 31, 1995 (unaudited)
Notes to Interim Combined Financial Statements as of January 31, 1995
(unaudited)
(b) 1. Pro Forma Financial Information
---------------------------------------
Pro Forma Condensed Combined Financial Statements at July 31, 1995
Pro Forma Condensed Combined Interim Financial Statements at January
31, 1996 (unaudited)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment of Report on 8-K to be signed on its
behalf by the undersigned hereunto duly authorized.
RoTech Medical Corporation,
a Florida Corporation
Dated: May 31, 1996 By: /s/ Rebecca R. Irish
------------ ---------------------------------
Rebecca R. Irish, Chief Financial
Officer
PHYSICIANS MANAGEMENT
GROUP, INC.
DECEMBER 31, 1994
C O N T E N T S
Independent Auditor's Report 1
- ----------------------------
Financial Statements:
- ---------------------
Balance Sheet 2
Statement of Loss and Operating Deficit 3
Statement of Cash Flows 4
Notes to Financial Statements 5 - 8
[LAPORTE SEHRT ROMIG & HAND LETTERHEAD APPEARS HERE]
To The Board of Directors
PHYSICIANS MANAGEMENT GROUP, INC.
Independent Auditor's Report
----------------------------
We have audited the accompanying balance sheet of PHYSICIANS MANAGEMENT GROUP,
INC. as of December 31, 1994, and the related statements of loss and operating
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PHYSICIANS MANAGEMENT GROUP,
INC. as of December 31, 1994, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of selling, general and
administrative expenses is presented for purposes of additional analysis and is
not a required part of the basic financial statements. Such information has
been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
LaPorte, Sehrt, Romig & Hand
May 28, 1996
PHYSICIANS MANAGEMENT GROUP, INC.
BALANCE SHEET
December 31, 1994
ASSETS
CURRENT ASSETS:
Accounts Receivable $110,625
Due from Shareholder 58,000
Accounts Receivable - Employees 600
--------
Total Current Assets 169,225
--------
FURNITURE AND EQUIPMENT:
Furniture and Equipment 19,613
Less: Accumulated Depreciation (19,494)
--------
Furniture and Equipment - Net 119
--------
OTHER ASSETS 3,705
--------
$173,049
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank Overdraft $ 52,307
Accounts Payable 22,933
Accrued Expenses Payable 81,680
Customer Advances 85,835
Deferred Income Taxes 20,375
Income Taxes Payable 8,087
--------
Total 271,217
--------
STOCKHOLDERS' DEFICIT:
Common Stock, No Par Value, 10,000 Shares
Authorized, 111 Issued and Outstanding 1,010
Operating Deficit (99,178)
--------
Total Stockholders' Deficit (98,168)
--------
$173,049
--------
The accompanying notes are an integral part of these financial statements.
PHYSICIANS MANAGEMENT GROUP, INC.
STATEMENT OF LOSS AND OPERATING DEFICIT
For The Year Ended December 31, 1994
REVENUES:
Professional Fees $1,257,464
Reimbursement of Expenses 1,760,352
----------
3,017,816
----------
COSTS AND EXPENSES:
Cost of Sales 1,174,738
Selling, General and Administrative Expenses 1,824,367
----------
2,999,105
----------
OPERATING INCOME 18,711
OTHER INCOME 10
----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 18,721
----------
PROVISION FOR INCOME TAXES:
Current 8,087
Deferred 20,375
----------
28,462
----------
NET LOSS (9,741)
----------
OPERATING DEFICIT - BEGINNING OF YEAR
AS PREVIOUSLY REPORTED (834,987)
PRIOR-PERIOD ADJUSTMENT 745,550
----------
OPERATING DEFICIT - BEGINNING OF YEAR
AS RESTATED (89,437)
----------
OPERATING DEFICIT - END OF YEAR $ (99,178)
==========
The accomanying notes are an integral part of these financial statements
3
PHYSICIANS MANAGEMENT GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,741)
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Depreciation 12,025
(Increase) in Accounts Receivable (11,877)
Decrease in Due from Shareholder 2,000
Increase in Accounts Payable 1,245
Increase in Customer Advances 20,789
Increase in Income Taxes Payable 6,474
Increase in Deferred Tax Liability 20,375
(Decrease) in Accrued Expenses Payable (46,229)
---------
Net Cash Used in Operating Activities (4,939)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment (11,900)
(Increase) in Other Assets (2,000)
(Increase) in Accounts Receivable - Employees (600)
---------
Net Cash Used In Investing Activities (14,500)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Bank Overdraft 52,307
Repayment of Notes Payable (41,719)
---------
Net Cash Provided by Financing Activities 10,588
---------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (8,851)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 8,851
---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ -
=========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid During the Year for:
Interest $ 1,796
Income Taxes $ 1,613
The accompanying notes are an integral part of these financial statements.
4
PHYSICIANS MANAGEMENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company provides management and consulting services to the
healthcare industry and as such grants credit to its customers, who are located
throughout the southern United States.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and are depreciated over
the estimated useful lives of the respective assets. Depreciation is computed
on accelerated methods and amounted to $12,025 for the year ended December 31,
1994.
INCOME TAXES
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to cash basis accounting for income tax
purposes.
RECEIVABLES - TRADE
The Company considers amounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. When amounts
become uncollectible, they are charged to operations. Use of this method does
not result in a material difference from the valuation method required by
generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less to
be cash equivalents.
NON-DIRECT RESPONSE ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense
charged to operations totaled $3,941 for the year ended December 31, 1994.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
5
PHYSICIANS MANAGEMENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE B
LEASES
The Company leases office space under an operating lease expiring
January 15, 2000.
Future minimum lease payments are as follows:
1995 $ 24,000
1996 54,000
1997 54,000
1998 54,000
1999 54,000
Subsequent to 1999 54,000
--------
$294,000
========
Rent expense for the year ended December 31, 1994 amounted to
$36,814.
The Company leases office equipment under an operating lease expiring
December 15, 1999.
Future minimum lease payments are as follows:
1995 $ 7,833
1996 7,833
1997 7,833
1998 7,833
1999 7,833
-------
$39,165
=======
NOTE C
COMMITMENTS
The Company has contracts to provide management and consulting
services to various physicians and health care providers, expiring September 1,
1995.
NOTE D
PRIOR PERIOD ADJUSTMENT
Retained earnings at the beginning of 1994 has been adjusted to
correct an error in the accrual of officers' salary made in 1993. The error
had no effect on net income for 1994.
6
PHYSICIANS MANAGEMENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE E
INCOME TAXES
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the accrual basis of
accounting used for financial reporting and the cash basis of accounting used
for tax reporting. The deferred taxes represent the future tax return
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled.
There were net deferred tax liabilities of $20,375 as of December 31,
1994. The temporary differences which created deferred tax assets and
liabilities are as follows:
Accounts Receivable $29,083
Accounts Payable (8,708)
-------
$20,375
=======
An analysis of corporate income taxes is as follows:
Current:
Federal $ 7,506
State 581
-------
Total 8,087
-------
Deferred Income Taxes:
Federal 16,876
State 3,499
-------
20,375
-------
Total Provision for
Corporate Income Tax $28,462
=======
A reconciliation of income tax at the statutory rate to income tax
expense at the Company's effective rate is as follows:
Computed Tax at the Expected Statutory Rate $ 6,365
Non-Deductible Permanent Differences 2,091
Deferred Taxes 20,375
Other Adjustments (369)
-------
$28,462
=======
7
PHYSICIANS MANAGEMENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE F
SUBSEQUENT EVENTS
On December 6, 1995, Physicians Management Group, Inc. ("PMG--I")
merged with Uniphy, Inc. Uniphy, Inc. survived the merger and subsequently
changed its name to PHYSICIANS MANAGEMENT GROUP, INC. ("PMG--II")
On December 15, 1995, PMG--II was sold to Doctors Management
Group, Inc., a subsidiary of RoTech Medical Corporation. The Company's
shareholder received $1,250,000 for a non-compete agreement, a stock option plan
and an employment agreement.
On January 17, 1996 a former minority shareholder of PMG--I filed
suit against Physicians Management Group, Inc. (assumed to be PMG--II) and its
majority shareholder to nullify the merger. The suit asks for damages of "at
least" $500,000 plus attorneys fees. The defendants have proposed a settlement
in the amount of $70,000 plus a future distribution of RoTech stock, which is
presently held in escrow, as part of the purchase described in the previous
paragraph. If the settlement offer is not accepted and the case goes to trial,
the amount of the ultimate loss, if any, may equal the amount of damages sought
by the plaintiff.
Physicians Management Group, Inc.
Interim Balance Sheet (Unaudited)
- --------------------------------------------------------------------------------
OCTOBER 31, 1995
----------------
ASSETS
Current Assets:
Cash
Accounts receivable:
Trade, less allowance for contractual
adjustments and doubtful accounts $245,800
Other 150,436
--------
Total Current Assets 396,236
Other Assets:
Other assets 3,705
Property and Equipment, less accumulated
depreciation 34,103
--------
Total Assets $434,044
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses and
other liabilities $451,235
Deferred income taxes 20,375
--------
Total Current Liabilities 471,610
Stockholders' Equity:
Common Stock 1,010
Retained earnings (deficit) (38,576)
--------
(37,566)
--------
Total Liabilities and Stockholders' Equity $434,044
========
See accompanying notes to interim financial statements (unaudited).
Physicians Management Group, Inc.
Interim Statement of Income (Unaudited)
- -------------------------------------------------------------------------------
TEN MONTHS ENDED
OCTOBER 31, 1995
--------------------
Operating revenue $4,317,896
Cost and expenses:
Selling, general and administrative 4,244,397
----------
4,244,397
Income before income taxes 73,499
----------
Income tax expense 12,897
----------
Net income $ 60,602
==========
See accompanying notes to interim financial statements (unaudited).
Physicians Management Group, Inc.
Interim Statement of Stockholders' Equity (Unaudited)
- ----------------------------------------------------------------------------
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS
------------------------------
Balance at January 1, 1995 111 $1,010 ($ 99,178)
Net income 60,602
-----------------------------
Balance at October 31, 1995 111 $1,010 $ (38,576)
============================
See accompanying notes to financial statements (unaudited).
Physicians Management Group, Inc.
Interim Statement of Cash Flows (Unaudited)
- -------------------------------------------------------------------------------
TEN MONTHS ENDED
OCTOBER 31, 1995
-------------------
NET CASH USED BY OPERATING ACTIVITIES $ 33,984
INVESTING ACTIVITIES
Purchases of property and equipment (33,984)
--------
Net cash used in investing activities (33,984)
Change in cash -
Cash at beginning of period -
--------
Cash at end of period $ -
========
See accompanying notes to interim financial statements (unaudited).
Physicians Management Group, Inc.
Notes to Interim Financial Statements - October 31, 1995 (Unaudited)
- -------------------------------------------------------------------------------
1. BASIS OF REPORTING
The interim balance sheet as of October 31, 1995 and the interim statements of
income, stockholders' equity and cash flows for the ten months ended October
31, 1995 are unaudited. In the opinion of management, these statements have
been prepared on the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring accruals, necessary for the
fair statement of the results of the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These interim financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's audited financial statements as of and for the year ended December
31, 1994. The results of operations for the interim period are not necessarily
indicative of the results which may be expected for an entire year.
2. SUBSEQUENT EVENT
Effective November 1, 1995, the Company sold substantially all of its assets and
granted a covenant not to compete to a Florida-based provider of home health
care services.
PREFERRED MEDICAL EQUIPMENT CORP.
FINANCIAL REPORT
DECEMBER 31, 1995
C O N T E N T S
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance sheet 2
Statement of income 3
Statement of changes in stockholders' equity 4
Statement of cash flows 5
Notes to financial statements 6-10
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors and Stockholders
Preferred Medical Equipment Corp.
Murfreesboro, Tennessee
We have audited the accompanying balance sheet of Preferred Medical Equipment
Corp. as of December 31, 1995, and the related statements of income, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Preferred Medical Equipment
Corp. as of December 31, 1995, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Hazlett, Lewis & Bieter, PLL
--------------------------------------
Hazlett, Lewis & Bieter, PLL
Chattanooga, Tennessee
May 10, 1996
-1-
PREFERRED MEDICAL EQUIPMENT CORP.
BALANCE SHEET
December 31, 1995
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 20,093
Accounts receivable, less allowance for doubtful
accounts of $110,610 239,606
Prepaid expenses 2,692
Deferred income tax benefit (Note 5) 41,000
---------
Total current assets 303,391
---------
EQUIPMENT AND VEHICLES, at cost (Notes 2 and 3) 640,486
Less accumulated depreciation (245,942)
---------
Equipment and vehicles, net 394,544
---------
$ 697,935
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 87,511
Current maturities of long-term debt 24,464
Current maturities of capital lease obligations 77,446
Accrued expenses 44,832
Income taxes payable 95,996
Affiliated companies (Note 6) 81,898
---------
Total current liabilities 412,147
---------
LONG-TERM LIABILITIES
Long-term debt (Note 2) 18,703
Capital lease obligations (Note 3) 50,175
Deferred income taxes (Note 5) 5,000
---------
Total long-term liabilities 73,878
---------
STOCKHOLDERS' EQUITY
Common stock, no par value, stated value $1 per share;
1,000 shares authorized and outstanding 1,000
Retained earnings 210,910
---------
Total stockholders' equity 211,910
---------
$ 697,935
=========
The Notes to Financial Statements are an integral part of this statement.
-2-
PREFERRED MEDICAL EQUIPMENT CORP.
