Exhibit 99.1
PSR Nurses Ltd.
Financial Statements
Years Ended September 30, 2003 and for the Period From
November 7, 2001 (Inception) Through September 30, 2002
PSR Nurses Ltd.
Contents
Report of Independent Certified Public Accountants 3
Financial Statements
Balance sheets 4
Statements of operations 5
Statements of stockholders' equity 6
Statements of cash flows 7 - 8
Summary of accounting policies 9 - 12
Notes to financial statements 13 - 20
BDO Seidman, LLP One Sansome Street 11th Floor
Accountants and Consultants San Francisco, CA 94104
Phone 415-397-7900
Fax 415-397-2161
Report of Independent Certified Public Accountants
To the Partners of
PSR Nurses, Ltd.
Dallas, Texas
We have audited the accompanying balance sheets of PSR Nurses Ltd. (the
"Partnership"), as of September 30, 2003 and 2002, and the related
statements of operations, partners' capital (deficit), and cash flows for
the year ended September 30, 2003 and the period from November 7, 2001
(inception), through September 30, 2002. These financial statements are
the responsibility of the Partnership's 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 of America. Those standards require that we
plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of PSR Nurses Ltd. at
September 30, 2003 and 2002 and the results of its operations and its cash
flows for each of the year ended September 30, 2003 and for the period from
November 7, 2001 (inception), through September 30, 2002 in conformity with
accounting principles generally accepted in the United States of America.
/s/ BDO Seidman LLP
December 2, 2003
San Francisco, California
3
PSR Nurses Ltd.
Balance Sheets
- ----------------------------------------------------------------------------
September 30, 2003 2002
- ----------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 215,334 $ 30,392
Accounts receivable, (including unbilled
accounts receivable of $112,311 in 2003
and $91,802 in 2002), net allowance for
doubtful accounts of $6,152 in 2003 and
$190,000 in 2002 2,602,852 2,595,942
Due from finance company 7,669 63,665
Prepaids and other current assets 277,466 538,177
- ----------------------------------------------------------------------------
Total Current Assets 3,103,321 3,228,176
- ----------------------------------------------------------------------------
Property and Equipment, net 337,762 541,154
Intangible Assets
Customer Relationships 428,084 566,922
International Nurse Contracts 362,092 696,332
Goodwill 1,827,198 1,827,198
- ----------------------------------------------------------------------------
Total Intangible Assets 2,617,374 3,090,452
- ----------------------------------------------------------------------------
Total Assets $6,058,457 $6,859,782
============================================================================
Liabilities and Partners' Capital
Current Liabilities
Advances payable to finance company $1,615,172 $1,589,352
Accounts payable 171,537 274,105
Accrued payroll and taxes 235,865 329,784
Accrued other 152,679 162,379
Current portion notes payable 2,744,437 180,662
- ----------------------------------------------------------------------------
Total Current Liabilities 4,919,690 2,536,282
Notes Payable, less current portion 2,492,557 3,457,757
- ----------------------------------------------------------------------------
Total Liabilities 7,412,247 5,994,039
- ----------------------------------------------------------------------------
Commitments and Contingencies (Notes 8, 10 and 12)
Total Partners' (Deficit) Capital (1,353,790) 865,743
- ----------------------------------------------------------------------------
Total Liabilities and Partners' Capital $6,058,457 $6,859,782
============================================================================
See accompanying summary of accounting policies and notes to financial
statements.
4
PSR Nurses Ltd.
Statements of Operations
- ----------------------------------------------------------------------------
Period from
November 7, 2001
Year Ended (inception) through
September 30, 2003 September 30, 2002
- ----------------------------------------------------------------------------
Revenue From Services $ 15,271,385 $ 16,373,277
Operating Expenses
Direct operating expenses 11,637,768 12,105,604
Selling, general, and
administrative 5,034,189 4,683,001
Amortization of intangibles 473,078 433,684
- ----------------------------------------------------------------------------
Loss from Operations (1,873,650) (849,012)
Interest Expense 583,383 466,491
- ----------------------------------------------------------------------------
Net Loss $ (2,457,033) $ (1,315,503)
- ----------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial
statements.
