Attached files
Exhibit 99.2
INTEGRITY PHARMACY SERVICES, LLC
AND INTEGRITY MEDICAL SUPPLIES, LLC
COMBINED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2009 and 2008
C O N T E N T S
Page Number | ||
COMBINED FINANCIAL STATEMENTS |
||
Combined Balance Sheets |
1 | |
Combined Statements of Operations |
2 | |
Combined Statements of Changes in Members Capital |
3 | |
Combined Statements of Cash Flows |
4 | |
Notes to Combined Financial Statements |
5 |
INTEGRITY PHARMACY SERVICES, LLC
AND INTEGRITY MEDICAL SUPPLIES, LLC
COMBINED BALANCE SHEETS
September 30, 2009 and December 31, 2008
(Unaudited)
ASSETS | ||||||
September 30, 2009 |
December 31, 2008 | |||||
CURRENT ASSETS |
||||||
Cash |
$ | 3,329,634 | $ | 1,252,189 | ||
Amounts held by revolving line-of-credit lender |
123,429 | 151,005 | ||||
Accounts receivable, net of allowance for doubtful accounts of approximately $94,900 and $226,000, respectively |
6,275,091 | 6,309,927 | ||||
Inventory |
2,910,438 | 2,396,755 | ||||
Prepaid expenses |
60,435 | 27,687 | ||||
TOTAL CURRENT ASSETS |
12,699,027 | 10,137,563 | ||||
PROPERTY AND EQUIPMENT, NET |
1,597,960 | 1,574,270 | ||||
DEFERRED FINANCING COSTS, NET |
18,000 | 27,000 | ||||
DEPOSITS AND OTHER ASSETS |
102,112 | 85,665 | ||||
TOTAL ASSETS |
$ | 14,417,099 | $ | 11,824,498 | ||
LIABILITIES AND MEMBERS CAPITAL | ||||||
CURRENT LIABILITIES |
||||||
Accounts payable |
$ | 3,828,793 | $ | 3,196,615 | ||
Accrued expenses |
658,470 | 655,684 | ||||
Notes payable to members |
3,018,773 | 2,624,083 | ||||
TOTAL CURRENT LIABILITIES |
7,506,036 | 6,476,382 | ||||
COMMITMENTS AND CONTINGENCIES |
||||||
MEMBERS CAPITAL |
6,911,063 | 5,348,116 | ||||
TOTAL LIABILITIES AND MEMBERS CAPITAL |
$ | 14,417,099 | $ | 11,824,498 | ||
The accompanying notes are an integral part of the combined financial statements.
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INTEGRITY PHARMACY SERVICES, LLC
AND INTEGRITY MEDICAL SUPPLIES, LLC
COMBINED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2009 and 2008
(Unaudited)
2009 | 2008 | |||||
PHARMACY AND MEDICAL SUPPLIES REVENUE |
$ | 41,438,607 | $ | 35,233,395 | ||
COST OF SALES |
36,632,289 | 31,005,388 | ||||
GROSS PROFIT |
4,806,318 | 4,228,007 | ||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
1,604,447 | 1,420,188 | ||||
INTEREST EXPENSE |
338,924 | 295,479 | ||||
TOTAL OPERATING EXPENSES |
1,943,371 | 1,715,667 | ||||
NET INCOME |
$ | 2,862,947 | $ | 2,512,340 | ||
The accompanying notes are an integral part of the combined financial statements.
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INTEGRITY PHARMACY SERVICES, LLC
AND INTEGRITY MEDICAL SUPPLIES, LLC
COMBINED STATEMENTS OF CHANGES IN MEMBERS CAPITAL
Nine Months Ended September 30, 2009
(Unaudited)
Members capital at December 31, 2008 |
$ | 5,348,116 | ||
Net income for the year |
2,862,947 | |||
Distribution to Members |
(1,300,000 | ) | ||
Members capital at September 30, 2009 |
$ | 6,911,063 | ||
The accompanying notes are an integral part of the combined financial statements.