STATEMENT OF INCOME
Year Ended December 31, 1995
REVENUE, net of contractual adjustments and returns $1,758,601
----------
OPERATING EXPENSES
Salaries and wages 420,183
Equipment cost 257,760
Provision for bad debt expense 107,888
Depreciation 107,335
Equipment supplies 93,271
Rent expense - buildings 75,791
Telephone 39,402
Taxes and licenses 38,584
Insurance 37,860
Management fees 32,932
Office supplies 30,118
Outside services 26,248
Uniform cost 24,320
Repairs and maintenance 21,151
Gasoline 15,409
Office equipment 12,609
Contract labor 9,703
Utilities 9,570
Marketing 9,354
Lodging 9,000
Advertising 8,216
Equipment rental 7,227
Shipping 6,483
Auto allowance 5,400
Postage 5,190
Meals and entertainment 4,636
Education and seminars 4,323
Mileage 4,174
Dues and subscriptions 2,652
Other expenses 12,461
----------
Total operating expenses 1,439,250
----------
Operating income 319,351
----------
OTHER EXPENSES
Interest expense 21,958
Loss on disposal of equipment 8,936
----------
Total other expenses 30,894
----------
Income before income taxes 288,457
PROVISION FOR INCOME TAXES (Note 5) 95,000
----------
Net income $ 193,457
==========
The Notes to Financial Statements are an integral part of this statement.
-3-
PREFERRED MEDICAL EQUIPMENT CORP.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31, 1995
- -------------------------------------------------------------------------------
Common Retained
Stock Earnings Total
------------- ------------- ----------
BALANCE, December 31, 1994, as previously
reported (unaudited) $1,000 $ 25,716 $ 26,716
Adjustment for correction of errors in prior
years - 11,033 11,033
------ --------- ---------
BALANCE, December 31, 1994, as restated 1,000 36,749 37,749
Cash dividends paid - (19,296) (19,296)
Net income for the year - 193,457 193,457
------ --------- ---------
BALANCE, December 31, 1995 $1,000 $ 210,910 $ 211,910
====== ========= =========
The Notes to Financial Statements are an integral part of this statement.
-4-
PREFERRED MEDICAL EQUIPMENT CORP.
STATEMENT OF CASH FLOWS
Year Ended December 31, 1995
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 193,457
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 107,335
Provision for bad debt expense 52,760
Deferred income tax expense 1,000
Loss on disposal of equipment 8,936
Change in operating assets and liabilities:
Accounts receivable (123,699)
Prepaid expenses 9,847
Accounts payable (4,776)
Accrued expenses 552
Income taxes payable 31,342
Affiliated companies (6,400)
---------
Net cash provided by operating activities 270,354
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (142,424)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (26,108)
Principal payments on capital leases (73,839)
Dividends paid to stockholder (19,296)
---------
Net cash used in financing activities (119,243)
---------
Net increase in cash 8,687
Cash at beginning of year 11,406
---------
Cash at end of year $ 20,093
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 21,958
Income taxes 11,294
=========
The Notes to Financial Statements are an integral part of this statement.
-5-
PREFERRED MEDICAL EQUIPMENT CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
- -------------------------------------------------------------------------------
Note 1. Summary of Operations and Significant Accounting Policies
The accounting and reporting policies of the Company conform with
generally accepted accounting principles. The policies that materially
affect financial position and results of operations are summarized
below.
Company operations:
The Company is engaged primarily in both the sale and rental of home
healthcare equipment to home healthcare patients in three locations:
Jackson, Johnson City, and Murfreesboro, Tennessee.
Cash and cash equivalents:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and cash in bank.
Inventories:
The Company has adopted the policy of expensing equipment and supplies
at the time of purchase, except for equipment with a cost over $500
leased to patients, which is capitalized and depreciated as described
below.
Equipment and vehicles:
Equipment and vehicles are recorded at cost. Depreciation is provided
over the estimated useful lives of the respective classes of assets
using straight-line and accelerated methods.
Income taxes:
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of
equipment and vehicles, different amortization period for the
noncompete agreement, and the allowance for doubtful accounts which is
not deductible until the accounts are actually written off. The
deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Rental income recognition:
The Company rents equipment under month-to-month leases. Income is
recognized monthly for rental equipment based on equipment on lease
each month. Rental equipment is depreciated over its economic useful
life.
Use of estimates in the preparation of financial statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and 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. Actual results could differ
from those estimates.
-6-
PREFERRED MEDICAL EQUIPMENT CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
- --------------------------------------------------------------------------------
Note 2. Long-Term Debt
The Company's long-term debt consists of the following:
Installment note; principal of $1,375 and interest at base
rate plus 1.50% payable monthly through September 1996;
collateralized by equipment $ 13,240
Vehicle installment note; payable $478 monthly including
interest at 10.25% through October 1998; collateralized
by vehicle 13,600
Vehicle installment note; payable $492 monthly including
interest at 10.99% through November 1998; collateralized
by vehicle 14,214
Other miscellaneous note payable 2,113
--------
43,167
Less current maturities (24,464)
--------
$18,703
=======
Aggregate maturities of long-term debt for succeeding years are as
follows:
1996 $24,464
1997 10,127
1998 8,576
Note 3. Lease Commitments
The Company leases certain durable medical equipment under agreements
which are classified as capital leases. Cost and accumulated
amortization of such assets totaled $223,754 and $66,712, respectively,
as of December 31, 1995.
As of December 31, 1995, future minimum lease payments under the capital
leases are as follows:
1996 $ 86,507
1997 51,935
--------
Total future minimum lease payments 138,442
Less amount representing interest (10,821)
--------
Present value of future minimum lease payments 127,621
Less current portion (77,446)
--------
Long-term portion $ 50,175
========
-7-
PREFERRED MEDICAL EQUIPMENT CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
- --------------------------------------------------------------------------------
Note 3. Lease Commitments (continued)
The Company leases office space at three locations under agreements
which are classified as operating leases with terms expiring at various
dates through 1997. Rent expense incurred under these leases was
$75,791 for the year ended December 31, 1995. The following is a
schedule by year of future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease
terms in excess of one year as of December 31, 1995.
1996 $65,556
1997 52,334
The Company subleases space at one location to an affiliated company.
Rent received from the affiliate totaled $13,776.
Note 4. Restatement of Retained Earnings at Beginning of Year
Prior to January 1, 1995, the Company's financial statements were not
audited and were prepared primarily on an income-tax basis of
accounting. Retained earnings and related assets and liabilities at the
beginning of the year have been restated to reflect the use of generally
accepted accounting principles (GAAP). The restatement relates to the
following:
Adjustment to amortize noncompete agreement over
the term of the agreement $(93,333)
Adjustment to reflect application of payments to parent
company against the liability rather than dividends 73,500
Adjustment to record deferred income taxes 37,000
Adjustment to record accrual to parent's ESOP plan (6,134)
________
$ 11,033
========
The net effect of these adjustments of $11,033 is reflected as an
adjustment of beginning retained earnings in the accompanying statement
of stockholders' equity.
Note 5. Income Taxes
The Company's results of operations will be included in the consolidated
federal income tax return of its parent company (see Note 6). The
Company's policy is to provide for income taxes as if it filed on a
separate return basis. The provision for income taxes consists of the
following:
Current tax expense:
Federal $78,000
State 16,000
Deferred taxes 1,000
-------
Total tax expense $95,000
=======
-8-
PREFERRED MEDICAL EQUIPMENT CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
- --------------------------------------------------------------------------------
Note 5. Income Taxes (continued)
Deferred income taxes in the accompanying balance sheet include the
following components:
Total deferred tax asset for deductible temporary
differences:
Allowance for doubtful accounts $39,000
Noncompete agreement 30,000
-------
Total $69,000
Total deferred tax liability for taxable temporary
differences - depreciation (33,000)
-------
Net deferred tax asset $36,000
=======
These amounts have been presented in the financial statement as follows:
Current deferred tax asset $41,000
Noncurrent deferred tax liability (5,000)
_______
$36,000
=======
Note 6. Related-Party Transactions
The Company is affiliated with certain other companies through common
ownership and management. Through December 29, 1995, the Company was a
wholly-owned subsidiary of Amedico, Inc. On December 29, 1995, Amedico
distributed the shares in Preferred Medical Equipment Corp. to its two
shareholders. Amedico, Inc. is related by common control to Century
Health Services, Inc., which owns and operates numerous home
healthcare agencies. Amedico, Inc. also owns a therapy company, data
services company, and a health services company. The more significant
transactions with related parties are as follows:
Management fees paid to Amedico, Inc. $ 32,900
Sale of uniforms to Comprehensive Therapies, Inc. 28,000
Health insurance premiums paid to health services company 20,700
Workers' compensation insurance paid to Century Health Services, Inc. 7,700
Payment of intercompany account to Amedico, Inc. 138,200
Dividends paid to Amedico, Inc. 19,295
Account payable at December 31, 1995, to Century Health Services, Inc. 81,898
Under an agreement between the Company and Century Health Services, Inc.,
Century has agreed to utilize the Company on an exclusive basis to provide
durable medical equipment to Century's patients.
-9-
PREFERRED MEDICAL EQUIPMENT CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
- --------------------------------------------------------------------------------
Note 6. Related-Party Transactions (continued)
The Company's employees are eligible to participate in an Employee Stock
Ownership Plan (ESOP) sponsored by Century Health Services, Inc. The
Company has an unpaid liability to Century of $25,357 related to plan
contributions it agreed to make on behalf of its employees.
Note 7. Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a
significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are
subjective in nature; involve uncertainties and matters of judgment;
and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial
instruments. The following methods and assumptions were used to estimate
the fair value of each class of financial instruments:
Cash, accounts receivable, accounts payable, and accrued expenses:
For cash, accounts receivable, accounts payable, and accrued expenses,
the carrying amount is a reasonable estimate of fair value.
Long-term debt and capital lease obligations:
Based on current borrowing rates, the fair value of the long-term debt
and capital lease obligations approximates their carrying amount.
Note 8. Event Subsequent to December 31, 1995
Effective January 1, 1996, Rotech Medical Corporation through its
subsidiary, Home Medical Systems, Inc., acquired substantially all of
the assets of Preferred Medical Equipment Corp. Rotech operates home
healthcare agencies providing infusion therapy, medical equipment,
respiratory and oxygen care in various states.
-10-
G & G MEDICAL, INC.
FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT AUDITORS
March 31, 1995
CONTENTS
Page
----
REPORT OF INDEPENDENT AUDITORS 1
BALANCE SHEET 2
STATEMENT OF INCOME AND RETAINED EARNINGS 3
STATEMENT OF CASH FLOWS 4
NOTES TO FINANCIAL STATEMENTS 5
Shareholders
G & G Medical, Inc.
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying balance sheet of G & G Medical, Inc. (the
Company) as of March 31, 1995, and the related statements of income and retained
earnings, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of G & G Medical, Inc. as of
March 31, 1995, and the results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting principles.
DALBY, WENDLAND & CO., P.C.
Grand Junction, Colorado
May 24, 1996
-1-
G & G MEDICAL, INC.
BALANCE SHEET
March 31, 1995
- --------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 8,491
Accounts receivable:
Trade, less allowance for doubtful accounts of $10,000 522,059
Stockholders 56,643
Other 12,597
Income taxes receivable 4,280
----------
Total Current Assets 604,070
PROPERTY AND EQUIPMENT, net 653,995
GOODWILL AND DEPOSITS 3,000
----------
TOTAL ASSETS $1,261,065
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 65,232
Checks in excess of bank balance 53,848
Accrued expenses and other liabilities 16,084
Notes payable:
Line of credit 35,627
Current portion of long-term debt 18,644
Capital lease obligations - current 49,618
Deferred income taxes - current 157,274
Income taxes payable 3,539
----------
Total Current Liabilities 399,866
NOTES PAYABLE - LONG-TERM 133,178
CAPITAL LEASE OBLIGATIONS - LONG-TERM 57,743
DEFERRED INCOME TAXES - LONG-TERM 20,681
----------
Total Liabilities 611,468
----------
SHAREHOLDERS' EQUITY
Common stock $1 par value, 100,000 shares authorized,
8,000 shares issued and outstanding 8,000
Retained earnings 641,597
----------
Total Shareholders' Equity 649,597
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,261,065
==========
See accompanying notes.
-2-
G & G MEDICAL, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
For the year ended March 31, 1995
- ----------------------------------------------------------------------------
OPERATING REVENUE $2,289,852
----------
OPERATING EXPENSES
Cost of revenue 1,148,158
General and administrative 900,333
----------
Total Operating Expenses 2,048,491
----------
Operating Income 241,361
----------
OTHER INCOME AND (EXPENSES)
Other income 6,665
Loss on sale of assets (20,121)
Interest expense (20,440)
----------
Income Before Income Taxes 207,465
----------
INCOME TAX EXPENSE 60,640
----------
NET INCOME 146,825
RETAINED EARNINGS - beginning 494,772
----------
RETAINED EARNINGS - ending $ 641,597
==========
See accompanying notes.
-3-
G & G MEDICAL, INC.
STATEMENT OF CASH FLOWS
For the year ended March 31, 1995
- ----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 146,825
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 66,754
Loss on asset disposition 20,121
(Increase) decrease in operating assets:
Accounts receivable (210,965)
Deposits (2,000)
Increase (decrease) in operating liabilities:
Checks in excess of bank balance 53,848
Income tax payable (50,345)
Accounts payable 19,601
Accrued expenses 8,941
Deferred income taxes 37,755
---------
Net Cash Provided by Operating Activities 90,535
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for fixed assets (324,183)
---------
Net Cash Used by Investing Activities (324,183)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 308,572
Payments on notes payable (142,763)
---------
Net Cash Provided by Financing Activities 165,809
---------
Decrease in Cash (67,839)
Cash at beginning of period 76,330
---------
CASH AT END OF PERIOD $ 8,491
=========
See accompanying notes.
-4-
G & G MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
G & G Medical, Inc. (the Company) is a regular "C" corporation formed under the
laws of the state of Colorado on June 1,1986. The primary business of the
Company is the rental of medical equipment to home care patients.
A summary of significant accounting policies follows:
USE OF ESTIMATES
Preparing financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and notes to financial statements.
Actual results could differ from those estimates.
ACCOUNTING METHOD
The Company maintains its records and files its tax returns on the cash basis of
accounting. These financial statements are prepared on the accrual basis whereby
revenue is recognized when billed and expenses are recognized when they are
incurred.