5
PSR Nurses Ltd.
Statements of Partners' Capital (Deficit)
- ----------------------------------------------------------------------------
Total
Partners'
Limited General Capital
Partners Partner (Defecit)
- ----------------------------------------------------------------------------
Balance, November 7, 2001 (inception) $ 742,797 $ 7,503 $ 750,300
Contributions 1,443,222 14,578 1,457,800
Distributions (26,585) (269) (26,854)
Net loss (1,302,348) (13,155) (1,315,503)
- ----------------------------------------------------------------------------
Balance, September 30, 2002 857,086 8,657 865,743
Partnership interest transferred to
former employee pursuant to
settlement agreement 237,500 - 237,500
Net loss (2,432,463) (24,570) (2,457,033)
- ----------------------------------------------------------------------------
Balance, September 30, 2003 $(1,337,877) $ (15,913) $(1,353,790)
============================================================================
See accompanying summary of accounting policies and notes to financial
statements.
6
PSR Nurses Ltd.
Statements of Cash Flows
- ----------------------------------------------------------------------------
Period from
November 7, 2001
Year Ended (inception) through
September 30, 2003 September 30, 2002
- ----------------------------------------------------------------------------
Cash Flows from Operating Activities
Net loss $(2,457,033) $(1,315,503)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Provisions for doubtful accounts (183,848) 113,313
Depreciation 229,952 109,257
Loss on disposal of property and
equipment 56,822 -
Amortization of identifiable
intangible assets 473,078 433,684
Non-cash charges for settlement
agreement 237,500 -
Changes in assets and liabilities:
Accounts receivable 190,758 (377,623)
Due from finance company 55,996 (63,665)
Prepaids and other current assets 260,711 (325,644)
Accounts payable (102,568) 81,557
Accrued payroll and taxes (93,919) (30,121)
Accrued other (9,700) 162,379
- ----------------------------------------------------------------------------
Net Cash Used In Operating Activities (1,342,250) (1,212,366)
- ----------------------------------------------------------------------------
Cash Flows From Investing Activities
Cash down payment for acquisition
of NSR - (1,500,000)
Purchases of property and equipment (79,927) (579,882)
Proceeds from the sale of property
and equipment 3,340 -
- ----------------------------------------------------------------------------
Net Cash Used In Investing Activities (76,587) (2,079,882)
- ----------------------------------------------------------------------------
Cash Flows From Financing Activities
Initial partnership capital contributions - 750,300
Cash contributions from partners - 1,457,800
Cash distributions to partners - (26,854)
Proceeds from finance company - net 25,820 1,589,352
Proceeds from note payable to limited
partner 1,597,965 202,035
Proceeds from notes payable 52,316 425,007
Repayments of notes payable (46,078) (1,075,000)
- ----------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,603,779 3,322,640
- ----------------------------------------------------------------------------
7
PSR Nurses Ltd.
Statements of Cash Flows
- ----------------------------------------------------------------------------
Period from
November 7, 2001
Year Ended (inception) through
September 30, 2003 September 30, 2002
- ----------------------------------------------------------------------------
Net Increase in Cash 184,942 30,392
Cash and Cash Equivalents,
beginning of year 30,392 -
- ----------------------------------------------------------------------------
Cash and Cash Equivalents,
end of year $ 215,334 $ 30,392
============================================================================
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 615,625 $ 401,889
============================================================================
Supplemental Disclosure of Non-Cash
Investing and Financing Transactions
Note payable issued in connection with
acquisition of the operating assets
of Nurses Registry of Savannah,
Inc. (NSR) $ - $ 2,619,299
============================================================================
See accompanying summary of accounting policies and notes to financial
statements.
8
PSR Nurses Ltd.
Summary of Accounting Policies
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Nature of Business
- ------------------
PSR Nurses Ltd. (the "Partnership" or "PSR") was organized under the laws
of the State of Texas on July 31, 2001. The Partnership is a provider of
healthcare staffing services to hospitals and healthcare providers
throughout the United States of America with its corporate offices in
Dallas, Texas.
