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EXHIBIT 99.1
AUDITED COMBINED FINANCIAL STATEMENTS
NetCare Facilities
Years ended December 31, 2000, 1999 and 1998 with Report of Independent
Auditors
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NetCare Facilities
Audited Combined Financial Statements
Years ended December 31, 2000, 1999 and 1998
CONTENTS
Report of Independent Auditors..............................................1
Audited Combined Financial Statements
Combined Balance Sheets.....................................................2
Combined Statements of Operations...........................................4
Combined Statements of Changes in Net Invested Capital......................5
Combined Statements of Cash Flows...........................................6
Notes to Combined Financial Statements......................................7
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Report of Independent Auditors
Board of Directors
KRUG International Corp.
We have audited the accompanying combined balance sheets of Chestatee Regional
Hospital, Chilton Medical Center, Dexter Memorial Hospital, Mountainside
Medical Center, North Georgia Medical Center, and Trace Regional Hospital
including nursing homes and clinics related to the operations of these
hospitals (collectively the "NetCare Facilities") as of December 31, 2000 and
1999, and the related combined statements of operations, changes in net
invested capital and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
NetCare Facilities' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
NetCare Facilities at December 31, 2000 and 1999, and the combined results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Nashville, Tennessee
April 12, 2001
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NetCare Facilities
Combined Balance Sheets
(In thousands)
DECEMBER 31
2000 1999
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 377 $ --
Patient accounts receivable, net of allowance for
doubtful accounts of $10,766 and $7,385 at
December 31, 2000 and 1999, respectively 9,315 11,827
Inventories 1,736 2,175
Prepaid expenses and other current assets 473 427
------- -------
Total current assets 11,901 14,429
Property and equipment:
Land and improvements 1,016 919
Buildings and improvements 22,365 22,373
Equipment 15,419 15,171
------- -------
38,800 38,463
Less accumulated depreciation 23,857 21,758
------- -------
14,943 16,705
Construction in progress 3,014 2,736
------- -------
Net property, plant and equipment 17,957 19,441
Excess of purchase price over net assets acquired 5,039 5,293
Other assets 35 86
------- -------
Total assets $34,932 $39,249
======= =======
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DECEMBER 31
2000 1999
------- -------
LIABILITIES AND NET INVESTED CAPITAL
Current liabilities:
Accounts payable $ 3,781 $ 4,240
Employee compensation and benefits 2,658 2,555
Other accrued liabilities 802 712
------- -------
Total current liabilities 7,241 7,507
Third-party settlements 3,166 1,723
Net invested capital 24,525 30,019
------- -------
Total liabilities and net invested capital $34,932 $39,249
======= =======
See accompanying notes.
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NetCare Facilities
Combined Statements of Operations
(In thousands)
YEAR ENDED DECEMBER 31
2000 1999 1998
-------- -------- --------
Net patient revenue $ 80,356 $ 82,251 $ 62,612
Other revenue 721 747 507
-------- -------- --------
Total revenue 81,077 82,998 63,119
Expenses:
Salaries, wages and benefits 38,008 36,807 26,830
Supplies and other 17,321 17,465 12,911
Provision for bad debts 11,033 13,276 9,765
Purchased services 7,364 7,334 4,550
Professional services 3,914 5,329 3,168
Rent and lease expense 2,008 1,902 1,239
Depreciation and amortization 2,497 3,080 2,701
Management fees 1,987 1,960 1,643
Interest expense, net 1,102 1,409 1,532
-------- -------- --------
Loss before income taxes (4,157) (5,564) (1,220)
Income tax benefit (provision) -- -- --
-------- -------- --------
Net loss $ (4,157) $ (5,564) $ (1,220)
======== ======== ========
See accompanying notes.
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NetCare Facilities
Combined Statements of Changes in Net Invested Capital
(In thousands)
Balance at January 1, 1998 $ 24,989
Net transfers from Parent 192
Parent's management fee 1,643
Net assets of hospital contributed by Parent,
net of cash received 3,256
Net loss (1,220)
--------
Balance at December 31, 1998 28,860
Net transfers from Parent 2,640
Parent's management fee 1,960
Net assets of hospital contributed by Parent 2,123
Net loss (5,564)
--------
Balance at December 31, 1999 30,019
Net transfers to Parent (3,324)
Parent's management fee 1,987
Net loss (4,157)
--------
Balance at December 31, 2000 $ 24,525
========
See accompanying notes.