PROPERTY, PLANT AND EQUIPMENT
Equipment owned by the Company is recorded at cost less accumulated
depreciation. Depreciation is computed under the ACRS and MACRS methods of
accounting for tax purposes and the straight-line method for financial
statements. Useful lives range between five and forty years.
INCOME TAXES
Income taxes are provided in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Under provisions of SFAS
No. 109, deferred tax assets and liabilities are recorded based on the
differences between the financial statement and tax bases of assets and
liabilities and the tax rates which will be in effect when these differences are
expected to reverse.
LEASES
The Company leases equipment from various vendors for rental to its customers.
Equipment to be returned to the vendor at the termination is charged directly to
expense. Equipment to be retained is recorded as a capitalized lease with the
asset recorded at cost and the corresponding liability reflected as a note
payable (see Note 5).
-5-
SCHEDULE OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
In the fiscal year ended March 31, 1995, the Company purchased service assets.
In conjunction with the acquisitions, liabilities were assumed as follows:
Liabilities
Fair Value Cash Paid Assumed
---------- --------- -----------
Year ended March 31, 1995
Medical equipment $136,855 $ - $136,855
Other additions 187,328 152,488 34,840
-------- --------- -----------
$324,183 $152,488 $171,695
======== ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 20,440
===========
Income taxes $ 73,920
===========
NOTE 2 - INCOME TAXES AND DEFERRED INCOME TAX
The components of the income tax provisions are as follows:
Federal:
Current $ 18,659
Deferred 24,727
State:
Current 4,226
Deferred 13,028
--------
Total $ 60,640
========
The components of the net deferred tax liability are as follows:
Deferred tax liabilities $199,932
Deferred tax assets (21,977)
Valuation reserve -
--------
Total $177,955
========
The types of temporary differences between the tax bases of assets and
liabilities and their financial statement amounts that give rise to the net
deferred tax liability relate primarily to accelerated depreciation for tax
purposes and straight-line depreciation for book purposes, and the use of cash
basis of accounting for tax purposes and accrual basis of accounting for book
purposes.
-6-
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment are valued at cost and consist of
the following:
Equipment $ 282,090
Furniture and fixtures 80,883
Vehicles 143,474
Cylinders 3,157
Real estate and improvements 263,159
---------
772,763
Less accumulated depreciation (118,768)
---------
Net Property, Plant and Equipment $ 653,995
=========
Depreciation expense for the year ended March 31, 1995, was $66,754.
NOTE 4 - NOTES PAYABLE
Notes payable consist of the following at March 31, 1995:
Revolving line of credit due August 30, 1995. Interest rate is 2.00% over
bank's prime, 11.00%. Monthly payments of interest only. Secured by
accounts receivable, inventory and equipment. $ 35,627
Term loan, matures August 14, 1995. Interest rate at 12.95%. Monthly
payments of $195 including interest. Secured by equipment. 1,127
Term loan, matures August 30, 1996. Interest rate at 6.75%. Monthly
payments of $309, including interest. Secured by equipment. 4,985
Term loan, matures August 30, 1998. Interest rate at 7.00%. Monthly
payments of $412, including interest. Secured by equipment. 14,969
Term loan, matures January 25, 1999. Interest rate at 8.95%. Monthly
payments of $414, including interest. Secured by equipment. 17,210
Term loan, matures September 15, 1999. Interest rate at 8.50%. Monthly
payments of $306, including interest. Secured by equipment. 13,877
Term loan, matures September 10, 1995. Interest rate at 11.50%. Monthly
payments of $365, including interest. Secured by equipment. 793
Term loan, matures August 30, 2001. Interest rate at 9.25%. Monthly
payments of $997, including interest. Secured by first deed of trust. 98,861
--------
187,449
Less current portion (54,271)
--------
Total Long-Term Debt $133,178
========
-7-
The Company had unadvanced revolving lines of credit at March 31, 1995, of
$24,373.
Scheduled note principal payments for the years ending March 31 are as follows:
1996 $ 54,271
1997 15,782
1998 15,503
1999 13,903
2000 6,849
Thereafter 81,141
--------
$187,449
========
NOTE 5 - LEASES
The Company leases certain equipment under capital and operating leases. Leases
that do not meet the criteria for capitalization are classified as operating
leases with related rentals charged to operations as incurred. The future
minimum rental payments required under these leases having an initial or
remaining noncancelable lease term in excess of one year at March 31, 1995, are
as follows:
Year Ending Capital Operating
March 31, Leases Leases
- ----------- --------- ---------
1996 $ 60,683 $ 26,400
1997 38,444 26,400
1998 16,005 26,400
1999 12,004 26,400
2000 - 26,400
-------- --------
Total 127,136 $132,000
========
Less amount representing interest (19,775)
--------
Capital lease obligations, collateralized by equipment with
an amortized cost of $130,325 at March 31, 1995 107,361
Less current portion of capital lease obligations (49,618)
--------
Capital lease obligations, excluding current portion $ 57,743
========
Rent expense for the operating lease was $26,400 for the year ended March 31,
1995. The operating lease expires on July 1, 1996, and is renewable for an
additional five-year term.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company has a note receivable from its president and shareholder for $56,643
at March 31, 1995. Interest is accrued on the note at the rate of 10% annually
and has no stated term. Interest earned on the note for 1995 was $3,691.
-8-
NOTE 7 - DEFINED CONTRIBUTION PLAN
The Company has a profit-sharing 401(k) plan (the Plan) covering employees who
have been employed by the Company for one year or more. Employees may contribute
any amounts up to the maximum allowable limit established by the federal tax
code. At its discretion, the Company can contribute a percentage of the
participant's deferred contribution. For the year ended March 31, 1995, the
Company contributed $8,430 to the Plan.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims arising in connection
with its business. It is the opinion of management that these claims will not
have a material adverse effect on the operations of the Company.
NOTE 9 - BUSINESS AND CREDIT CONCENTRATIONS
The Company derives its customer base primarily from patients in western
Colorado who are insured by Medicare and Rocky Mountain Health Maintenance
Organization.
NOTE 10 - SUBSEQUENT EVENTS
On January 4, 1996, all of the outstanding shares of stock of the Company were
purchased by RoTech Medical Corporation.
-9-
G & G Medical, Inc.
Interim Balance Sheet (Unaudited)
- ----------------------------------------------------------------
DECEMBER 31, 1995
------------------
ASSETS
Current Assets:
Cash $ 15,053
Accounts receivable:
Trade, less allowance for contractual
adjustments and doubtful accounts 399,670
Other 59,608
Prepaid expenses and other 13,610
----------
Total Current Assets 487,941
Other Assets:
Other assets 1,950
Property and Equipment, less accumulated
depreciation 594,420
----------
Total Assets $1,084,311
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses and
other liabilities $ 196,113
Deferred income taxes 155,129
Income taxes payable 10,600
----------
Total Current Liabilities 361,842
Other liabilities:
Long-term debt 201,046
Deferred income taxes 31,366
Stockholders' Equity:
Common stock 8,000
Retained earnings 482,057
----------
Total Liabilities and Stockholders' Equity $1,084,311
==========
See accompanying notes to interim financial statements (unaudited).
G & G Medical, Inc.
Interim Statement of Operations (Unaudited)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
DECEMBER 31, 1995
-----------------
Operating revenue $1,910,952
Cost and expenses:
Cost of revenue 1,011,266
Selling, general and administrative 801,139
Depreciation 11,531
Interest 30,694
----------
1,854,630
Income before income taxes 56,322
----------
Income tax expense 94,141
----------
Net loss ($37,819)
==========
See accompanying notes to interim financial statements (unaudited).
G & G Medical, Inc.
Interim Statement of Stockholders' Equity (Unaudited)
- --------------------------------------------------------------------------------
COMMON STOCK
-------------- RETAINED
SHARES AMOUNT EARNINGS
--------------------------
Balance at April 1, 1995 8,000 $8,000 $ 641,597
Dividends (121,721)
Net loss (37,819)
--------------------------
Balance at December 31, 1995 8,000 $8,000 $ 482,057
==========================
See accompanying notes to interim financial statements (unaudited).
G & G Medical, Inc.
Interim Statement of Cash Flows (Unaudited)
- ---------------------------------------------------------------------------
NINE MONTHS ENDED
DECEMBER 31, 1995
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 174,003
INVESTING ACTIVITIES
Disposal of property and equipment
Net cash used in investing activities 48,044
---------
48,044
FINANCING ACTIVITIES
Payment of notes payable (93,764)
Dividends Paid (121,721)
---------
Net cash used in financing activities (215,485)
---------
Increase in cash 6,562
Cash at beginning of period 8,491
---------
Cash at end of period $ 15,053
See accompanying notes to interim financial staements (unaudited).
G & G Medical, Inc.
Notes to Interim Financial Statements - December 31, 1995 (Unaudited)
- -----------------------------------------------------------------------------
1. BASIS OF REPORTING
The interim balance sheet as of December 31, 1995 and the interim statements of
income, stockholders' equity and cash flows for the nine months ended December
31, 1995 are unaudited. In the opinion of management, these statements have
been prepared on the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring accruals, necessary for the
fair statement of the results of the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These interim financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's audited financial statements as of and for the year ended March
31, 1995. The results of operations for the interim period are not necessarily
indicative of the results which may be expected for an entire year.
2. SUBSEQUENT EVENT
Effective January 4, 1996, the Company sold substantially all of the outstanding
shares of stock to RoTech Medical Corporation.
RHEMA, INC.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
[LETTERHEAD OF HARTMAN, WALTON & LEITO, LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
----------------------------
TO THE BOARD OF DIRECTORS
RHEMA, INC.
IRVING, TEXAS
WE HAVE AUDITED THE ACCOMPANYING BALANCE SHEET OF RHEMA, INC. (THE "COMPANY") AS
OF DECEMBER 31, 1995, AND THE RELATED STATEMENTS OF INCOME, STOCKHOLDERS'
EQUITY, AND CASH FLOWS FOR THE YEAR THEN ENDED. THESE FINANCIAL STATEMENTS ARE
THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS
AN OPINION ON THESE FINANCIAL STATEMENTS BASED ON OUR AUDIT.
WE CONDUCTED OUR AUDIT IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING STANDARDS.
THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO OBTAIN REASONABLE
ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL
MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING
THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. AN AUDIT ALSO INCLUDES
ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY
MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION.
WE BELIEVE THAT OUR AUDIT PROVIDES A REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE FINANCIAL STATEMENTS PRESENT FAIRLY, IN ALL MATERIAL
RESPECTS, THE FINANCIAL POSITION OF RHEMA, INC. AT DECEMBER 31, 1995, AND THE
RESULTS OF ITS OPERATIONS, CASH FLOWS AND CHANGES IN STOCKHOLDERS' EQUITY FOR
THE YEAR THEN ENDED IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
/s/ Hartman, Walton & Leito, LLP
- -------------------------------
FEBRUARY 20, 1996
(1)
RHEMA, INC.
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
------
CURRENT ASSETS:
CASH $ 60,710
ACCOUNTS RECEIVABLE - NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $181,882 1,232,222
INVENTORY 332,370
PREPAID EXPENSES 17,578
DEFERRED TAXES (NOTE 5) 92,014
----------
TOTAL CURRENT ASSETS 1,734,894
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION (NOTES 2 AND 8) 2,672,417
----------
TOTAL ASSETS $4,407,311
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 804,754
ACCRUED EXPENSES AND OTHER LIABILITIES (NOTE 3) 227,768
NOTES PAYABLE (NOTE 4) 2,037,113
INCOME TAXES PAYABLE (NOTE 5) 154,645
----------
TOTAL CURRENT LIABILITIES 3,224,280
----------
STOCKHOLDERS' EQUITY:
COMMON STOCK, PAR VALUE $10 PER SHARE,
100 SHARES ISSUED AND OUTSTANDING, 100,000
SHARES AUTHORIZED 1,000
TREASURY STOCK, 25 SHARES AT COST (5,000)
RETAINED EARNINGS 1,187,031
----------
1,183,031
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,407,311
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
(2)
RHEMA, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
OPERATING REVENUE $6,844,617
----------
COST AND EXPENSES:
COST OF REVENUE 3,077,761
SELLING, GENERAL AND ADMINISTRATIVE 3,030,903
INTEREST 178,026
----------
6,286,690
----------
INCOME BEFORE INCOME TAXES 557,927
INCOME TAX EXPENSE (NOTE 5) 203,430
----------
NET INCOME $ 354,497
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
(3)
RHEMA, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
COMMON STOCK
-------------- TREASURY RETAINED
SHARES AMOUNT STOCK EARNINGS
-------------- --------- ----------
BALANCE AT JANUARY 1, 1995 1,000 $1,000 $(5,000) $ 832,534
NET INCOME - - - 354,497
------ ------ -------- ----------
BALANCE AT DECEMBER 31,1995 1,000 $1,000 $(5,000) $1,187,031
====== ====== ======== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
(4)
RHEMA, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 354,497
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATIONS:
DEPRECIATION 479,820
LOSS ON DISPOSITION OF ASSETS 1,777
PROVISION FOR DEFERRED INCOME TAXES (92,013)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
INCREASE IN ACCOUNTS RECEIVABLE (503,186)
INCREASE IN INVENTORIES (194,833)
DECREASE IN PREPAID EXPENSES 85,954
INCREASE IN ACCOUNTS PAYABLE 475,314
INCREASE IN ACCRUED EXPENSES AND OTHER LIABILITIES 153,227
DECREASE IN INCOME TAXES PAYABLE (22,347)
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 738,210
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASES OF PROPERTY AND EQUIPMENT (1,703,889)
PROCEEDS FROM SALE OF EQUIPMENT 105,552
-----------
NET CASH USED IN INVESTING ACTIVITIES (1,598,337)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM NOTES PAYABLE 2,326,439
PAYMENTS ON NOTES PAYABLE (1,407,691)
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 918,748
-----------
NET INCREASE IN CASH 58,621
-----------
CASH AT BEGINNING AT PERIOD 2,089
-----------
CASH AT END OF PERIOD $ 60,710
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
INTEREST $ 162,140
INCOME TAXES $ 205,285
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
(5)
RHEMA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------------
(A) NATURE OF BUSINESS - RHEMA, INC. (THE "COMPANY") WAS INCORPORATED
------------------
ON DECEMBER 28, 1982. THE COMPANY OPERATES UNDER THE ASSUMED NAME OF
RHEMA MEDICAL EQUIPMENT AND SUPPLIES. THE COMPANY MARKETS AND PROVIDES
HOME HEALTH CARE PRODUCTS AND SERVICES AND RENTS HOME HEALTH CARE
EQUIPMENT TO PATIENTS, PRIMARILY IN THE NORTH TEXAS AREA. THESE
PRODUCTS AND SERVICES, WHICH ARE TYPICALLY PRESCRIBED BY A PHYSICIAN,
INCLUDE HOME HEALTH CARE PRODUCTS (SUCH AS RESPIRATORY THERAPY
EQUIPMENT AND CONVALESCENT MEDICAL EQUIPMENT) AND HOME INFUSION THERAPY
PRODUCTS AND RELATED SERVICES.