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INTEGRITY PHARMACY SERVICES, LLC
AND INTEGRITY MEDICAL SUPPLIES, LLC
COMBINED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2009 and 2008
(Unaudited)
2009 | 2008 | |||||||
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES |
||||||||
Net income |
$ | 2,862,947 | $ | 2,512,340 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for uncollectible accounts |
155,653 | 91,452 | ||||||
Depreciation and amortization |
230,275 | 195,667 | ||||||
Changes in operating assets and liabilities: |
||||||||
Amounts held by revolving line-of-credit lender |
27,576 | 25,800 | ||||||
Accounts receivable |
(120,816 | ) | (2,186,871 | ) | ||||
Inventory |
(513,683 | ) | (511,768 | ) | ||||
Prepaid expenses |
(32,748 | ) | (16,048 | ) | ||||
Deposits and other assets |
(16,447 | ) | (38,618 | ) | ||||
Accounts payable and accrued expenses |
1,029,654 | 1,079,448 | ||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
3,622,411 | 1,151,402 | ||||||
CASH FLOWS USED IN INVESTING ACTIVITIES |
||||||||
Acquisition of property and equipment |
(244,966 | ) | (378,786 | ) | ||||
NET CASH USED IN OPERATING ACTIVITIES |
(244,966 | ) | (378,786 | ) | ||||
CASH FLOWS USED IN FINANCING ACTIVITIES |
||||||||
Net change in line of credit |
- | (930,444 | ) | |||||
Distribution to members |
(1,300,000 | ) | - | |||||
NET CASH USED IN FINANCING ACTIVITIES |
(1,300,000 | ) | (930,444 | ) | ||||
NET INCREASE IN CASH |
2,077,445 | (157,828 | ) | |||||
CASH - BEGINNING OF PERIOD |
1,252,189 | 593,856 | ||||||
CASH - END OF PERIOD |
$ | 3,329,634 | $ | 436,028 | ||||
The accompanying notes are an integral part of the combined financial statements.
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INTEGRITY PHARMACY SERVICES, LLC
AND INTEGRITY MEDICAL SUPPLIES, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2009 and 2008
NOTE 1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business and Basis of Presentation
Integrity Pharmacy Services, LLC (IPS) and Integrity Medical Supplies, LLC (IMS) (collectively, Integrity) were organized in August 2004 to provide long-term care facilities with a full range of pharmacy services, including dispensing, pharmacist and nurse consulting, infusion and enteral therapy, medication therapy management, and medical record production. Integrity has locations in Florida, Pennsylvania and Massachusetts.
The accounts of IPS and IMS are presented on a combined basis based on common ownership and management. All significant intercompany accounts and transactions have been eliminated in the combination.
Inventory
Inventory is stated at the lower of cost or market on a first-in, first-out basis. Physical inventory counts are taken on a regular basis in each distribution center and is the primary procedure used to validate the recorded inventory balances.
Property and Equipment
Property and equipment and improvements to leased premises are depreciated using the straight-line method over the estimated useful lives or, when applicable, the term of the lease, whichever is shorter. Estimated useful lives generally range from 10 to 40 years for building improvements and leasehold improvements and 3 to 10 years for fixtures and equipment. Repair and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated.
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INTEGRITY PHARMACY SERVICES, LLC
AND INTEGRITY MEDICAL SUPPLIES, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Nine Months Ended September 30, 2009 and 2008
NOTE 1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred Financing Costs
Costs related to obtaining the revolving line of credit (see Note 3) have been deferred and are being systematically amortized over the term of the related revolving line-of-credit agreement. Amortization expense approximated $9,000 and $17,800 for the nine months ended September 30, 2009 and 2008, respectively. Deferred financing costs of approximately $114,400 at September 30, 2009 and December 31, 2008 are presented in the combined balance sheets, net of accumulated amortization of approximately $96,400 and $87,400, respectively.
Revenue Recognition
Integrity has agreements with third-party payors that provide for payments at contracted prices. Pharmacy and medical supplies revenue is reported at the estimated net realizable amounts due from customers or third-party payors. Revenue is recognized at the time pharmaceuticals or medical supplies are delivered to patients. Approximately 89% and 93% of Integritys revenues during the nine months ended September 30, 2009 and 2008, respectively, were generated from institutional facilities that were commonly controlled by a single management company.
Income Taxes
IPS and IMS were both organized as limited liability companies treated as pass-through entities for income tax reporting purposes. Accordingly, the individual members of the LLCs include their respective share of taxable income or losses in their individual income tax returns. As a result, no provision for income taxes has been included in these combined financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
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INTEGRITY PHARMACY SERVICES, LLC
AND INTEGRITY MEDICAL SUPPLIES, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Nine Months Ended September 30, 2009 and 2008
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 2009 and December 31, 2008:
September 30, 2009 |
December 31, 2008 |
|||||||
Equipment |
$ | 1,399,160 | $ | 1,529,558 | ||||
Computer software |
547,923 | 172,560 | ||||||
Leasehold improvements |
327,679 | 327,679 | ||||||
2,274,762 | 2,029,797 | |||||||
Less accumulated depreciation and amortization |
(676,802 | ) | (455,527 | ) | ||||
Property and equipment, net |
$ | 1,597,960 | $ | 1,574,270 | ||||
Depreciation and amortization of property and equipment during the nine months ended September 30, 2009 and 2008, amounted to approximately $221,000 and $178,000, respectively.