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NetCare Facilities
Combined Statements of Cash Flows
(In thousands)
YEAR ENDED DECEMBER 31
2000 1999 1998
-------- -------- -------
OPERATING ACTIVITIES
Net loss $ (4,157) $ (5,564) $(1,220)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,497 3,080 2,701
Provision for bad debts 11,033 13,276 9,765
NetCare's management fee 1,987 1,960 1,643
Changes in operating assets and liabilities, net
of effect of acquisitions:
Patient accounts receivable (8,360) (12,344) (8,100)
Inventories 439 (330) (176)
Prepaid expenses and other current assets 5 258 568
Accounts payable (459) 557 (445)
Employee compensation and benefits 103 493 (256)
Other current liabilities 90 (185) (2,918)
Third-party settlements 1,443 (1,339) 1,000
-------- -------- -------
Net cash provided by (used in) operating activities 4,621 (138) 2,562
INVESTING ACTIVITIES
Purchases of property, plant and equipment (920) (2,863) (2,876)
-------- -------- -------
Net cash used in investing activities (920) (2,863) (2,876)
FINANCING ACTIVITIES
Net transfers from/(to) Parent (3,324) 2,640 192
-------- -------- -------
Net cash provided by (used in) financing activities (3,324) 2,640 192
-------- -------- -------
Increase (decrease) in cash and cash equivalents 377 (361) (122)
Cash and cash equivalents at beginning of period -- 361 483
-------- -------- -------
Cash and cash equivalents at end of period $ 377 $ -- $ 361
======== ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 1,102 $ 1,409 $ 1,532
See accompanying notes.
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NetCare Facilities
Notes to Combined Financial Statements
(In thousands)
December 31, 2000
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF COMBINATION
NetCare Health Systems, Inc. ("NetCare"), a wholly-owned subsidiary of NetCare
Health Systems, LLC (the "LLC"), is a Delaware corporation that owns and
operates hospitals and ancillary health care facilities. NetCare, which was
incorporated on November 9, 1995, owns and operates general acute care
hospitals and adjacent nursing home facilities.
On January 31, 2001, NetCare and certain of its wholly-owned subsidiaries
entered into a Stock Acquisition Agreement ("Agreement") with SunLink
Healthcare Corp. ("SunLink"), a wholly-owned subsidiary of KRUG International
Corp., pursuant to which SunLink agreed to acquire from NetCare substantially
all of the assets and liabilities related to the operations of six acute care
hospitals and three nursing home facilities in four states for a purchase price
of approximately $30 million. The six hospitals and three nursing homes are
referred to collectively as the "NetCare Facilities."
The combined financial statements include the accounts of Chestatee Regional
Hospital, Chilton Medical Center, Dexter Memorial Hospital, Mountainside
Medical Center, North Georgia Medical Center, and Trace Regional Hospital,
including nursing homes and clinics related to the operations of these
hospitals. All material intercompany accounts and transactions have been
eliminated in combination.
CASH AND CASH EQUIVALENTS
The NetCare Facilities consider all highly liquid investments with a maturity
of 90 days or less when purchased to be cash equivalents.
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NetCare Facilities
Notes to Combined Financial Statements (continued)
(In thousands)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATIENT ACCOUNTS RECEIVABLE
The NetCare Facilities' primary concentration of credit risk is patient
accounts receivable, which consist of amounts owed by various governmental
agencies, insurance companies and private patients. The NetCare Facilities
manage receivables by regularly reviewing its accounts and contracts and by
providing appropriate allowances for uncollectible amounts. Medicare and
Medicaid programs comprised approximately 23% and 10% of patient accounts
receivable, respectively, for 2000 and 27% and 15%, respectively, for 1999.
Remaining receivables relate primarily to various commercial insurance
carriers, HMO/PPO programs and individual patients.
INVENTORIES
Inventories consist principally of medical and surgical supplies, general store
supplies and pharmacy items and are stated at the lower of cost (first-in,
first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets, which
approximate 4 to 40 years.
Depreciation expense was $2,404, $3,038 and $2,654 for the years ending
December 31, 2000, 1999 and 1998, respectively.