The Partnership's staffing services consists of travel nurse staffing where
registered nurses temporarily relocate to the geographic area of their
assignment. The Partnership employs domestic and foreign nurses in their
program.
Cash and Cash Equivalents
- -------------------------
The Partnership considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The
Partnership may from time to time maintain cash deposits in accounts at
banks which are in excess of the federally insured amounts.
Revenue Recognition Policy
- --------------------------
Revenue is recognized when the nurses render services. Accordingly, the
Partnership accrues revenue for employees' time worked but not yet invoiced.
In the accompanying balance sheet this accrual is included in accounts
receivable. At the time of service delivery, Partnership management
believes that they have evidence of an arrangement or a contract, the price
of the services is fixed, the services have been rendered, collectibility
is reasonably assured and they have no continuing obligations with respect
to the services already rendered.
Accounts Receivable and Allowance for Doubtful Accounts
- -------------------------------------------------------
The Partnership records its trade accounts receivable at the amount of the
earned. The Partnership generally does not require collateral for its trade
accounts receivable nor does the Partnership charge interest on past due
accounts. The Partnership's general payment terms are 30 days. The
Partnership provides an allowance for doubtful accounts based upon a
combination of factors: historical experience, current economic conditions,
customer specific conditions and the age of specific overdue trade accounts
receivable. The Company writes-off trade accounts receivable against the
allowance for doubtful accounts when pervasive evidence exists that an
account has become uncollectible. Recoveries of previous write-off accounts
are recorded in income in the period of recovery.
Long-lived Assets
- -----------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation on property and equipment is computed using the straight-line
method over the estimated useful lives of the assets. Ordinary repairs and
maintenance are charged to expense as incurred.
9
PSR Nurses Ltd.
Summary of Accounting Policies
- ----------------------------------------------------------------------------
Goodwill and other intangible assets were created when PSR acquired certain
assets and assumed certain liabilities of Professional Staffing Resources,
Inc. and Nursing Services Registry of Savannah, Inc. Goodwill represents
the excess of purchase price over the fair value of net assets acquired in
accordance with Financial Accounting Standards Board ("FASB") Statement No.
142, Goodwill and Other Intangible Assets. FASB No. 142 clarifies the
criteria to recognize intangible assets separately from goodwill and
promulgates that goodwill and certain intangible assets with indefinite
lives not be amortized. Instead, these assets are reviewed for impairment
annually with any related losses recognized in earnings when incurred.
Other identifiable intangible assets continue to be amortized, under the
provisions of this Statement, using the straight-line method over their
estimated useful lives ranging from three to five years.
In accordance with FASB No. 142, the Partnership completed an analysis of
impairment test of goodwill and indefinite-lived intangible assets. Under
this impairment test, the Partnership determined the fair value of each
reporting unit, as defined, and compared it to the reporting unit's
carrying amount. The Partnership compared the unit's carrying amount to a
third-party valuation, which included the assets of the Partnership.
Long-lived assets, including property and equipment, are assessed for
possible impairment whenever events or changes in circumstances indicate
that the carrying amounts may not be recoverable, or whenever management
has committed to a plan to dispose of the assets. Such assets are carried
at the lower of book value or fair value as estimated by management based
on appraisals, current market value, and comparable sales value, as
appropriate. Long-lived assets to be retained that are affected by such
impairment loss are depreciated or amortized at their new carrying amount
over the remaining estimated life; assets to be sold or otherwise disposed
of are not subject to further depreciation or amortization.
International Nurse Recruiting
- ------------------------------
The Partnership recruits and trains international nurse candidates to work
in the United States market. Over the course of a period of approximately
15 to 18 months, the Partnership will pay for certain costs of nurse
candidates including training, examinations, credentialing, and similar
matters. These costs are expensed as incurred. During the year and period
ended September 30, 2003 and 2002, the Partnership paid approximately
$186,000 and $49,000 respectively.
10
PSR Nurses Ltd.