NOTE 3 - REVOLVING LINE OF CREDIT
During 2005, Integrity entered into a revolving line-of-credit agreement (the Line) with a lender. In November 2008, the Line was amended to decrease the upper limit of the Line from $4,000,000 to $2,000,000. The maturity date is December 2010. The Line provides, among other things, that Integrity may borrow up to the higher of a percentage of eligible receivables (as defined in the Line) or $2,000,000, interest at a variable rate approximating 7.25% as of September 30, 2009 and December 31, 2008, with interest paid on a monthly basis. Borrowings under the Line are collateralized by substantially all of Integritys assets.
The Line contains certain financial and performance covenants, including, but not limited to, minimum earnings before interest, taxes, depreciation and amortization, and net leverage and interest coverage ratios. Integrity was in compliance with the Lines covenants at September 30, 2009.
At September 30, 2009 and December 31, 2008, there were no borrowings under the Line. Additionally, amounts held by the lender were approximately $123,400 and $151,000 at September 30 2009 and December 31, 2008, respectively. Cash paid for interest on borrowings under the Line during the nine months ended September 30, 2008 and 2009, amounted to approximately $163,600 and $25,600, respectively.
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INTEGRITY PHARMACY SERVICES, LLC
AND INTEGRITY MEDICAL SUPPLIES, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Nine Months Ended September 30, 2009 and 2008
NOTE 4 - NOTES PAYABLE TO MEMBERS
During 2005, Integrity borrowed $1,800,000 from its members pursuant to a series of subordinated demand notes (the Member Notes). The Member Notes, which are subordinated to the Line agreement (see Note 3), are unsecured and provide for the accrual of interest at 15% per annum and may not be repaid unless Integrity has excess cash flow (as defined in the Line agreement). Total interest incurred on the Member Notes for the nine months ended September 30, 2009 and 2008 amounted to approximately $338,700 and $295,500, respectively.
In January 2008, the Member Notes were amended to extend the maturity date until December 31, 2009 and add the accrued and unpaid interest of approximately $342,000 to the outstanding balance due on the Member Notes.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
Integrity leases operating facilities and certain equipment under operating leases which expire at various dates through 2016. Aggregate monthly payments on these leases are approximately $43,000. Rent expense charged to operations in the nine months ended September 30, 2009 and 2008 was approximately $431,900 and $354,700, respectively. Future minimum payments under these operating lease agreements for each of the next five calendar years and thereafter are as follows:
Year Ending |
Amount | ||
2009 |
$ | 614,200 | |
2010 |
608,100 | ||
2011 |
506,800 | ||
2012 |
314,400 | ||
2013 |
233,700 | ||
Thereafter |
450,700 | ||
$ | 2,727,900 | ||
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INTEGRITY PHARMACY SERVICES, LLC
AND INTEGRITY MEDICAL SUPPLIES, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Nine Months Ended September 30, 2009 and 2008
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
Credit Risk
Financial instruments, which potentially subject Integrity to concentrations of credit risk, consist principally of cash deposited in financial institutions in excess of federally insured limits and accounts receivable. Management believes that the taxing authority of the governmental entities funding the Medicaid and Medicare programs mitigates the concentration of credit risk with respect to those accounts receivable.
Insurance and Legal Matters
Integrity maintains professional liability insurance on a claims-made basis. Management is not aware of any asserted or unasserted claims, or incidents that are considered probable to result in future claims. As a result, these combined financial statements do not include a provision or liability related to incurred but unreported claims. While management is unaware of any claims or probable claims from incidents that would result in uninsured losses, the potential for such losses exists, and losses in excess of insurance coverage limits could possibly result in a material adverse effect on Integritys financial position.
Medicare and Medicaid Programs and Healthcare Reform
During the nine months ended September 30, 2009 and 2008, approximately 54.7% and 57.0%, of Integritys revenue resulted from reimbursement from the Medicaid and Medicare programs, respectively. Laws and regulations governing these programs are complex and are subject to interpretation. Integrity believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future governmental review and interpretation, as well as significant regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs.
Governmental funding for healthcare programs is subject to statutory and regulatory changes, administrative rulings, interpretations of policy, intermediary determina-tions, and governmental funding restrictions, all of which may materially affect program reimbursement to healthcare facilities. Changes in the reimbursement policies of the Medicaid and Medicare programs, as a result of legislative and regulatory actions, could adversely affect Integritys revenues.
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INTEGRITY PHARMACY SERVICES, LLC
AND INTEGRITY MEDICAL SUPPLIES, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Nine Months Ended September 30, 2009 and 2008
NOTE 6 - SUBSEQUENT EVENT
On December 31, 2009, Integrity was acquired by PharMerica Corporation. The entire membership interest of Integrity was acquired for $38,000,000 million in cash plus $3,300,000 million to pay off the outstanding Member Notes.
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