(B) FINANCIAL INSTRUMENTS - THE COMPANY BELIEVES THE BOOK VALUE OF
---------------------
THEIR FINANCIAL INSTRUMENTS, CASH EQUIVALENTS, ACCOUNTS RECEIVABLE,
NOTES PAYABLE, ACCOUNTS PAYABLE, ACCRUED AND OTHER LIABILITIES AND
INCOME TAXES PAYABLE APPROXIMATES THEIR FAIR VALUE DUE TO THEIR SHORT-
TERM NATURE (SEE NOTE 8).
(C) REVENUE RECOGNITION - REVENUES ARE REPORTED ON THE ACCRUAL BASIS
-------------------
IN THE PERIOD IN WHICH SERVICES ARE PROVIDED. OPERATING REVENUE
REPRESENTS THE ESTIMATED NET REALIZABLE AMOUNTS FROM PATIENTS, THIRD-
PARTY PAYORS, AND OTHERS FOR SERVICES RENDERED.
RENTAL INCOME UNDER SHORT-TERM LEASING ARRANGEMENTS IS RECOGNIZED
ON A STRAIGHT-LINE BASIS OVER THE TERM OF THE LEASE.
(D) USE OF ESTIMATES - THE PROCESS OF PREPARING FINANCIAL STATEMENTS
----------------
IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES REQUIRES
THE USE OF ESTIMATES AND ASSUMPTIONS REGARDING CERTAIN TYPES OF ASSETS,
LIABILITIES, REVENUES, AND EXPENSES. SUCH ESTIMATES PRIMARILY RELATE TO
UNSETTLED TRANSACTIONS AND EVENTS AS OF THE DATE OF THE FINANCIAL
STATEMENTS. ACCORDINGLY, UPON SETTLEMENT, ACTUAL RESULTS MAY DIFFER
FROM ESTIMATED AMOUNTS.
(E) INVENTORIES - INVENTORIES CONSIST PRINCIPALLY OF DURABLE MEDICAL
-----------
EQUIPMENT, MEDICAL SUPPLIES AND PHARMACEUTICAL PRODUCTS AND ARE STATED
AT THE LOWER OF COST (FIRST-IN, FIRST-OUT METHOD) OR MARKET.
(F) PROPERTY AND EQUIPMENT - PROPERTY AND EQUIPMENT IS STATED AT COST.
----------------------
DEPRECIATION IS PROVIDED USING ACCELERATED DEPRECIATION METHODS OVER
THE ESTIMATED USEFUL LIVES OF THE ASSETS AS FOLLOWS:
BUILDING 31 TO 39 YEARS
RENTAL EQUIPMENT 3 TO 5 YEARS
FURNITURE AND EQUIPMENT 7 YEARS
VEHICLES 5 YEARS
(6) (CONTINUED)
RHEMA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------------
(CONTINUED)
-----------
(G) INCOME TAXES - DEFERRED INCOME TAXES ARE PROVIDED FOR ALL ITEMS
------------
INCLUDED IN THE DETERMINATION OF EARNINGS IN DIFFERENT PERIODS FOR TAX
AND FINANCIAL REPORTING PURPOSES.
(H) STATEMENT OF CASH FLOWS - THE COMPANY CONSIDERS CASH IN BANK TO BE CASH
-----------------------
EQUIVALENTS.
2. PROPERTY AND EQUIPMENT
----------------------
PROPERTY AND EQUIPMENT CONSISTS OF THE FOLLOWING:
LAND $ 442,487
BUILDING 832,898
RENTAL EQUIPMENT 2,012,424
FURNITURE AND EQUIPMENT 293,078
VEHICLES 208,646
----------
3,789,533
ACCUMULATED DEPRECIATION 1,117,116
----------
$2,672,417
==========
THE RENTAL EQUIPMENT OF $2,012,424 HAS BEEN DEPRECIATED OVER ITS USEFUL LIFE.
THE PORTION OF ACCUMULATED DEPRECIATION RELATED TO THE RENTAL EQUIPMENT IS
$806,694 AT DECEMBER 31, 1995 (SEE NOTE 8).
3. ACCRUED LIABILITIES
-------------------
ACCRUED LIABILITIES CONSISTS OF THE FOLLOWING:
ACCRUED WAGES PAYABLE $ 95,909
ACCRUED VACATION PAYABLE 57,118
ACCRUED INTEREST PAYABLE 15,886
ACCRUED PAYROLL TAXES 2,165
ACCRUED PROPERTY TAXES 38,954
ACCRUED INSURANCE PAYABLE 7,051
ACCRUED OTHER LIABILITIES 10,685
--------
$227,768
========
(7) (CONTINUED)
RHEMA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
4. NOTES PAYABLE
-------------
AS A RESULT OF THE MERGER WITH ROTECH MEDICAL CORPORATION ("ROTECH") (SEE
NOTE 8) THE NOTES PAYABLE WERE ALL PAID SUBSEQUENT TO DECEMBER 31, 1995.
ACCORDINGLY, ALL OF THE OUTSTANDING NOTES PAYABLE ARE REFLECTED AS CURRENT
LIABILITIES IN THE ACCOMPANYING FINANCIAL STATEMENTS. THE NOTES PAYABLE AT
DECEMBER 31, 1995 WERE AS FOLLOWS:
SMALL BUSINESS ADMINISTRATION PROMISSORY NOTE PAYABLE TO A BANK
WITH AN ORIGINAL PRINCIPAL AMOUNT OF $1,310,000, WITH AN ORIGINAL
INTEREST RATE OF 10%, ADJUSTED QUARTERLY TO A RATE OF 1.5% OVER
THE MINIMUM U.S. MONEY CENTER COMMERCIAL BANKS AS PUBLISHED IN
THE MONEY RATE SECTION OF THE WALL STREET JOURNAL. THE NOTE IS
PAYABLE IN MONTHLY INSTALLMENTS OF $14,078, INCLUDING PRINCIPAL
AND INTEREST SECURED BY A SECURITY AGREEMENT COVERING INVENTORY,
EQUIPMENT, ACCOUNTS RECEIVABLE AND GENERAL INTANGIBLES, AND A
LIFE INSURANCE POLICY IN THE AMOUNT OF $700,000 INSURING THE LIFE
OF THE PRESIDENT OF THE COMPANY; AND FURTHER SECURED BY A DEED
OF TRUST FROM RHEMA, INC. TO DON R. MCBRIDE, TRUSTEE, DATED
JANUARY 4, 1995; AND FURTHER SECURED BY THE STOCKHOLDER OF THE
COMPANY. $1,283,678
NOTE PAYBLE TO A BANK WITH AN ORIGINAL PRINCIPAL BALANCE OF
$27,543, INTEREST AT A FLUCTUATING RATE EQUAL TO THE BASE RATE
OF INTEREST CHARGED BY THE BANK, PLUS 1.5%. THE NOTE IS
PAYABLE IN MONTHLY INSTALLMENTS OF $1,148 AND ONE FINAL
PAYMENT EQUAL TO THE PRINCIPAL BALANCE AND ACCRUED INTEREST ON
NOVEMBER 15, 1996. THE NOTE PAYABLE IS SECURED BY A VEHICLE,
AND FURTHER SECURED BY GUARANTEES OF STOCKHOLDER OF THE COMPANY. 12,624
TWO PROMISSORY NOTES TO FORD MOTOR CREDIT CORPORATION DATED
SEPTEMBER 15, 1994 WITH ORIGINAL PRINCIPAL BALANCES OF $10,922
AND $10,672, PAYABLE IN 24 EQUAL MONTHLY INSTALLMENTS OF $469
AND $459, INTEREST AT A RATE OF 2.9% PER ANNUM, SECURED BY THE
VEHICLES. 8,314
COMMERCIAL PURCHASE AGREEMENT WITH INVACARE CORPORATION AND
ITS SUBSIDIARIES, WITH AN ORIGINAL AMOUNT OF $242,955, DATED
FEBRUARY 3, 1995, WITH INTEREST AT 6%, PAYABLE IN SIX EQUAL
MONTHLY INSTALLMENTS OF $41,204. THE PAYMENTS ON THIS NOTE
BEGAN IN AUGUST 1995. 40,999
COMMERCIAL PURCHASE AGREEMENT, IN THE ORIGINAL AMOUNT
FINANCED OF $79,621, DATED SEPTEMBER 29, 1995, WITH INTEREST
AT 8%, PAYABLE IN 9 EQUAL MONTHLY INSTALLMENTS OF $9,328.
THE PAYMENTS ON THIS NOTE BEGAN IN JANUARY 1996. 79,621
(8) (CONTINUED)
RHEMA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
4. NOTES PAYABLE (CONTINUED)
-------------------------
PROMISSORY NOTE PAYABLE TO A BANK WITH AN ORIGINAL PRINCIPAL
AMOUNT OF $250,000, DATED SEPTEMBER 7, 1995, WITH INTEREST AT
10.25%, PRINCIPAL AND ACCRUED INTEREST DUE FEBRUARY 15, 1996,
SECURED BY COMMERCIAL SECURITY AGREEMENT COVERING ALL ACCOUNTS
RECEIVABLE, CHATTEL PAPER, GENERAL INTANGIBLES AND INVENTORY
AND OTHER ITEMS SPECIFIED THEREIN AND FURTHER SECURED BY A
GUARANTY OF THE PRESIDENT OF THE COMPANY. THIS AGREEMENT
CONTAINS CERTAIN RESTRICTIVE COVENENTS FOR TANGIBLE NET WORTH
AND CASH FLOWS. $ 250,000
PROMISSORY NOTE PAYABLE TO A BANK WITH AN ORIGINAL PRINCIPAL
AMOUNT OF $29,300, DATED JULY 13, 1995, WITH INTEREST AT
10.25%, PAYABLE IN REGULAR INSTALLMENTS OF $1,356 EACH,
SECURED BY A VEHICLE. 23,535
PROMISSORY NOTE PAYABLE TO A BANK WITH AN ORIGINAL PRINCIPAL
AMOUNT OF $13,041, DATED OCTOBER 11, 1995, WITH INTEREST AT
8.25%, PAYABLE IN 23 PRINCIPAL PAYMENTS OF $543 AND ONE FINAL
PAYMENT OF $547, SECURED BY A VEHICLE. 11,954
PROMISSORY NOTE PAYABLE TO A BANK WITH AN ORIGINAL PRINCIPAL
AMOUNT OF $13,041, DATED OCTOBER 11, 1995, WITH INTEREST AT
8.25%, PAYABLE IN 23 PRINCIPAL INSTALLMENTS OF $543 EACH AND
ONE FINAL PAYMENT OF $547, SECURED BY A VEHICLE. 11,954
PROMISSORY NOTE PAYABLE TO A BANK WITH AN ORIGINAL PRINCIPAL
AMOUNT OF $34,560, DATED APRIL 14, 1995, WITH INTEREST
AT 10.5%, PAYABLE IN MONTHLY INSTALLMENTS OF $2,880, PLUS
ACCRUED INTEREST, WITH A FINAL PAYMENT OF PRINCIPAL AND ACCRUED
INTEREST ON APRIL 20, 1996, SECURED BY CERTAIN EQUIPMENT. 11,520
PROMISSORY NOTE PAYABLE TO A BANK WITH AN ORIGINAL PRINCIPAL
AMOUNT OF $38,900, DATED JUNE 16, 1995, WITH INTEREST
AT 10.5%, PAYABLE IN 11 PRINCIPAL PAYMENTS OF $3,241 AND ONE
FINAL PAYMENT OF PRINCIPAL AND INTEREST OF $3,271, SECURED
BY INVENTORY AND EQUIPMENT. 19,450
PROMISSORY NOTE PAYABLE TO A BANK WITH AN ORIGINAL PRINCIPAL
AMOUNT OF $22,432, DATED AUGUST 25, 1995, WITH INTEREST
AT 10.25%, PAYABLE IN 11 PRINCIPAL PAYMENTS OF $1,869 AND ONE
FINAL PAYMENT OF PRINCIPAL AND INTEREST OF $1,886, SECURED
BY INVENTORY AND EQUIPMENT. 14,955
(9) (CONTINUED)
RHEMA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
4. NOTES PAYABLE (CONTINUED)
-------------------------
PROMISSORY NOTE PAYABLE TO A BANK WITH AN ORIGINAL PRINCIPAL
AMOUNT OF $29,160, DATED SEPTEMBER 26, 1995, WITH
INTEREST AT 10.25%, PAYABLE IN 11 PRINCIPAL PAYMENTS OF
$2,430 AND ONE FINAL PAYMENT OF PRINCIPAL AND INTEREST OF
$2,451, SECURED BY EQUIPMENT. $ 21,870
PROMISSORY NOTE PAYABLE TO A BANK WITH AN ORIGINAL PRINCIPAL
AMOUNT OF $30,095, DATED AUGUST 11, 1995, WITH INTEREST
AT 10.25%, PAYABLE IN 11 PRINCIPAL PAYMENTS OF $2,508 AND ONE
FINAL PAYMENT OF PRINCIPAL AND INTEREST OF $2,530, SECURED BY
INVENTORY AND CERTAIN EQUIPMENT. 20,064
PROMISSORY NOTE PAYABLE TO A BANK WITH AN ORIGINAL PRINCIPAL
AMOUNT OF $27,304, DATED OCTOBER 7, 1995, WITH INTEREST
AT 10.25%, PAYABLE IN 11 PRINCIPAL PAYMENTS OF $2,275 AND
ONE FINAL PAYMENT OF PRINCIPAL AND INTEREST OF $2,295,
SECURED BY CERTAIN EQUIPMENT. 22,754
PROMISSORY NOTE PAYABLE TO A BANK WITH AN ORIGINAL PRINCIPAL
AMOUNT OF $5,300, DATED JULY 13, 1995, WITH INTEREST AT
10.25%, PAYABLE IN 11 PRINCIPAL PAYMENTS OF $442 AND ONE
FINAL PAYMENT OF PRINCIPAL AND INTEREST OF $445, SECURED
BY CERTAIN EQUIPMENT. 3,092
PROMISSORY NOTE TO ROTECH MEDICAL CORPORATION DATED DECEMBER
13, 1995, SECURED BY STOCK PLEDGE AND SECURITY AGREEMENT.