Summary of Accounting Policies
- -----------------------------------------------------------------------------
Prepaid Housing and Deposits
- ----------------------------
The Partnership leases a number of apartments for its nurses under short-
term agreements (typically three to six months), which generally coincide
with each nurse's staffing contract. As a condition of these agreements,
the Partnership places security deposits on the leased apartments. Prepaid
housing and deposits disclosed in Note 3 to the financial statements relate
to these short-term agreements.
Income Taxes
- ------------
The partners are required to report their respective shares of the
Partnership's taxable income or loss in their individual income tax returns
and are personally liable for any related taxes thereon. Accordingly, no
provision for income taxes is made in the financial statements of the
Partnership.
Advertising
- -----------
Advertising costs are paid for print media, on-line advertising and similar
matters. The cost of advertising is expensed as incurred. Advertising
expense during the year and period ended September 30, 2003 and 2002 is
approximately $277,000 and $428,000 respectively.
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.
Recent Accounting Pronouncements
- --------------------------------
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 requires that a liability
for expenses associated with an exit or disposal activity be recognized
when the liability is incurred. SFAS No. 146 also establishes that fair
value is the objective for initial measurement of the liability. Severance
pay under SFAS No. 146, in many cases, would be recognized over time rather
than up front. The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after September 30, 2002 with early
application encouraged. Management does not expect the adoption of SFAS No.
146 to have a material impact on the Partnership's financial condition or
results of operations.
In November 2002 the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, which is effective
for financial statements issued after December 15, 2002. The adoption of
FIN 45 did not have a material impact on the Partnership's financial
condition or results of operations.
11
PSR Nurses Ltd.
Summary of Accounting Policies
- -----------------------------------------------------------------------------
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), which requires the consolidation of
certain special purpose entities. FIN 46 is applicable to financial
statements issued after 2002, however, disclosures are required currently
if the Partnership expects to consolidate any variable interest entities.
There are no entities that will be consolidated with the Partnership's
financial statements as a result of FIN 46.
12
PSR Nurses Ltd.
Notes to Financial Statements
- -----------------------------------------------------------------------------
1. Purchase Accounting and Intagibles
On November 7, 2001, PSR Nurses, Ltd. (PSR) purchased the operating assets
and liabilities of Nurses Registry of Savannah, Inc. (NSR). PSR was formed
and capitalized with the intent of purchasing the operating assets of NSR.
PSR's operations commenced upon completion of the purchase of NSR's
operating assets. NSR was engaged in the business of providing temporary
nurse staffing services to hospitals and healthcare providers, primarily
through the use of traveling nurses. These registered nurses relocate to
the geographic area of their assignment. NSR employed both domestic and
foreign nurses in its business. NSR's foreign nurse recruitment program
was a substantial operating asset of NSR and one of the key strategic
reasons for the purchase by PSR.
Total consideration paid to the seller consisted of $1,500,000 in cash
payments, funded primarily from partner cash contributions, plus a note
payable to seller totaling $2,619, 299. In addition the purchase agreement
provided for additional purchase consideration (earn-out) up to $3,000,000
based upon certain performance milestones. None of these performance
milestones, relating to nurse recruitment and gross profit goals, were met
therefore no additional purchase consideration was subsequently issued. In
addition, an equity incentive agreement provided an incentive arrangement
whereby the seller could earn partnership units based upon the same
performance milestones as the earn-out previously mentioned. These
performance milestones were not met and therefore no partnership units were
awarded to the seller. The former owner also entered into an one-year
employment agreement with the Company.
The total purchase consideration of $4,119,399 plus transaction costs
of $55,361 was allocated as follows:
- ----------------------------------------------------------------------------
Total purchase consideration plus transaction costs $ 4,174,760
- ----------------------------------------------------------------------------
Accounts receivable 2,331,632
Prepaids and other assets 212,533
Property and equipment 93,941
Customer relationships 694,190
International nurse contracts 1,002,719
Goodwill 1,827,198
Trade accounts payable (192,548)
Accrued payroll and taxes (359,905)
Other liabilities (76,000)
Notes payable (1,359,000)
- ----------------------------------------------------------------------------
$ 4,174,760
============================================================================
13
PSR Nurses Ltd.