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED
Excess of purchase price over net assets acquired is being amortized on a
straight-line basis over 40 years. To the extent that operating results
indicate the probability that the carrying values of certain long-lived assets
and the related identifiable intangible assets have been impaired, the NetCare
Facilities would prepare projections of the undiscounted cash flows from
operations of the acquired entity over the remaining amortization period. If
the projections indicated that the recorded cost would not be recoverable, such
cost amounts would be reduced to estimated fair value. As of December 31, 2000,
in the opinion of management, there has been no such impairment.
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NetCare Facilities
Notes to Combined Financial Statements (continued)
(In thousands)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The NetCare Facilities file as a part of the consolidated federal tax return of
NetCare. As a result, the provisions for income taxes are calculated and
allocated to the NetCare Facilities from NetCare. All balance sheet accounts
have been included as a component of net invested capital for this
presentation.
NET INVESTED CAPITAL
Net transfers to/from NetCare include advances from NetCare to fund operating
and investing activities, contributions of acquired hospitals by NetCare and
amounts advanced to NetCare from operating cash flows generated by the NetCare
Facilities. Net transfers are included as part of net invested capital as the
NetCare Facilities are not required to settle these amounts on a current basis.
Intercompany interest expense (net) was $1,102, $1,409 and $1,532 for December
31, 2000, 1999 and 1998, respectively, pursuant to NetCare's internal policy
for charging interest on net funds advanced. Net invested capital is shown in
lieu of stockholder's equity in the accompanying combined financial statements.
NetCare provides certain corporate services to the NetCare Facilities,
including legal services, risk management, certain employment benefit
administration, tax advice and preparation of tax returns, software support
services and certain financial and other services. These fees are charged by
NetCare to the NetCare Facilities based on patient days. NetCare believes this
method of allocation to be reasonable. The amounts recorded by NetCare for
these allocations in the accompanying combined statements of operations were
approximately $2.0 million, $2.0 million and $1.6 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
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NetCare Facilities
Notes to Combined Financial Statements (continued)
(In thousands)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INVESTED CAPITAL (CONTINUED)
NetCare maintains professional medical malpractice, workers compensation and
other general liability insurance on behalf of the NetCare Facilities. NetCare
maintains reserves for estimated incurred losses not covered by third parties
and charges premiums to the NetCare Facilities. Accordingly, no reserve for
liability risks is recorded on the accompanying combined balance sheets.
RISK MANAGEMENT
The NetCare Facilities maintain self-insured medical and dental plans for
employees. Claims are accrued under these plans as the incidents that give rise
to them occur. Unpaid claim accruals are based on the estimated ultimate cost
of settlement, including claim settlement expenses, in accordance with an
average lag time and past experience. The NetCare Facilities have entered into
reinsurance agreements for certain plans with independent insurance companies
to limit its losses on claims. Under the terms of these agreements, the
insurance companies will reimburse the NetCare Facilities for claims in excess
of $60 per individual claim and $3,600 in the aggregate. These reimbursements
are included in salaries, wages and benefits in the accompanying combined
statements of operations.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents: The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value.
Patient Accounts Receivable and Accounts Payable: The carrying amount reported
in the balance sheets for patient accounts receivable and accounts payable
approximates fair value.
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NetCare Facilities
Notes to Combined Financial Statements (continued)
(In thousands)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET PATIENT REVENUE
The NetCare Facilities have agreements with third-party payors that provide for
payments to the NetCare Facilities at amounts different from its established
rates. A summary of the payment arrangements with major third-party payors
follows:
Medicare: Inpatient acute care services rendered to Medicare program
beneficiaries are paid at prospectively determined rates per diagnosis related
group ("DRG"). These DRG rates vary according to a patient classification
system that is based on clinical, diagnostic, and other factors. Outpatient
services are generally reimbursed under the outpatient prospective payment
system, which pays a fixed rate for a given bundle of outpatient services.
These bundles are known as Ambulatory Payment Classifications or "APCs."
Inpatient nonacute services related to Medicare beneficiaries are paid based on
a cost reimbursement methodology subject to various cost limits. The NetCare
Facilities are reimbursed for cost-based services at a tentative rate, with
final settlement determined after submission of annual cost reports by the
NetCare Facilities and audits thereof by the Medicare fiscal intermediary.
Medicaid: Inpatient and outpatient services rendered to Medicaid program
beneficiaries are reimbursed either under contracted rates or reimbursed for
cost reimbursable items at a tentative rate with final settlement determined
after submission of annual cost reports by the NetCare Facilities and audits
thereof by Medicaid.