THE NOTE IS DUE AND PAYABLE IN FULL ON THE FIRST TO OCCUR OF
THE FOLLOWING; SALE OF ALL ASSETS OF THE COMPANY TO ROTECH ON
MARCH 31, 1996. THE NOTE BEARS INTEREST AT A RATE OF 8.75%
PER ANNUM. 200,729
----------
$2,037,113
==========
(10) (CONTINUED)
RHEMA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
5. INCOME TAXES
------------
INCOME TAX EXPENSE FOR THE YEAR ENDED DECEMBER 31, 1995 CONSISTS OF THE
FOLLOWING:
CURRENT:
FEDERAL $ 261,128
STATE 34,317
DEFERRED:
FEDERAL (81,260)
STATE (10,755)
---------
$ 203,430
=========
DEFERRED INCOME TAXES REFLECT THE NET TAX EFFECTS OF TEMPORARY DIFFERENCES
BETWEEN THE CARRYING AMOUNTS OF ASSETS AND LIABILITIES FOR FINANCIAL
REPORTING PURPOSES AND THE AMOUNTS USED FOR INCOME TAX PURPOSES. PROVISIONS
HAVE BEEN MADE FOR DEFERRED INCOME TAXES ARISING PRIMARILY FROM THE USE OF
DIFFERENT METHODS OF REPORTING BAD DEBT EXPENSE AND ACCRUED VACATION PAYABLE
FOR FINANCIAL AND TAX REPORTING PURPOSES. SIGNIFICANT COMPONENTS OF THE
COMPANY'S DEFERRED TAX ASSETS AS OF DECEMBER 31, 1995 ARE AS FOLLOWS:
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
FEDERAL $61,840
STATE 8,184
ACCRUED VACATION PAYABLE:
FEDERAL 19,420
STATE 2,570
-------
TOTAL DEFERRED TAX ASSETS $92,014
=======
THE ACTUAL INCOME TAX PROVISION DIFFERS FROM THE AMOUNT COMPUTED USING THE
INCOME TAX RATE OF 34% APPLIED TO INCOME BEFORE INCOME TAX DUE TO THE
FOLLOWING:
CURRENT "EXPECTED" FEDERAL TAX EXPENSE $189,695
STATE INCOME TAX EXPENSE 23,563
OTHER (11,668)
LIMITATION OF DEDUCTION FOR MEALS AND
ENTERTAINMENT 1,840
---------
$ 203,430
=========
THE REALIZATION OF THE DEFERRED TAX ASSETS IS DEPENDENT UPON THE COMPANY
GENERATING SUFFICIENT FUTURE TAXABLE INCOME. ALTHOUGH THE COMPANY EXPECTS TO
FULLY BENEFIT FROM THE RECORDED DEFERRED TAX ASSET, THAT EXPECTATION COULD
CHANGE IF NEAR-TERM ESTIMATES OF FUTURE TAXABLE INCOME IS REDUCED.
(11) (CONTINUED)
RHEMA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
6. PROFIT SHARING PLAN
-------------------
THE COMPANY SPONSORS A DEFINED CONTRIBUTION 401(K) PROFIT SHARING PLAN
("PLAN") THAT COVERS ALL EMPLOYEES WHO HAVE COMPLETED SIX MONTHS OF
EMPLOYMENT AND HAVE ATTAINED THE AGE OF 20.5 YEARS. CONTRIBUTIONS TO THE PLAN
ARE BASED ON A MATCHING CONTRIBUTION EQUAL TO 100% OF AN EMPLOYEES
CONTRIBUTION TO THE PLAN, NOTING THAT THE MAXIMUM AMOUNT THE COMPANY WILL
MATCH IS LIMITED TO 5% OF AN EMPLOYEES COMPENSATION. FOR 1995, THE AMOUNT OF
PROFIT SHARING EXPENSE WAS $47,105.
EFFECTIVE NOVEMBER 30, 1995, THE COMPANY TERMINATED THE PLAN. THE
PLAN WAS TERMINATED DUE TO THE PENDING MERGER WITH ROTECH (SEE NOTE 8).
7. LEASES
------
THE COMPANY LEASES ITS EQUIPMENT TO HOME HEALTH PATIENTS. THE COMPANY IS
PAID EITHER BY THE PATIENT OR THE HEALTH INSURANCE PROVIDER. THE COMPANY
LEASES ITS EQUIPMENT GENERALLY ON A MONTHLY BASIS. INCLUDED IN OPERATING
REVENUE IS RENTAL INCOME OF $4,483,165.
DURING 1995, THE COMPANY LEASED BUILDINGS THAT WERE OWNED BY THE STOCKHOLDER.
THE MONTHLY LEASE PAYMENTS WERE $3,500 PER MONTH. THE TOTAL LEASE EXPENSE FOR
1995 WAS $38,500 AND THE LEASE WAS TERMINATED ON NOVEMBER 30, 1995 (SEE NOTE
8).
8. SUBSEQUENT EVENT
----------------
ON JANUARY 5, 1996 THE COMPANY MERGED WITH ROTECH. ROTECH AGREED TO PAY
THE STOCKHOLDERS $2,500,000 IN CASH PLUS 109,091 SHARES OF ROTECH COMMON
STOCK. THE MERGER AGREEMENT REQUIRED $500,000 OF THE CASH CONSIDERATION AND
54,546 SHARES OF THE STOCK BE ESCROWED. THE ESCROWED CASH WILL BE RELEASED
UPON THE COMPLETION OF TWENTY FOUR MONTHS AND FULFILLMENT OF THE PLEDGES AND
SECURITY AGREEMENT. THE 54,545 SHARES OF ROTECH COMMON STOCK HELD IN ESCROW
WILL BE RELEASED TO THE FORMER OWNER OF THE COMPANY IF THE AVERAGE OF THE
FIRST TWO YEAR'S OPERATING PROFIT EXCEEDS $1,600,000.
THE PRESIDENT OF THE COMPANY HAS ENTERED INTO A FIVE YEAR NONCOMPETE
AGREEMENT AND A THREE YEAR EMPLOYMENT AGREEMENT WITH ROTECH IN CONNECTION
WITH THE MERGER.
IN CONNECTION WITH THE MERGER, THE LAND AND BUILDING THAT THE COMPANY USES
FOR ITS OPERATIONS WERE DISTRIBUTED TO THE STOCKHOLDER IN EXCHANGE FOR A
PARTIAL REDEMPTION OF THEIR STOCK IN THE COMPANY. THE COMPANY ENTERED INTO A
THREE YEAR LEASE AGREEMENT WITH THE STOCKHOLDER, WITH MONTHLY RENTAL PAYMENTS
OF $15,000. THE FUTURE LEASE COMMITMENTS ARE AS FOLLOWS:
YEAR
--------
1996 $180,000
1997 180,000
1998 180,000
--------
$540,000
========
(12) (CONCLUDED)
RESPIRATORY HOME CARE, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
TOGETHER WITH REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Respiratory Home Care, Inc.:
We have audited the accompanying balance sheet of Respiratory Home Care, Inc. (a
Georgia corporation) as of December 31, 1995, and the related statements of
income, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Respiratory Home Care, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Orlando, Florida,
May 16, 1996
RESPIRATORY HOME CARE, INC.
---------------------------
BALANCE SHEET -- DECEMBER 31, 1995
----------------------------------
ASSETS
------
CURRENT ASSETS:
Cash $ 5,744
Accounts receivable, net of allowance
of $209,000 (Note 1) 151,993
Inventories 141,691
--------
Total current assets 299,428
--------
PROPERTY AND EQUIPMENT, net (Note 2) 324,444
--------
$623,872
========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 85,083
Deferred revenue 45,000
Current maturities of obligation
under capital lease (Note 4) 5,395
Current maturities of long-term debt
(Note 3) 68,676
--------
Total current liabilities 204,154
OBLIGATION UNDER CAPITAL LEASE, less
current maturities (Note 4) 7,336
LONG-TERM DEBT, less current
maturities (Note 3) 68,004
--------
Total liabilities 279,494
--------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock- $1.00 par value, 100,000 shares
authorized, 5,000 shares issued and
outstanding 5,000
Retained earnings 339,378
--------
Total stockholders' equity 344,378
--------
$623,872
========
The accompanying notes are an integral part of this balance sheet.
RESPIRATORY HOME CARE, INC.
---------------------------
STATEMENT OF INCOME
-------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------
OPERATING REVENUE $2,019,063
COSTS AND EXPENSES:
Cost of revenue 404,501
Selling, general and administrative expenses 939,375
Depreciation and amortization (Note 2) 98,045
Interest expense (Notes 3 and 4) 18,795
----------
1,460,716
----------
NET INCOME $ 558,347
==========
The accompanying notes are an integral part of this statement.
RESPIRATORY HOME CARE, INC.
---------------------------
STATEMENT OF STOCKHOLDERS' EQUITY
---------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------
Common Retained
Stock Earnings Total
------ --------- ---------
BALANCE, December 31, 1994 $5,000 $ 206,112 $ 211,112
Dividends - (425,081) (425,081)
Net income - 558,347 558,347
------ --------- ---------
BALANCE, December 31, 1995 $5,000 $ 339,378 $ 344,378
====== ========= =========
The accompanying notes are an integral part of this statement.
RESPIRATORY HOME CARE, INC.
---------------------------
STATEMENT OF CASH FLOWS
-----------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 558,347
Adjustments to reconcile net income
to net cash provided by operating
activities-
Depreciation and amortization 98,045
Increase in accounts receivable, net 27,352
Decrease in inventories 45,266
Decrease in accounts payable and accrued expenses (217)
Increase in deferred revenue 13,000
----------
Net cash provided by operating activities 741,793
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (179,478)
----------
Net cash used in investing activities (179,478)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of short-term debt (45,000)
Repayments of obligation under capital lease (3,564)
Repayments of long-term debt (100,190)
Payment of dividends (425,081)
----------
Net cash used in financing activities (573,835)
----------
NET DECREASE IN CASH (11,520)
CASH, beginning of year 17,264
----------
CASH, end of year $ 5,744
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 18,795
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTION:
Rental equipment obtained through
issuance of capital lease obligation $ 16,295
The accompanying notes are an integral part of this statement.
RESPIRATORY HOME CARE, INC.
---------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995
-----------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------------------------------
Nature of Business
- ------------------
Respiratory Home Care, Inc. (the Company) is a Georgia corporation engaged
primarily in the rental and sale of durable medical equipment, as well as the
sale of medical supplies. The primary markets for the Company's products are
participants in Medicare, Medicaid and private health insurance plans in the
State of Georgia.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and 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.
Actual results could differ from those estimates.
Inventories
- -----------
Inventories consist primarily of medical supplies and equipment and are stated
at the lower of cost or market. Cost is determined using the first-in, first-
out method.
Revenue Recognition
- -------------------
Revenues from sales of medical supplies and equipment are recognized on the date
of delivery. Equipment rentals are billed monthly in advance and recorded as
deferred revenue. All equipment rentals are recognized as revenues when earned.
A majority of the Company's revenues are billed to insurance carriers and other
care providers and are subject to review for eligibility. Accounts receivable
are recognized at estimated reimbursable amounts. Provisions are made for
doubtful accounts and sales returns. Approximately 54 percent of the Company's
accounts receivable are due from Medicare and Medicaid programs.
Income Taxes
- ------------
The Company has elected to be taxed as an S corporation under provisions of the
Internal Revenue Code. Accordingly, federal and state taxable income of the
Company is distributable to the shareholders who are responsible for the payment
of taxes thereon.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Depreciation is provided using the
straight-line method over five years. Property and equipment consisted of the
following at December 31, 1995:
Amount
--------
Rental equipment $562,806
Vehicles 63,500
Other 59,791
--------
686,097
Less- Accumulated depreciation and amortization (361,653)
--------
$324,444
========
3. DEBT:
-----
Long-term debt consisted of the following at December 31, 1995:
Amount
--------
Notes payable, interest ranging from
7.4% to 8.75%, secured by accounts receivable,
inventory and property and equipment, payable in
monthly installments, final installments due
between January 1997 and May 1999 $136,680
Less- Current maturities (68,676)
--------
Long-term debt, less current maturities $ 68,004
========
Long-term debt is scheduled to mature as follows:
Year Amount
- ---- --------
1996 $ 68,676
1997 59,231
1998 5,693
1999 3,080
--------
$136,680
========
During 1995, the Company repaid in full a line of credit of $30,000 and a
stockholder loan of $15,000, both of which were included in short-term debt.
4. OBLIGATION UNDER CAPITAL LEASE:
-------------------------------
Rental equipment obtained under a capital lease is as follows at December 31,
1995:
Amount
----------
Rental equipment $16,925
Less- Accumulated amortization (3,385)
-------
$13,540
=======
Future minimum lease payments on the capital lease are as follows:
Year Amount
- ---- --------
1996 $ 6,500
1997 6,500
1998 1,226
-------
14,226
-------
Less- Amounts representing interest
at 13 percent (1,495)
-------
$12,731
=======
5. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company conducts its operations in leased premises. Future minimum lease
payments under noncancelable operating leases are as follows:
Year Amount
- ---- ------
1996 $8,400
1997 8,400
1998 2,800
------
$19,600
=======
Rent expense for the year ended December 31, 1995, was $48,017.