Notes to Financial Statements
- ----------------------------------------------------------------------------
The following summarizes the activity from November 7, 2001 (inception)
through December 31, 2003 for the acquired intangible assets:
Net Net
Gross Amortization Carrying Amortization Carrying
Carrying 11/7/2001 to Amount Year ended Amount
Amount 9/30/2002 9/30/2002 9/30/2003 9/30/2003
- ----------------------------------------------------------------------------
Customer
relationships $ 694,190 $ (127,268) $ 566,922 $ (138,838) $ 428,084
International
nurse contracts 1,002,719 (306,387) 696,332 (334,240) 362,092
Goodwill 1,827,198 - 1,827,198 - 1,827,198
- ----------------------------------------------------------------------------
$3,524,107 $ (433,655) $3,090,452 $ (473,078) $2,617,374
============================================================================
The following summarizes estimated future amortization expense on these
intangible assets:
Year ended September 30,
2004 $ (473,078)
2005 (166,690)
2006 (138,838)
2007 (11,570)
--------------------
$ (790,176)
====================
2. Sales and Accounts Receivable
During the year ended September 30, 2003 and the period from November 7,
2001 (inception) through September 30, 2002, the Partnership had no
customer representing more than 10% of total revenues in each respective
period.
At September 30, 2003, the Partnership had two customers representing
approximately 20% and 10%, respectively of accounts receivable. At
September 30, 2002, the Partnership had two customers representing
approximately 10% and 10%, respectively of accounts receivable.
3. Prepaid Expenses
Prepaid expenses consist of the following:
September 30, 2003 2002
- ----------------------------------------------------------------------------
Prepaid housing and deposits $ 137,025 $ 250,107
Prepaid insurance 99,328 140,497
Prepaid consulting fees - 78,999
Prepaid other 41,113 68,574
- ----------------------------------------------------------------------------
$ 277,466 $ 538,177
============================================================================
14
PSR Nurses Ltd.
Notes to Financial Statements
- ----------------------------------------------------------------------------
4. Property and Equipment
Property and equipment consists of the following:
September 30, 2003 2002
- ----------------------------------------------------------------------------
Furniture, fixtures, and equipment $ 456,772 $ 516,059
Software 179,229 134,352
- ----------------------------------------------------------------------------
636,001 650,411
Accumulated depreciation 298,239 109,257
- ----------------------------------------------------------------------------
$ 337,762 $ 541,154
============================================================================
Depreciation expense for 2003 and 2002 was $229,952 and $109,257, respectively.
5. Advances Payable to Finance Company
In November 2001 the Partnership entered into a financing agreement. The
agreement remains in full force unless terminated by either party with 30
days written notice or at the option of the finance company in the event of
a default. The agreement provides that the finance company will purchase,
with recourse, eligible accounts receivable up to a maximum of $2,600,000
or more at the discretion of the finance company. The financing agreement
is secured by the underlying purchased accounts receivable and by a personal
guaranty of a limited partner, who is also a principal in the entity that
holds the general partner interests. The Partnership can take advances of up
to 80% of the face amount of the purchased accounts. All accounts greater
than 120 days are subject to repurchase by the Partnership at the sole
discretion of the finance company. Interest accrues on the net value of each
receivable purchased at 0.02947% per day for the period November 8, 2001 to
November 7, 2002 and at 0.02778% thereafter. The finance company collects
all receivable payments and releases each week the net amount after
repayment of advance, interest and applying any amount owed by the
Partnership. Upon termination of the agreement any remaining amounts of
reserve will be refunded to the Partnership provided all obligations under
the agreement have been fulfilled. Advances under the agreement are secured
by the full-face amount of the financed receivables. Advances outstanding
at September 30, 2003 totaled $1,589,352. Interest expense on outstanding
advances for 2003 and 2002 was $209,333 and $157,602, respectively.
15
PSR Nurses Ltd.