Other: The Hospitals have also entered into payment agreements with certain
commercial insurance carriers, health maintenance organizations and preferred
provider organizations. The basis for payment to the NetCare Facilities under
these agreements includes prospectively determined rates per discharge,
discounts from established charges, and prospectively determined daily rates.
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NetCare Facilities
Notes to Combined Financial Statements (continued)
(In thousands)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET PATIENT REVENUE (CONTINUED)
Settlements under cost reimbursement agreements with third-party payors are
estimated and recorded in the period in which the related services are rendered
and are adjusted in future periods as settlements are determined. Final
determination of amounts earned under the Medicare and Medicaid programs often
occur in subsequent years because of audits by the programs, rights of appeal
and the application of numerous technical provisions. The effect of adjustments
to estimated settlements for prior years was an increase (decrease) to net
patient revenue of approximately $(305), $619 and $907 for 2000, 1999 and 1998,
respectively.
USE OF ESTIMATES
The preparation of combined financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the combined
financial statements and accompanying notes. Actual results could differ from
those estimates.
2. ACQUISITIONS
Dexter Memorial Hospital: In 1999, NetCare acquired and contributed certain
assets and liabilities of Dexter Memorial Hospital ("Dexter"), a 48-bed acute
care hospital located in Dexter, Missouri, and also entered into a lease
agreement for certain buildings and equipment related to Dexter.
Chilton Medical Center: In 1998, NetCare acquired and contributed certain
assets and liabilities of Chilton Medical Center ("Chilton"), a 45-bed general
acute care hospital located in Clanton, Alabama.
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NetCare Facilities
Notes to Combined Financial Statements (continued)
(In thousands)
2. ACQUISITIONS (CONTINUED)
The following sets forth the assets and liabilities contributed and the net
NetCare contribution:
1999 1998
------- -------
Fair value of assets contributed:
Patient accounts receivable $ 2,122 $ 480
Inventories 289 157
Prepaid expenses and other current assets 323 57
Property, plant, and equipment -- 3,267
Liabilities assumed:
Accounts payable (556) (1,036)
Employee compensation and benefits (288) (431)
Other liabilities (49) (132)
------- -------
Net assets acquired 1,841 2,362
Excess of purchase price over net assets acquired 282 894
------- -------
Contribution from NetCare $ 2,123 $ 3,256
======= =======
The operations of Dexter and Chilton are included in the combined statement of
operations from their respective dates of acquisition.
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NetCare Facilities
Notes to Combined Financial Statements (continued)
(In thousands)
3. OPERATING LEASES
The NetCare Facilities lease various buildings, office and medical equipment
under operating leases with various renewal options. At December 31, 2000,
future minimum rental payments under operating leases with terms of one year or
more are as follows:
2001 $ 528
2002 461
2003 413
2004 134
2005 54
Thereafter --
------
$1,590
======
Rent expense under operating leases was approximately $2.0 million, $1.9
million and $1.2 million for December 31, 2000, 1999 and 1998, respectively.
4. INCOME TAXES
Significant components of the NetCare Facilities' deferred tax assets and
liabilities are as follows:
2000 1999 1998
------- ------- -------
Deferred tax assets:
Accrued vacation and bonuses $ 391 $ 418 $ 308
Net operating losses 720 42 --
Differences in book and tax provision for
doubtful accounts 3,998 2,987 2,316
Book over tax depreciation/amortization 453 659 482
------- ------- -------
Total deferred tax assets 5,562 4,106 3,106
Less valuation allowance (5,213) (3,645) (1,537)
------- ------- -------
Net deferred tax assets 349 461 1,569
Deferred tax liabilities:
Tax over book depreciation/amortization (349) (461) (651)
------- ------- -------
Net deferred tax assets $ -- $ -- $ 918
======= ======= =======
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NetCare Facilities
Notes to Combined Financial Statements (continued)
(In thousands)
4. INCOME TAXES (CONTINUED)
Significant components of the provision (benefit) for income taxes attributable
to operations are as follows:
DECEMBER 31
2000 1999 1998
----- ----- -----
Current:
Federal $ -- $(773) $ 773
State -- (145) 145
----- ----- -----
Total current -- (918) 918
----- ----- -----
Deferred:
Federal -- 822 (822)
State -- 96 (96)
----- ----- -----
Total deferred -- 918 (918)
----- ----- -----
Provision (benefit) for income taxes $ -- $ -- $ --
===== ===== =====
The NetCare Facilities' combined effective tax rate differed from the federal
statutory rate as set forth below:
DECEMBER 31
2000 1999 1998
------- ------- -----
Tax at U.S. statutory rates $(1,415) $(1,894) $(420)
State taxes, net of federal benefits (165) (221) (49)
Increase (decrease) in valuation allowance 1,569 2,108 460
Other 11 7 9
------- ------- -----
Total $ -- $ -- $ --
======= ======= =====
At December 31, 2000, the NetCare Facilities have net operating loss carryovers
of approximately $1.9 million for federal and state income tax purposes that
expire between the years 2011 and 2018.