6. SUBSEQUENT EVENT:
-----------------
Effective January 1, 1996, substantially all of the net assets of the Company
were sold to Respiratory Medical Equipment of Georgia, Inc., a Florida
corporation, which is a wholly owned subsidiary of RoTech Medical Corporation, a
Florida corporation.
CPO2, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
TOGETHER WITH REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
CPO2, Inc.:
We have audited the accompanying balance sheet of CPO2, Inc. (a Pennsylvania
corporation) as of December 31, 1995, and the related statements of income,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CPO2, Inc. as of December 31,
1995, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Orlando, Florida,
May 10, 1996
CPO2, INC.
----------
BALANCE SHEET -- DECEMBER 31, 1995
----------------------------------
ASSETS
------
CURRENT ASSETS:
- ---------------
Cash $ 108,428
Accounts receivable, net of allowance of $139,000 (Note 1) 599,537
Inventories 165,205
Other current assets 16,920
----------
Total current assets 890,090
PROPERTY AND EQUIPMENT, net 1,196,413
----------
$2,086,503
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 98,823
Accrued liabilities 84,142
Deferred revenue 114,000
Short-term debt (Note 2) 190,564
Current maturities of long-term debt (Note 2) 74,221
Notes payable to related parties (Note 3) 521,093
----------
Total current liabilities 1,082,843
LONG-TERM DEBT, LESS CURRENT MATURITIES (Note 2) 22,655
----------
Total liabilities 1,105,498
----------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Common stock- no par value, 10,000 shares authorized,
1,000 shares issued and outstanding -
Additional paid-in capital 10,000
Retained earnings 971,005
----------
Total stockholders' equity 981,005
----------
$2,086,503
==========
The accompanying notes are an integral part of this balance sheet.
CPO2, INC.
----------
STATEMENT OF INCOME
-------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------
REVENUE:
Equipment rental $2,424,320
Sales of supplies and equipment 1,133,431
----------
3,557,751
COST OF SALES 708,163
----------
Gross profit 2,849,588
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,810,678
----------
INCOME BEFORE DEPRECIATION, AMORTIZATION AND
INTEREST EXPENSE 1,038,910
DEPRECIATION AND AMORTIZATION 274,877
INTEREST EXPENSE, net (Notes 2 and 3) 109,207
INCOME TAX EXPENSE 89,000
----------
NET INCOME $ 565,826
==========
The accompanying notes are an integral part of this statement.
CPO2, INC.
----------
STATEMENT OF STOCKHOLDERS' EQUITY
---------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
------ ---------- -------- --------
BALANCE, December 31, 1994 $ - $10,000 $455,179 $465,179
------ ------- -------- --------
Dividends - - (50,000) (50,000)
Net income - - 565,826 565,826
------ ------- -------- --------
BALANCE, December 31, 1995 $ - $10,000 $971,005 $981,005
====== ======= ======== ========
The accompanying notes are an integral part of this statement.
CPO2, INC.
----------
STATEMENT OF CASH FLOWS
-----------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 565,826
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization 274,877
Decrease in deferred income taxes 89,000
Increase in accounts receivable, net (92,030)
Increase in inventories (43,752)
Increase in other current assets (15,045)
Decrease in accounts payable (20,185)
Increase in accrued liabilities 5,557
Increase in deferred revenue 24,000
---------
Net cash provided by operating activities 788,248
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (522,413)
---------
Net cash used in investing activities (522,413)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of short-term debt, net (74,945)
Repayments of long-term debt (78,255)
Repayments of notes payable to related parties (13,792)
Payment of dividends (50,000)
---------
Net cash used in financing activities (216,992)
---------
NET INCREASE IN CASH 48,843
CASH, beginning of year 59,585
---------
CASH, end of year $ 108,428
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 105,601
Cash paid for income taxes $ 10,673
The accompanying notes are an integral part of this statement.
CPO2, INC.
----------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995
-----------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------------------------------
Nature of Business
- ------------------
CPO2, Inc. (the Company) is a Pennsylvania corporation engaged primarily in the
rental and sale of durable medical equipment, as well as the sale of medical
supplies. The primary markets for the Company's products are participants in
Medicare, Medicaid and private health insurance plans in the Commonwealth of
Pennsylvania.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and 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.
Actual results could differ from those estimates.
Inventories
- -----------
Inventories consist primarily of medical supplies and equipment and are stated
at the lower of cost or market. Cost is determined using the first-in, first-
out method.
Revenue Recognition
- -------------------
Revenues from sales of medical supplies and equipment are recognized on the date
of delivery. Equipment rentals are billed monthly in advance and recorded as
deferred revenue. All equipment rentals are recognized as revenues when earned.
A majority of the Company's revenues are billed to insurance carriers and other
care providers and are subject to review for eligibility. Accounts receivable
are recognized at estimated reimbursable amounts. Provisions are made for
doubtful accounts and sales returns. Approximately 51 percent of the Company's
accounts receivable are due from Medicare and Medicaid programs.
-2-
Income Taxes
- ------------
Effective January 1, 1995 the Company elected and received approval from the
Internal Revenue Service to report its earnings under the provisions of
Subchapter S of the Internal Revenue Code. Accordingly, federal and state
taxable income of the Company is distributable to the shareholders who are
responsible for the payment of taxes thereon. As a result, as of January 1, 1995
deferred tax assets of $89,000 were eliminated and charged to income tax
expense.
Property and Equipment
- ----------------------
Property and equipment is recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets. Property
and equipment consisted of the following at December 31, 1995:
Estimated
Useful Lives Amount
------------ -----------
Rental equipment 3 - 7 $ 2,034,513
Vehicles 3 - 5 207,606
Office equipment 7 181,714
Other 7 - 31 78,867
-----------
2,502,700
Less- Accumulated depreciation and amortization (1,306,287)
-----------
$ 1,196,413
===========
2. DEBT:
-----
The Company has available two lines of credit, one unsecured whereby the Company
may borrow up to $145,000, and the other secured by property and equipment
whereby the Company may borrow up to $150,000. Each line of credit bears
interest at prime plus 1 percent (9.5 percent at December 31, 1995). Borrowings
totaling $136,958 were included in short-term debt at December 31, 1995. The
lines of credit expire on October 12, 1996.
Other short-term debt is secured by rental equipment and is non-interest
bearing. Borrowings totaling $53,606 were outstanding at December 31, 1995.
Short-term debt is payable in monthly installments, with final installments due
between May and September 1996.
-3-
Long-term debt consisted of the following at December 31, 1995:
Amount
-------
Mortgage, bearing interest at prime plus 1.5%
(10% at December 31, 1995), secured by office equipment, payable in monthly
installments, final installment due April 1997 $ 78,389
Various notes payable, bearing interest at rates between 8.0% and 8.25%, secured by
equipment, payable in monthly installments, final installments due between
July 1996 and July 1997 18,487
--------
96,876
Less- Current maturities (74,221)
--------
Long-term debt, less current maturities $ 22,655
========
Long-term debt is scheduled to mature as follows:
Year Amount
---- --------
1996 $ 74,221
1997 22,655
--------
$ 96,876
========
The carrying amount of the lines of credit, short-term debt and long-term debt
approximates fair value based on future cash flows as discounted using a rate
commensurate with the credit, interest rate and prepayment risks involved.
3. RELATED PARTY TRANSACTIONS:
---------------------------
Notes payable to related parties consists of unsecured advances from the
Company's stockholders and an employee. These advances have no scheduled
repayment date and bear interest at the rate of 12 percent. Interest expense
on notes payable to related parties was $79,144 in 1995. Subsequent to
December 31, 1995, the notes payable to related parties were repaid in full in
connection with the sale of the Company as discussed in Note 6.
The carrying amount of notes payable to related parties approximates its fair
value based on its future cash flows as discounted using a rate commensurate
with the credit, interest rate and prepayment risks involved.
-4-
During 1995, rent expense of $32,507 was paid under the terms of a lease with
Lauver and Fisher Realty, Inc., which is owned by the stockholders of the
Company. Included in obligations for future minimum lease payments are
$36,000 and $37,840 for the years ended December 31, 1996 and 1997,
respectively, under the terms of this lease.
4. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company conducts its operations in leased premises. Total future minimum
lease payments under noncancelable operating leases are as follows:
Year Amount
----- --------
1996 $ 78,877
1997 81,767
1998 42,248
1999 29,530
2000 30,711
--------
$263,133
========
Rent expense for the year ended December 31, 1995, was $76,073.
5. 401(K) RETIREMENT PLAN:
-----------------------
The Company sponsors a 401(k) retirement plan (the Plan) covering all
employees who have completed one year of service, as defined. Employees may
contribute based upon limitations established by the Internal Revenue Service.
The Company matches all employee contributions up to 3 percent of
compensation. The Company recorded expense of $13,499 for contributions to
the Plan for the year ended December 31, 1995.
6. SUBSEQUENT EVENT:
-----------------
Effective January 1, 1996, all of the outstanding common stock of the Company
was purchased by RoTech Medical Corporation, a Florida corporation.
NATIONAL HOME CARE SERVICES, INC.
Orlando, Florida
FINANCIAL STATEMENTS
--------------------
Year Ended December 31, 1995
CONTENTS
--------
Page
----
Independent Auditors' Report 1
Financial Statements:
Balance Sheet 2
Statement of Income 3
Statement of Shareholder's Equity 4
Statement of Cash Flows 5
Notes to Financial Statements 6
1
INDEPENDENT AUDITORS' REPORT
----------------------------
Shareholder and Director
National Home Care Services, Inc.
Orlando, Florida
We have audited the accompanying balance sheet of National Home Care Services,
Inc. as of December 31, 1995, and the related statements of income,
shareholder's equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis of our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Home Care Services,
Inc. at December 31, 1995, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ Michael Galloway & Company
- ------------------------------
Michael Galloway & Company
May 24, 1996
2
NATIONAL HOME CARE SERVICES, INC.
BALANCE SHEET
-------------
December 31, 1995
ASSETS
------
Current Assets:
Cash $ 1,417
Accounts receivable, net of allowance for contractual
adjustments and doubtful accounts of $150,000 292,985
Prepaid expenses 4,575
--------
Total current assets 298,977
Property and Equipment, net of accumulated depreciation
of $93,138 183,511
Intangible Assets, net of accumulated amortization
of $28,614 222,531
--------
Total assets $705,019
========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Current Liabilities:
Current portion of long-term debt $140,588
Accounts payable 54,479
Accrued expenses 18,721
Deferred income taxes 76,000
--------
Total current liabilities 289,788
Long-Term Debt, less current portion 201,144
--------
Total liabilities 490,932
--------
Shareholder's Equity:
Common stock, par value $1.00 per share, 1,000
shares authorized, issued and outstanding 1,000
Retained earnings 213,087
--------
Total shareholder's equity 214,087
--------
Total liabilities and shareholder's equity $705,019
========
See accompanying notes to financial statements.
3
NATIONAL HOME CARE SERVICES, INC.
STATEMENT OF INCOME
-------------------
Year Ended December 31, 1995
Operating Revenues $986,245
--------
Cost and Expenses:
Cost of revenue 358,068
Selling, general and administrative 439,691
Interest 38,147
--------
835,906
--------
Income Before Income Taxes 150,339
Income Taxes 52,200
--------
Net Income $ 98,139
========
See accompanying notes to financial statements.
4
NATIONAL HOME CARE SERVICES, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
---------------------------------
Year Ended December 31, 1995
Common Stock
---------------------- Retained
Shares Amount Earnings
------------ -------- --------
Balance at December 31, 1994 1,000 $1,000 $114,948
Net Income - - 98,139
----- ------ --------
Balance at December 31, 1995 1,000 $1,000 $213,087
===== ====== ========
See accompanying notes to financial statements.
5
NATIONAL HOME CARE SERVICES, INC.
STATEMENT OF CASH FLOWS
-----------------------
Year Ended December 31, 1995
Cash Flows from Operating Activities:
Net Income $ 98,139
Adjustments to reconcile net income to net
cash flows from operating activities:
Loss on disposition of assets 104,896
Depreciation 95,474
Amortization 13,793
Bad debt expense 100,000
Deferred income taxes 51,000
Cash flows from changes in operating assets and liabilities:
Increase in accounts receivable (302,816)
Decrease in prepaid expenses 6,526
Increase in accounts payable 29,666
Decrease in accrued expenses (4,010)
---------
Net cash flows from operating activities 192,668
---------
Cash Flows From Investing Activities:
Purchases of property and equipment (120,827)
Payments for acquisitions of net assets (150,000)
---------
Net cash flows from investing activities (270,827)
---------
Cash Flows from Financing Activities:
Proceeds from long-term debt 189,966
Payments on long-term debt (113,449)
---------
Net cash flows from financing activities 76,517
---------
Net Decrease in Cash (1,642)
Cash at Beginning of Year 3,059
---------
Cash at End of Year $ 1,417
=========
Supplemental Disclosures of Cash Flow Information:
Interest paid $35,147
Taxes paid $20,432
See accompanying notes to financial statements.
6
NATIONAL HOME CARE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Year Ended December 31, 1995
Note 1 - Summary of Significant Accounting Policies:
Nature of Business:
National Home Care Services, Inc. (the "Company") was incorporated on July
7, 1993. The Company markets and provides home health care products and
services and rents home care equipment to patients throughout Central
Florida. These products and services, which are typically prescribed by a
physician, include home health care products such as respiratory therapy
equipment and convalescent medical equipment.
Revenue Recognition:
Revenues are reported on the accrual basis in the period in which services
are provided. Operating revenue represents the estimated net realizable
amounts from patients, federal reimbursement programs, and other third-
party payors. The Company's accounts receivable consist primarily of
amounts due from Medicare.