Notes to Financial Statements
- ----------------------------------------------------------------------------
6. Notes Payable
The company has notes payable from limited partners as well as independent
sources. The terms of the notes payable are discussed below:
September 30, 2003 2002
- ----------------------------------------------------------------------------
Note A $ 689,001 $ 709,007
Note B 26,644 52,316
Note C 196,349 180,662
Note D 2,525,000 2,494,399
Note E 1,800,000 202,035
----------------------------
5,236,994 3,638,419
Less - current maturities 2,744,437 180,662
----------------------------
Total $ 2,492,557 $ 3,457,757
============================
The terms of the above notes are as follows:
Note A - The note is to a third party lender at an interest rate of 20% per
annum. The Partnership is required to make a principal payment of $50,000
at the closing of the merger agreement with Crdentia, discussed in Note 12
below. The remaining outstanding principal balance, with accrued interest
thereon, will be due and payable on February 28, 2004. Amounts payable are
classified as a short term payable at September 30, 2003.
Note B - This is a non-interest bearing note to a third party lender with
monthly principal payments of $5,328 until the note is paid in full.
Note C - This note is due to a limited partner and was part of the
liabilities resulting from advances to PSR and assumed in connection with
the purchase transaction in November 2001. The note carries an 8% per
annum interest rate and is payable to the limited partner over a period of
60 months based on certain actions of the limited partner. These amounts
are not considered current at September 30, 2003.
Note D - This note, which was part of the purchase consideration for NSR,
is due to the limited partner as under Note C and is comprised of twenty-
four $100,000 notes and one $125,000 note, all notes have the same terms
and conditions. The interest rate on these notes is 8% per annum. Interest
only payments for all notes will be paid through November 1, 2004.
Thereafter principal and interest payments will be made in 96 monthly
installments, with the unpaid principal balance and accrued interest being
due on November 1, 2012.
16
PSR Nurses Ltd.
Notes to Financial Statements
- ----------------------------------------------------------------------------
Note E - This note serves as a line of credit for the Partnership and is
due to a limited partner, who is also a principal in the entity that holds the
general partner interests. The interest rate for this note is 12% per
annum. The note is payable on demand.
Future maturities of the notes payable are as follows:
Year ended September 30, Amount
- --------------------------------------------
2004 $ 2,744,437
2005 247,095
2006 266,863
2007 288,212
2008 311,269
Thereafter 1,379,118
--------------
$ 5,236,994
==============
7. Partners' Capital
The limited partnership consists of a general partner and three classes of
limited partners. The general partner owns 1 unit of general partner units
of the partnership. Class A limited partners own 22 units of Class A
limited partner units. Class B limited partners own 62.625 units of Class
B limited partner units. Class C limited partners own 14.275 units of
Class C limited partner units. The preferences, rights and ownership
obligations associated with each class of units owned is described in the
partnership agreement and generally states that the Class A partners
receive a preference on any distributions until their initial capital is
returned. During the first 36 months, the Class C partners are excluded
from any distribution allocation. Thereafter, distributions are made based
on total partner units for all partners.
In July 2003, the Company entered into a settlement agreement with the
former owner of NSR modifying and clarifying certain provisions of the
original purchase agreement as well as terminating an employment agreement
with the former owner. Pursuant to the settlement agreement it was
confirmed that the Company had no obligations to make any awards pursuant
to the incentive arrangement. Further the agreement provided that a limited
partner, who is also a principal in the entity that holds the general partner
interests, would transfer 12.375 of her Class C partnership units to
the former owner and she would provide a guaranteed value of the
partnership units transferred and ultimately exchanged for Crdentia Corp.
stock (see Note 12) of $200,000. Finally the settlement agreement provided
for the restructuring of the payment terms of the notes payable originally
issued in connection with the purchase of NSR (See Note 6).
17
PSR Nurses Ltd.
Notes to Financial Statements
- ----------------------------------------------------------------------------
In connection with the transfer of the Class C partnership units from a
limited partner, who is also a principal in the entity that holds the general
partner interests, to the former owner, the Company recorded compensation
expense for the fair value of the partnership units transferred totaling
$237,500. Fair value of the shares was determined via reference to the
ultimate value of stock received by this limited partner in the subsequent
sale of PSR to Crdentia (see Note 12).
