SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
AMENDMENT
TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (D)
of the
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported) July 12, 2005
____________________________________________________
PAPERFREE MEDICAL SOLUTIONS, INC.
(formerly Crown Medical Services, Inc.)
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization)
98-0375957
(IRS Employer Identification Number)
121 WEST SYCAMORE ST.
KOKOMO, INDIANA 46901
(Address of principal executive offices)
RONALD COLE, JR., PRESIDENT
PAPERFREE MEDICAL SOLUTIONS, INC.
121 WEST SYCAMORE ST.
KOKOMO, INDIANA 46901
(Name and address of agent for service)
(765) 456-1089
(Telephone number, including area code of agent for service)
ITEM 2. FINANCIAL INFORMATION
- ------------------------------
Item 2.01 - Completion of Acquisition or Disposition of Assets.
- ---------------------------------------------------------------
The following pro forma financial statements have been derived from the
financial statements of PaperFree Medical Solutions, Inc. ("PaperFree") at
February 28, 2005 and adjusts such information to give effect to its purchase of
KMS Computer Services, Inc. ("KMS"), as if the acquisition had occurred at their
respective year-ends as shown. The pro forma financial statements are presented
for informational purposes only and do not purport to be indicative of the
financial condition that would have resulted if the acquisition had been
consummated at either year-end. The pro forma financial statements should be
read in conjunction with the notes thereto and each Company's financial
statements and related notes thereto contained herein and in PaperFree's 10-KSB
filed with the SEC on June 22, 2005.
The KMS acquisition has been accounted for using the purchase method of
accounting and, accordingly, the assets acquired and liabilities assumed have
been recorded at their estimated fair values based upon estimates as of March 1,
2005.
The following pro forma consolidated balance sheet and statement of
operations should be read in connection with the "Notes to Pro Forma
Consolidated Balance Sheet and Consolidated Statement of Operations" presented
below and the historical financial statements included elsewhere or incorporated
by reference.
Page 1
Pro forma Consolidated Condensed Balance Sheet:
02/28/05 12/31/04
PMS KMS Adjustments Pro Forma
----------- ---------- ------------- -----------
Cash $ 121,837 $ - $ - $ 121,837
Accounts receivable, net - 134,517 - 134,517
Furniture and equipment, net - 74,515 - 74,515
Goodwill - - (b) 3,751,762 3,751,762
----------- ---------- ------------- -----------
Total assets $ 121,837 $ 209,032 $ 3,751,762 $ 4,082,631
=========== ========== ============= ===========
Accounts payable and accrued
expenses $ 106,810 $ 503,470 $ - $ 610,280
Deferred revenue - 7,944 - 7,944
Stock payable 170,400 - - 170,400
Advances from related parties 10,144 - - 10,144
Notes payable - related parties - 371,463 (a) (55,000) 316,463
Notes payable - third parties - 132,917 - 132,917
Mandatorily redeemable Series C
Preferred Stock 75,600 - - 75,600
Series A Convertible Preferred
Stock - - - -
Series B Preferred Stock - - - -
Common stock, $0.001 par value 47,732 - (b) 2,400 50,132
Common stock, no par value - 1,000 (b) (1,000) -
Additional paid-in-capital 57,283,839 29,520 (b) (29,520) 60,281,439
(b) 2,997,600
Accumulated deficit (57,572,688) (837,282)(a) 55,000 (57,572,688)
(b) 782,282
----------- ---------- ------------- -----------
Total liabilities and
stockholders' deficit $ 121,837 $ 209,032 $ 3,751,762 $ 4,082,631
=========== ========== ============= ===========
Page 2
Pro forma Consolidated Condensed Statement of Operations:
12 months 12 months
02/28/05 12/31/04
PaperFree KMS Adjustments Pro Forma
------------ ----------- ------------- ------------
Revenues $ - $ 917,878 $ - $ 917,878
Cost of sales - (242,960) - (242,960)
------------ ----------- ------------- ------------
Gross profit - 674,918 - 674,918
------------ ----------- ------------- ------------
General and administrative 27,155,786 1,197,101 - 28,352,887
Consulting fees 30,177,114 - - 30,177,114
Professional fees 29,991 22,946 - 52,937
Loss on disposition of assets - 345 - 345
Bad Debt expense /
debt forgiveness income 55,000 - (a) (55,000) -
Interest expense 16,967 55,475 - 72,442
------------ ----------- ------------- ------------
Total operating expenses 57,434,858 1,275,867 (55,000) 58,655,725
------------ ----------- ------------- ------------
Net loss $ (57,434,858) $ (600,949) $ 55,000 $(57,980,807)
============ =========== ============= ============
Basic and diluted loss
per share $ (2.56) - - $ (2.43)
Basic and diluted weight
average shares outstanding 22,391,892 - 1,500,000 23,891,892
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(a) The note payable from KMS to Paperfree was $55,000 on December 31,
2004. Paperfree wrote off this uncollectible balance at February 28, 2005.
(b) On March 1, 2005, all of the outstanding shares of KMS, 1,000 at the
time, were acquired by PaperFree for 2,400,000 shares of PaperFree common
stock. These shares are valued at $3,000,000 according to the acquisition
agreement.
Page 3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and shareholders of
KMS Computer Services, Inc.