Rental income under short-term leasing arrangements is recognized on a
straight-line basis over the term of the lease and approximated $800
thousand in 1995. Approximately 80% of gross revenue in 1995 was derived
under the Medicare reimbursement program.
Property and Equipment:
Property and equipment is stated at cost. Depreciation is provided on an
accelerated basis over estimated useful lives of five years. Amortization
of leasehold improvements is included in depreciation.
Intangible Assets:
Intangible assets, which consist of goodwill, non-compete covenants,
patient contracts, and other assets arising from business acquisitions, are
being amortized on a straight-line basis over periods from 2 to 25 years.
Income Taxes:
Deferred income taxes arise from temporary differences between income tax
and financial reporting. The primary difference is that revenues and
expenses are recognized on an accrual basis for financial reporting and on
a cash basis for income tax purposes.
7
NATIONAL HOME CARE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Year Ended December 31, 1995
Note 1 - Summary of Significant Accounting Policies - Continued:
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those
estimates.
Note 2 - Property and Equipment:
Property and equipment consists of the following:
Rental equipment $193,630
Furniture and fixtures 15,949
Vehicles 30,090
Leasehold improvements 9,956
Computer equipment 27,024
--------
276,649
Less accumulated depreciation 93,138
--------
$183,511
========
The carrying value of the rental equipment is approximately $128,000.
8
NATIONAL HOME CARE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Year Ended December 31, 1995
Note 3 - Long-Term Debt:
Long-term debt consists of the following:
Note payable incurred in connection with
acquisition of equipment and intangible
assets, due in monthly installments of
$3,000 to 1999, including interest at 7.0%,
collateralized by equipment and receivable $109,106
Notes payable to banks, due in monthly
installments totalling up to $6,955 to
2002, including interest from 8.4% to 11.8%,
collateralized by equipment and receivable 123,311
Various equipment obligations, due in
monthly installments totalling up to
$3,166 to 2000, including interest from
12.2% to 13.3% 109,315
--------
Total 341,732
Less current portion 140,588
--------
$201,144
========
Future annual maturities are as follows:
1996 $140,588
1997 90,676
1998 56,881
1999 30,538
2000 8,661
Later 14,388
--------
$341,732
========
9
NATIONAL HOME CARE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Year Ended December 31, 1995
Note 4 - Income Taxes:
The provision for income taxes consists of the following:
Current $ 1,200
Deferred 51,000
-------
$52,200
=======
Note 5 - Acquisitions:
In 1995, the Company acquired substantially all of the significant assets
of two Central Florida home health care entities for approximately
$150,000.
The acquisitions consisted of the following:
Property and equipment $ 40,000
Intangible assets 110,000
--------
$150,000
========
Note 6 - Retirement Plan:
The Company maintains a voluntary simplified employee pension plan covering
substantially all employees 21 years of age or older. Employees are
permitted to make contributions to the plan pursuant to salary reduction
agreements. The Company made no contributions to the plan for 1995.
Note 7 - Related Party Transactions:
The Company leases office and warehouse space from its president and sole
shareholder. Rent expense under this short-term operating lease amounted
to $21,028 in 1995.
Note 8 - Subsequent Event:
Effective February 1, 1996, the Company sold substantially all of its
assets and granted a covenant not to compete to a Florida-based provider of
home health care services for approximately $2.0 million cash, 19,917
shares of the buyer's restricted common stock, and assumption of
liabilities of $250,000.
ROTH MEDICAL, INC. AND MURRAY MEDICAL, INC.
COMBINED FINANCIAL STATEMENTS
AS OF MAY 31, 1995
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Roth Medical, Inc. and Murray Medical, Inc.:
We have audited the accompanying combined balance sheet of ROTH MEDICAL, INC.
AND MURRAY MEDICAL, INC. ("Roth" and "Murray") as of May 31, 1995, and the
related combined statements of income, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of each
Corporation's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Roth and Murray as of
May 31, 1995, and the combined results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Denver, Colorado,
May 24, 1996.
ROTH MEDICAL, INC. AND MURRAY MEDICAL, INC.
-------------------------------------------
COMBINED BALANCE SHEET
----------------------
AS OF MAY 31, 1995
------------------
ASSETS
------
CURRENT ASSETS:
Cash $ 19,792
Accounts receivable-
Trade, less allowance of $228,386 for contractual
adjustments and doubtful accounts 1,540,002
Income taxes receivable 16,386
Inventories 362,745
Prepaid expenses 51,342
Deferred tax asset 24,800
----------
Total current assets 2,015,067
DEFERRED TAX ASSET 19,200
PROPERTY AND EQUIPMENT, less accumulated depreciation 1,293,383
----------
Total assets $3,327,650
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 433,854
Accrued expenses and other liabilities 283,218
Deferred revenue 52,500
Notes payable-
Shareholder debt 981,811
Lease obligations 259,731
Other notes payable 914,063
----------
Total current liabilities 2,925,177
LONG-TERM LIABILITIES:
Notes payable-
Shareholder debt 62,323
Lease obligations 199,664
Other notes payable 120,144
----------
382,131
SHAREHOLDERS' EQUITY:
Common stock, par value $2.80 per share, 20,000 shares
authorized, 20,000 shares issued and outstanding 56,000
Accumulated deficit (35,658)
----------
Total shareholders' equity 20,342
----------
Total liabilities and shareholders' equity $3,327,650
==========
The accompanying notes are an integral part of this combined balance sheet.
ROTH MEDICAL, INC. AND MURRAY MEDICAL, INC.
-------------------------------------------
COMBINED STATEMENT OF INCOME
----------------------------
FOR THE YEAR ENDED MAY 31, 1995
-------------------------------
OPERATING REVENUE $5,260,665
OPERATING EXPENSES:
Cost of revenue 2,371,735
Selling, general and administrative 2,497,761
Depreciation 90,509
----------
OPERATING INCOME 300,660
INTEREST EXPENSE 229,064
----------
INCOME BEFORE INCOME TAXES 71,596
INCOME TAX PROVISION 9,000
----------
NET INCOME $ 62,596
==========
The accompanying notes are an integral part of this combined statement.
ROTH MEDICAL, INC. AND MURRAY MEDICAL, INC.
-------------------------------------------
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
------------------------------------------
FOR THE YEAR ENDED MAY 31, 1995
-------------------------------
Common Stock
---------------- Accumulated
Shares Amount Deficit
------- ------- -----------
BALANCE, at May 31, 1994 20,000 $56,000 $(98,254)
Net income - - 62,596
------ ------- --------
BALANCE, at May 31, 1995 20,000 $56,000 $(35,658)
====== ======= ========
The accompanying notes are an integral part of this combined statement.
ROTH MEDICAL, INC. AND MURRAY MEDICAL, INC.
-------------------------------------------
COMBINED STATEMENT OF CASH FLOWS
--------------------------------
FOR THE YEAR ENDED MAY 31, 1995
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 62,596
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation 321,956
Increase in deferred taxes (7,000)
Changes in operating assets and liabilities-
Increase in trade accounts receivable (497,053)
Decrease in income taxes receivable 5,490
Increase in inventories (55,032)
Decrease in prepaid expenses 24,164
Increase in accounts payable 184,901
Increase in accrued expenses and other liabilities 43,173
Increase in deferred revenue 17,500
---------
Net cash provided by operating activities 100,695
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (300,704)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt and notes payable 908,030
Payments on long-term debt and notes payable (688,229)
---------
Net cash provided by financing activities 219,801
---------
NET INCREASE IN CASH 19,792
CASH, at beginning of period -
---------
CASH, at end of period $ 19,792
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 228,407
=========
Income taxes $ 52,316
=========
NONCASH TRANSACTIONS:
Financing activities-acquisition of capitalized equipment leases $ 389,422
=========
The accompanying notes are an integral part of this combined statement.
ROTH MEDICAL, INC. AND MURRAY MEDICAL, INC.
-------------------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
MAY 31, 1995
------------
(1) NATURE OF BUSINESS AND SUMMARY OF
---------------------------------
SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
Nature of Business
------------------
Roth Medical, Inc. was incorporated on June 1, 1989 and Murray Medical, Inc. was
incorporated on September 15, 1993 (together, the "Companies"). The Companies
market and provide home health care products and services and rent home health
care equipment to patients, primarily in the front range of Colorado. These
products and services, which are typically prescribed by a physician, include
home health care products (such as respiratory therapy equipment and
convalescent medical equipment) and related services.
Principles of Combination
-------------------------
The combined financial statements include the accounts of Roth Medical, Inc. and
Murray Medical, Inc., which are related under common ownership and control. All
significant intercompany accounts and transactions have been eliminated in the
combined financial statements.
Financial Instruments
---------------------
The Companies believe the book value of their financial instruments (cash
equivalents, accounts receivable, lines of credit and note payables, accounts
and other payables) approximates their fair value due to their short-term
nature.
Revenue Recognition
-------------------
Revenues are reported on the accrual basis in the period in which services are
provided. Operating revenue represents the estimated net realizable amounts
from patients, third-party payors, and others for services rendered.
Rental income under short-term leasing arrangements is recognized on a straight-
line basis over the term of the lease and approximated $2,292,000 in 1995. The
provision for doubtful accounts approximated $176,000 in 1995.
Inventories
-----------
Inventories consist principally of durable medical equipment and medical
supplies held for resale, and are stated at the lower of cost (first-in, first-
out) or market value.
Property and Equipment
----------------------
Property and equipment is stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets (generally
three to five years). Leasehold improvements are amortized over the lease term
and are included in depreciation.
(2) THIRD-PARTY RATE ADJUSTMENTS AND REVENUE
----------------------------------------
Approximately 63% in 1995 of gross revenue was derived under federal and state
third-party reimbursement programs. A portion of these revenues is based on
cost reimbursement principles and is subject to audit and retroactive adjustment
by the respective third-party fiscal intermediaries. In the opinion of
management, retroactive adjustments, if any, would not be material to the
financial position or results of operations of the Companies.
(3) PROPERTY AND EQUIPMENT
----------------------
Property and equipment consists of the following:
May 31,
1995
----------
Rental equipment $1,806,625
Furniture and equipment 202,902
Vehicles 372,047
Leasehold improvements 73,606
-----------
2,455,180
Less accumulated depreciation and
amortization (1,161,797)
-----------
$ 1,293,383
===========
(4) NOTES PAYABLE
-------------
Notes payable consists of the following:
May 31,
1995
----------
Lines of credit payable to a financial institution
due June 20, 1995; with interest payments at
the bank's commercial base rate plus 1.50%
payable monthly; collateralized by accounts
receivable and inventory. The lines of credit
were subsequently refinanced in June 1995
with a due date of June 20, 1996. $399,382
Notes payable to a financial institution due
June 25, 1995, payable in aggregate monthly
installments of $8,778 including interest at the
bank's commercial base rate plus 1.50%,
collateralized by personal guarantee of owners.
The notes payable were refinanced in June
1995 with a due date of June 25, 1996. 453,904
Note payable to related parties requiring monthly
payments of $8,104 including interest at 13%,
collateralized by certain items of property and
equipment. 133,235
Notes payable to financial institutions payable in
aggregate monthly installments of $6,810
including interest averaging 9%, collateralized
by certain items of property and equipment. 180,921
Capitalized lease obligations requiring monthly
payments of approximately $31,800 including interest
averaging 12%, collateralized by related rental
equipment. 459,395
Notes payable to an officer/shareholder at an
interest rate of 13%, due on demand and
unsecured. 910,899
-----------
2,537,736
Less current portion (2,155,605)
-----------
Long-term debt $ 382,131
===========
Future maturities of long-term debt at May 31, 1995 were as follows:
Years ending May 31,
1996 $ 2,155,605
1997 268,725
1998 95,734
1999 17,672
-----------
$ 2,537,736
===========
(5) OPERATING LEASES AND
--------------------
RELATED-PARTY TRANSACTIONS
--------------------------
Office space is leased from the shareholders under lease agreements which
expired in September and June 1995 and were renewed for a period of one year and
five years. The agreements provide for annual rentals subject to an escalation
at the lessor's discretion. Total rents paid to related parties during 1995
were $131,000. The following is a schedule by year of future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of May 31, 1995.
For the years ending May 31,
1996 $122,140
1997 $116,400
1998 $116,400
1999 $116,400
2000 $116,400
(6) INCOME TAXES
------------
The Companies account for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No.
109 requires recognition of deferred tax assets and liabilities for the
estimated future tax effects of deductible temporary differences between the tax
basis and financial reporting basis of assets and liabilities, operating loss
carryforwards and tax credit carryforwards. Deferred tax liabilities are
recognized for taxable temporary differences. Management of current and
deferred tax liabilities and assets is based on provisions of enacted tax law;
the effects of future changes in tax laws or rates are not anticipated. A
valuation allowance for deferred tax assets is required to the extent deemed
more likely than not it will not be realized.
The net deferred tax assets as of May 31, 1995 are comprised of the following:
1995
--------
Current-
Deferred revenue $ 13,000
Accrued liabilities and allowances 29,400
Other 400
Valuation allowance (18,000)
--------
Net current deferred tax assets 24,800
Noncurrent-
Depreciation and amortization 18,600
Alternative minimum tax carryforward 6,600
Valuation allowance (6,000)
--------
Net noncurrent deferred tax assets 19,200
--------
Total net deferred tax asset $ 44,000
========
The components of the income tax provision consist of the following:
1995
-------
Federal $13,600
State 2,400
-------
Current 16,000
Deferred (7,000)
-------
Income tax provision $ 9,000
=======
The statutory federal rate for the combined companies was 15% - 25%.
A reconciliation of the Companies' combined income before taxes for financial
statement purposes to estimated combined federal taxable income is as
follows:
1995
--------
Income before income taxes $ 71,596
Difference between income before income
taxes and taxable income-
State income taxes (1,452)
Net operating loss carryforward (43,052)
Permanent differences 8,433
Temporary differences, net 1,811
--------
Taxable income $ 37,336
========
(7) EMPLOYEE BENEFIT PLAN
---------------------
The Companies have an employee profit sharing plan which covers all full-time
employees of the Companies. There were no contributions made by the
Companies and the employees may contribute up to 15% of their gross salary in
any plan year.