8. Estimated Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable, and accounts payable and accrued expenses
approximate fair value because of their short maturity. The carrying
amount of the advances payable to the finance company approximates fair
value because the interest rate represents current market rates for similar
instruments.
9. Segment Information
The Partnership operates under a single segment: healthcare staffing. All
revenues are earned in the United States of America.
10. Related Parties
A general and limited partner has an ownership interest in Rison Management
(Rison). Rison provides ongoing management consulting services to the
Partnership. Rison is paid a monthly consulting fee of 1.75% of monthly
gross revenue. Fees paid to Rison for the year and period ended September
30, 2003 and 2002 was approximately $235,000 and $278,000 respectively.
A limited partner, who is also a principal in the entity that holds the general
partner interests, has loaned the Partnership approximately $1,850,000.
This loan is in the form of a Note Payable and is discussed in Note 6 above.
The Partnership also entered into a consulting agreement with a limited
partner. Under the terms of the agreement, the Partnership pays to the
consultant $4,000 per month through September 30, 2004.
11. Commitments and Contingencies
Operating Leases - The Partnership leases its corporate and sales offices
under operating leases with various terms ranging from month-to-month to
four years. These leases generally contain some or all of the following
terms: base rent escalations, operating expenses and/or renewal provisions.
In addition, the Partnership rents various apartments throughout the country
for its traveling nurses. These leases generally are very short-term ranging
from month-to-month to six months or more in length. Substantially all of
the Partnership's leases require security deposits and are included in
other assets on the balance sheet.
18
PSR Nurses Ltd.
Notes to Financial Statements
- ----------------------------------------------------------------------------
Future minimum lease payments required under operating leases with remaining
terms in excess of one year from the balance sheet date are as follows:
Year ending September 30, Amount
- -----------------------------------------------
2004 $ 263,989
2005 62,705
2006 17,648
2007 13,950
--------------
Total $ 358,292
==============
Total Partnership rent expense for the year and period ended September 30,
2003 and 2002 was $191,085 and $102,568, respectively. In addition to the
above, the Partnership pays a lease stipend to some of its traveling nurses.
Legal Claims - The Partnership is defendant for claims against the
Partnership which are considered in the normal course of business. The
General Partner believes the claims are without merit and will vigorously
defend the Partnership and believes any outcome will not have a material
impact to the financial statements of the Partnership.
Guarantees - The Partnership enters into indemnification provisions under
(i) its agreements with other companies in its ordinary course of business,
typically with business partners, contractors and customers, its landlord
and (ii) its partnership agreement, which provides for indemnification of
the general partner. Under these provisions the Partnership has agreed to
generally indemnify and hold harmless the indemnified party for losses
suffered or incurred by the indemnified party as a result of the
Partnership's activities or, in some cases, as a result of the indemnified
party's activities under the agreement. These indemnification provisions
often include indemnifications relating to representations made by the
Partnership with regard to intellectual property rights. These
indemnification provisions generally survive termination of the underlying
agreement. The maximum potential amount of future payments the Partnership
could be required to make under these indemnification provisions is
unlimited. To date, the Partnership has not incurred any costs as there
have been no lawsuits or claims related to these indemnification agreements.
Accordingly, the Partnership has no liabilities recorded for these
agreements as of September 30, 2003 and 2002.
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PSR Nurses Ltd.
Notes to Financial Statements
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12. Subsequent Events
In August of 2003, PSR Nurses Holdings Corp. was established. Subsequent
to September 30, 2003, the limited partners exchanged their partnership
interest for stock in PSR Nurses Holdings Corp. PSR Nurses Holdings Corp.
holds all limited partnership interest in the Partnership and PSR Nurse
Recruiting, Inc. holds all general partnership interests of the Partnership.
As part of a merger agreement with Crdentia Corp., the entities were merged
into two wholly owned subsidiaries of Crdentia. Under the terms of the
merger agreement, the shareholders of PSR Nurse Recruiting, Inc. and PSR
Nurses Holdings Corp. are to receive shares of Crdentia common stock at the
closing of the transaction plus additional shares equal to a formula based
on gross revenue of PSR for the two-year period subsequent to the effective
date of the transaction.
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