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NetCare Facilities
Notes to Combined Financial Statements (continued)
(In thousands)
5. COMMITMENTS AND CONTINGENCIES
GENERAL AND PROFESSIONAL LIABILITY
The NetCare Facilities carry general and professional liability insurance from
an unrelated commercial insurance carrier for per occurrence losses up to
$1,000 with policy limits of $3,000 in the aggregate, on a claims-made basis
for professional liability and on an occurrence basis for general liability. In
addition, the NetCare Facilities have an umbrella policy with the insurance
carrier with coverage up to $10,000 per occurrence and in the aggregate. At
December 31, 2000 and 1999, there were no asserted claims against the hospitals
or nursing homes that management expects to exceed current insurance coverage.
At January 1, 2001, NetCare purchased a tail policy in the commercial insurance
market to transfer all risk for the NetCare Facilities' professional liability.
LITIGATION
The NetCare Facilities are presently, and from time to time, subject to various
other claims and lawsuits arising in the normal course of business. In the
opinion of management, the ultimate resolution of these matters will not have a
material adverse effect on the NetCare Facilities' financial position or
results of operations.
6. HEALTHCARE REGULATION
CURRENT OPERATIONS
Laws and regulations governing the Medicare, Medicaid and other federal health
care programs are complex and subject to interpretation. The NetCare Facilities
believe that they are in compliance with all applicable laws and regulations in
all material respects and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing other than those
discussed below under Potential Liability to the Federal Government. While no
such regulatory inquiries have been made, other than those discussed below
under Potential Liability to the Federal Government, compliance with such laws
and regulations can be subject to future government review and interpretation
as well as significant regulatory action including fines, penalties, and
exclusion from the Medicare, Medicaid and other federal health care programs.
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6. HEALTHCARE REGULATION (CONTINUED)
POTENTIAL LIABILITY TO THE FEDERAL GOVERNMENT
The OIG of the HHS and the Department of Justice have from time to time
established enforcement initiatives that focus on specific billing practices or
other suspected areas of abuse. Current initiatives include a nationwide
Medicare/Medicaid audit project regarding hospital pneumonia billing practices,
referred to as the "pneumonia upcoding" project. Two of the NetCare Facilities
have been audited by the federal government. The government has issued a notice
of payment due these two facilities. Management estimates the aggregate
potential liability for these two hospitals to be approximately $160, which has
been accrued by the NetCare Facilities at December 31, 2000 and 1999.
7. RETIREMENT PLAN
The NetCare Facilities participate in a defined contribution plan covering all
full-time employees who have completed one year of service, as defined, and are
age twenty-one or older. Participants may contribute up to 17% of their annual
compensation, as defined, up to a maximum of $10. Employer contributions amount
to 50% of employee contributions up to 3% of the individual participants'
annual compensation, as defined. Retirement plan expense was approximately
$122, $323 and $370 for the years ended December 31, 2000, 1999 and 1998,
respectively.
8. SUBSEQUENT EVENTS
On January 31, 2001, NetCare and certain of its wholly-owned subsidiaries
entered into a Stock Acquisition Agreement with SunLink, a wholly-owned
subsidiary of KRUG International Corp., pursuant to which SunLink agreed to
acquire from NetCare substantially all of the assets and liabilities of the
NetCare Facilities for a purchase price of approximately $30 million.
On February 28, 2001, one of the NetCare Facilities purchased approximately 20
acres of land for approximately $557. The hospital intends to build a new
facility on this land during 2001.
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