(8) SUBSEQUENT EVENTS
-----------------
Effective February 1, 1996, the shareholders of the Companies sold their
stock and granted a covenant not to compete to a Florida-based provider of
home health care services.
Roth Medical, Inc. and Murray Medical, Inc.
Interim Balance Sheet (Unaudited)
- ------------------------------------------------------------------------
JANUARY 31, 1996
----------------
ASSETS
Current Assets:
Cash $ (79,561)
Accounts receivable:
Trade, less allowance for
contractual
adjustments and doubtful accounts 2,007,540
Other 120,383
Inventories 427,235
Prepaid expenses and other 79,770
----------
Total Current Assets 2,555,367
Other Assets:
Other assets 149,863
Property and Equipment, less accumulated
depreciation 1,947,916
----------
Total Assets $4,653,146
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses and
other liabilities $1,042,144
Notes Payable 3,401,732
Deferred income taxes 8,000
Income taxes payable 16,000
----------
Total Current Liabilities 4,467,876
Stockholders' Equity:
Common Stock 56,000
Retained earnings 129,270
----------
185,270
----------
Total Liabilities and Stockholders'
Equity $4,653,146
==========
See accompanying notes to interim financial statements (unaudited).
Roth Medical, Inc. and Murray Medical, Inc.
Interim Statement of Income (Unaudited)
- --------------------------------------------------------------------------------
EIGHT MONTHS ENDED
JANUARY 31, 1996
------------------
Operating revenue $4,578,558
Cost and expenses:
Cost of revenue 1,837,010
Selling, general and administrative 2,310,727
Depreciation 78,532
Interest 168,361
----------
4,394,630
Income before income taxes 183,928
----------
Income tax expense 19,000
----------
Net income $ 164,928
==========
See accompanying notes to interim financial statements (unaudited).
Roth Medical, Inc. and Murray Medical, Inc.
Interim Statement of Stockholders' Equity (Unaudited)
- --------------------------------------------------------------------------------
COMMON STOCK
--------------- RETAINED
SHARES AMOUNT EARNINGS
----------------------------
Balance at June 1, 1995 20,000 $56,000 $( 35,658)
Net income 164,928
----------------------------
Balance at January 31, 1996 20,000 $56,000 $ 129,270
============================
See accompanying notes to interim financial statements (unaudited).
Roth Medical, Inc. and Murray Medical, Inc.
Interim Statement of Cash Flows (Unaudited)
- -------------------------------------------------------------------------------
EIGHT MONTHS ENDED
JANUARY 31, 1996
------------------
NET CASH USED BY OPERATING ACTIVITIES $(230,284)
INVESTING ACTIVITIES
Purchases of property and equipment (733,065)
---------
Net cash used in investing activities (733,065)
FINANCING ACTIVITIES
Proceeds from notes payable 863,996
---------
Net cash provided by financing
activities 863,996
---------
Decrease in cash (99,353)
Cash at beginning of period 19,792
---------
Cash at end of period $( 79,561)
=========
See accompanying notes to interim financial statements (unaudited).
Roth Medical, Inc. and Murray Medical, Inc.
Notes to Interim Financial Statements - January 31, 1996 (Unaudited)
- ------------------------------------------------------------------------------
1. BASIS OF REPORTING
The interim balance sheet as of January 31, 1996 and the interim statements of
income, stockholders' equity and cash flows for the eight months ended January
31, 1996 are unaudited. In the opinion of management, these statements have
been prepared on the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring accruals, necessary for the
fair statement of the results of the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These interim financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's audited financial statements as of and for the year ended May 31,
1995. The results of operations for the interim period are not necessarily
indicative of the results which may be expected for an entire year.
2. SUBSEQUENT EVENT
Effective February 1, 1995, the Company sold all of its stock and granted a
covenant not to compete to a Florida-based provider of home health care
services.
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Pro Forma Condensed Combined Financial Statements
The pro forma condensed combined financial statements for the year ended
July 31, 1995 and the six months ended January 31, 1996 have been prepared to
illustrate the estimated combined effects of the Agreements of Purchase and
Sales (Agreements) between RoTech Medical Corporation (the Company) and PMG,
Preferred, G&G, Rhema, RHC, CPO2, NHC and Roth and Murray.
The pro forma condensed combined balance sheet as of January 31, 1996 was
derived by adjusting the historical balance sheet as of January 31, 1996 of the
Company and the historical balance sheet as of January 31, 1996 of Roth and
Murray. The pro forma condensed combined statement of income for the year ended
July 31, 1995 was derived by adjusting the historical statement for the year
ended July 31, 1995 of the Company and the unaudited historical statement of
income for the year ended October 31, 1995 of PMG, the historical statement of
income for the year ended December 31, 1995 of Preferred, Rhema, RHC, CPO2, and
NHC, the historical statement of income for the year ended March 31, 1995 of G&G
and the historical statement of income for the year ended May 31, 1995 of Roth
and Murray. The pro forma condensed combined interim statement of income for
the six months ended January 31, 1996 was derived by adjusting the unaudited
historical statement for the six months ended January 31, 1996 of the Company
and the unaudited historical interim statement of income for the ten months
ended October 31, 1995 of PMG, the historical statement of income for the year
ended December 31, 1995 of Preferred, Rhema, RHC, CPO2, and NHC, the unaudited
historical statement of income for the nine months ended December 31, 1995 of
G&G and the unaudited historical statement of income for the eight months ended
January 31, 1996 of Roth and Murray. The pro forma condensed combined statements
of income were prepared as if each purchase and sale had occurred on August 1,
1994 for the year ended July 31, 1995 and August 1, 1995 for the six months
ended January 31, 1996. The pro forma condensed combined statements of income
presented are not necessarily indicative of the results of operations that might
have occurred had the transaction been completed as of the date specified or of
the results of operations of the Company and its subsidiaries for any future
period.
No changes in operating revenue and expenses have been made to reflect the
results of any modification to operations that might have been made had the
Agreements been consummated on the aforesaid assumed effective date for purposes
of presenting pro forma results. The acquisitions have been accounted for in
accordance with the purchase method of accounting. The pro forma condensed
combined statement of income includes amortization of intangible assets as if
the Agreements had been completed on the assumed effective date referred to
above.
The pro forma financial statements should be read in conjunction with the
audited consolidated financial statements and related notes thereto included in
the Company's July 31, 1995 Form 10-K and the condensed consolidated interim
financial statements and the related notes thereto included in the Company's
January 31, 1996 Form 10-Q.
1
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------------------
Pro Forma Condensed Combined Balance Sheet
JANUARY 31, 1996
---------------------------------------------------------------------
(UNAUDITED)
ROTECH MEDICAL
ROTECH MEDICAL CORPORATION
CORPORATION COMBINED
CONSOLIDATED COMBINED PRO FORMA PRO FORMA
JANUARY 31, 1996 ACQUIRED ENTITIES ADJUSTMENTS RESULTS
----------------- ----------------- ----------- --------------
ASSETS
Current Assets
Cash................................. $ 3,547,339 $ (79,561) $(2,962,000)(2) $ 505,778
Accounts receivable..................
Trade, net...................... 65,556,906 2,007,540 (415,145)(1) 67,149,301
Other........................... 3,512,431 120,383 3,632,814
Inventories.......................... 16,848,535 427,235 17,275,770
Prepaid expenses..................... 753,383 79,770 833,153
------------ ---------- ------------ ------------
Total current assets............ 90,218,594 $2,555,367 (3,377,145) 89,396,816
Other Assets
Intangible assets, net............... 115,714,154 - 3,585,341 (3) 119,299,495
Other assets......................... 1,670,366 149,863 - 1,820,229
------------ ---------- ------------ ------------
117,384,520 149,863 3,585,341 121,119,724
Property and equipment, net............... 66,863,661 1,947,916 175,122 (1) 68,986,699
------------ ---------- ------------ ------------
TOTAL ASSETS.............................. $274,466,775 $4,653,146 $ 383,318 $279,503,239
============ ========== ============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, accrued
expenses and other
liabilities........................ $ 9,713,512 $1,042,144 $ 1,036,386 (1) $ 11,606,772
Notes payable to bank............... 100,199,176 3,401,732 (548,798)(1) 103,052,110
Deferred income taxes............... 539,634 8,000 - 547,634
Income taxes payable................ (1,431,220) 16,000 81,000 (1) (1,334,220)
------------ ---------- ------------ ------------
Total current liabilities...... 109,021,102 4,467,876 568,588 113,872,296
Other Liabilities
Deferred income taxes............... 3,895,200 - - 3,895,200
Long-term debt......................
------------ ---------- ------------ ------------
3,895,200 - 3,895,200
Shareholders' Equity
Common stock........................ 2,320 - 2,320
Treasury stock, at cost............. (814,535) - (814,535)
Additional paid in capital.......... 120,669,089 56,000 (56,000)(2) 120,725,089
Retained earnings................... 41,693,599 129,270 (129,270)(2) 41,822,869
------------ ---------- ------------ ------------
161,550,473 185,270 (185,270) 161,735,743
TOTAL LIABILITIES AND
------------ ---------- ------------ ------------
SHAREHOLDERS' EQUITY..................... $274,466,775 $4,653,146 $ 383,318 $279,503,239
============ ========== ============ ============
2
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Pro Forma Condensed Combined Statement of Income
FOR THE YEAR ENDED JULY 31, 1995
-----------------------------------------------------------------------------------------
(UNAUDITED)
ROTECH MEDICAL ROTECH MEDICAL
CORPORATION CORPORATION
CONSOLIDATED COMBINED
YEAR ENDED JULY COMBINED PRO FORMA PRO FORMA
31, 1995 ACQUIRED ENTITIES ADJUSTMENTS RESULTS
--------------- ----------------- ----------- ---------------
Operating revenue................ $134,111,458 $27,898,269 $162,009,727
Cost and expenses
Cost of revenue............. 36,287,811 8,419,417 44,707,228
Selling, general and
administrative............. 66,477,381 15,715,293 82,192,674
Depreciation and
amortization............... 9,565,238 570,766 $1,301,148 (a) 11,437,152
Interest.................... 835,462 615,637 1,147,092 (b) 2,598,191
------------ ----------- ----------- ------------
113,165,892 25,321,113 2,448,240 140,935,245
------------ ----------- ----------- ------------
Income before income taxes...... 20,945,566 2,577,156 (2,448,240) 21,074,482
Income tax expense.............. 7,800,800 524,746 (510,745)(d) 7,814,801
------------ ----------- ----------- ------------
Net income............ $ 13,144,766 $ 2,052,410 $(1,937,495) $ 13,259,681
============ =========== =========== ============
Net Income Per Share............ $.64 $.63
============ ===============
Weighted Average Number of
Shares Outstanding............. 20,684,000 523,352 21,207,352
3
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Pro Forma Condensed Combined Statement of Income
FOR THE SIX MONTHS ENDED JANUARY 31, 1996
---------------------------------------------------------------
(UNAUDITED)
ROTECH MEDICAL ROTECH MEDICAL
CORPORATION CORPORATION
CONSOLIDATED COMBINED
SIX MONTHS ENDED COMBINED PRO FORMA PRO FORMA
JANUARY 31, 1996 ACQUIRED ENTITIES ADJUSTMENTS RESULTS
------------- ----------------- ----------- ---------------
Operating revenue........................... $106,582,378 $12,110,209 $118,692,587
Cost and expenses
Cost of revenue.......................... 29,030,503 3,981,040 33,011,543
Selling, general and administrative...... 51,739,877 6,455,803 58,195,680
Depreciation and amortization............ 9,762,514 265,412 $ 650,574 (a) 10,678,500
Interest................................. 1,336,721 295,878 573,546 (c) 2,206,145
------------ ----------- ------------- ------------
91,869,615 10,998,133 1,224,120 104,091,868
------------ ----------- ------------- ------------
Income before income taxes................. 14,712,763 1,112,076 (1,224,120) 14,600,719
Income tax expense......................... 5,458,435 253,599 (261,669)(d) 5,450,365
------------ ----------- ------------- ------------
Net income..................... $ 9,254,328 $ 858,477 $ (962,451) $ 9,150,354
============ =========== ============= ============
Net Income Per Share....................... $.38 $ .37
============ ============
Weighted Average Number of Shares
Outstanding......................... 24,445,104 523,352 24,968,456
4
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Notes to Pro Forma Condensed Combined Financial Statements
(1) Elimination of net book value of certain assets and liabilities not
acquired. Reclassification of certain liabilities assumed to accounts
payable. Assumption of certain leases for rental equipment.
(2) Purchase price paid as a decrease in cash. Elimination of the
acquired entities' equity in accordance with the purchase method of
accounting. (Shares issued as consideration paid for acquired entities' net
assets are contingent and, therefore, not recorded as outstanding and not
included in the weighted average share calculations.)
(3) Additional intangibles resulting from the excess of the purchase price over
the net assets acquired and non-compete contracts. This adjustment does
not contemplate any change to the purchase price for the differences in the
business purchased at their respective dates of acquisition compared to
what the purchase price may have been as of August 1, 1995.
(a) Amortization of intangibles recorded in the acquisition
(amortized over various lives from 5 to 25 years).
(b) Additional interest expense related to borrowings for cash paid
to acquire PMG, Preferred, G&G, Rhema, RHC, CPO2, Murray and Roth.
assumed borrowed on August 1, 1994, less interest expense pertaining to
liabilities not assumed by the Company. Assumed 6.0% interest rate on
purchase price.
(c) Additional interest expense related to borrowings for cash paid
to acquire PMG, Preferred, G&G, Rhema, RHC, CPO2, Murray and Roth.
assumed borrowed on August 1, 1995, less interest expense pertaining to
liabilities not assumed by the Company. Assumed 6.0% interest rate on
purchase price.
(d) Adjustment to income tax expense for the tax expense relating to
the net income as adjusted for the combined entity. Income taxes are
calculated on the basis that operations of the consolidated company could
be combined as one company for federal income tax purposes at the actual
historical rate for the period. No assurance can be given that these tax
benefits will be realizable by the Company.
5