Kokomo, Indiana
We have audited the accompanying balance sheet of KMS Computer Services, Inc. as
of December 31, 2004, and the related statements of operations, stockholders'
deficit and cash flows for the years ended December 31, 2004 and 2003. These
financial statements are the responsibility of KMS' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 KMS as of December 31, 2004,
and the results of its operations and its cash flows for the years ended
December 31, 2004 and 2003 in conformity with accounting principles generally
accepted in the United States of America.
As shown in the accompanying financial statements, KMS incurred recurring net
losses in 2004 and 2003, and has a working capital deficit as of December 31,
2004. These conditions raise substantial doubt as to KMS' ability to continue
as a going concern. The financial statements do not include any adjustments that
might be necessary if KMS' is unable to continue as a going concern.
/s/ Malone & Bailey, PC
- -----------------------------
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
March 24, 2005
Page 4
KMS COMPUTER SERVICES, INC.
BALANCE SHEET
December 31,
2004
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Accounts Receivable, net of allowance for
doubtful accounts of $36,362 $ 134,517
- -------------------------------------------------------------------------------
Total current assets 134,517
FIXED ASSETS, net of $89,514 of accumulated depreciation 74,515
- -------------------------------------------------------------------------------
TOTAL ASSETS $ 209,032
===============================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable & Accrued Liabilities $ 503,470
Deferred Revenue 7,944
Notes Payable - Related Parties 371,463
Notes Payable - Third Parties 132,917
- -------------------------------------------------------------------------------
1,015,794
- -------------------------------------------------------------------------------
Commitment -
STOCKHOLDERS' DEFICIT
Common Stock:
1,000 shares authorized, no par value, 100 shares
issued and outstanding 1,000
Additional paid-in capital 29,520
Accumulated deficit (837,282)
- -------------------------------------------------------------------------------
(806,762)
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 209,032
===============================================================================
See accompanying summary of accounting policies and notes to financial
statements.
Page 5
KMS COMPUTER SERVICES, INC.
STATEMENTS OF OPERATIONS
Year ended Year ended
December 31, December 31,
2004 2003
====================================================================================
REVENUE $ 917,878 $1,054,743
COST OF SALES 242,960 318,325
- -----------------------------------------------------------------------------------
GROSS PROFIT 674,918 736,418
- -----------------------------------------------------------------------------------
OPERATING EXPENSES
Salaries and Wages 848,597 623,216
General and Administrative 335,058 293,920
Bad Debt (16,899) 52,071
Legal and Professional 22,946 3,873
Depreciation 30,345 28,361
Loss on Disposition of Assets 345 519
Interest 55,475 9,826
- -----------------------------------------------------------------------------------
Total operating expenses 1,275,867 1,011,786
----------------------------
NET LOSS $ (600,949) $ (275,368)
============================
See accompanying summary of accounting policies and notes to financial
statements.
Page 6
KMS COMPUTER SERVICES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003 AND 2004
Additional
Common Stock Paid In Accumulated
Share Amount Capital Deficit Total
- -----------------------------------------------------------------------------------------------------------
BALANCES - December 31, 2002 100 $ 1,000 $ - $ 39,035 $ 40,035
Imputed interest on related party loans - - 1,484 - 1,484
Net Loss - - - (275,368) (275,368)
- ------------------------------------------------------------------------------------------------------------
BALANCES - December 31, 2003 100 1,000 1,484 (236,333) (233,849)
Imputed interest on related party loans - - 28,036 - 28,036
Net Loss - - - (600,949) (600,949)
- ------------------------------------------------------------------------------------------------------------
BALANCES - December 31, 2004 100 $ 1,000 $ 29,520 $(837,282) $(806,762)
- ------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial
statements.
Page 7
KMS COMPUTER SERVICES, INC.
STATEMENTS OF CASH FLOWS
Year ended Year ended
December 31, December 31,
2004 2003
- -------------------------------------------------------------------------------
CASH FOWS FROM OPERATING ACTIVITIES
Net Loss $(600,949) $(275,368)
- -------------------------------------------------------------------------------
ADJUSTMENT TO RECONCILE NET LOSS TO NET
CASH USED IN BY OPERATING ACTIVITIES
Imputed interest on related party debt 28,036 1,484
Loss on disposal of capital assets 345 519
Depreciation 30,345 28,361
Bad debt expense (recovery) (16,899) 52,071
Change in:
accounts receivable (6,918) (3,189)
deferred revenue (1,810) 9,754
related party debt (23,662) 23,662
accounts payable 312,890 74,546
- -------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITES (278,622) (88,160)
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (3,780) (67,502)
- -------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITES (3,780) (67,502)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Notes Payable - related parties 260,463 111,000
Proceeds from Notes Payable - third parties 30,000 75,000
Repayment of notes payable (38,462) (29,790)
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 252,001 156,210
- -------------------------------------------------------------------------------
NET CHANGE IN CASH (30,401) 548
CASH - BEGINNING OF PERIOD 30,401 29,853
- -------------------------------------------------------------------------------
CASH - END OF PERIOD $ - $ 30,401
- -------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------------------------------------------------------------
Interest Paid $ 27,439 $ 8,342
- -------------------------------------------------------------------------------
Taxes Paid - -
===============================================================================
See accompanying summary of accounting policies and notes to financial
statements.
Page 8
KMS COMPUTER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
KMS Computer Services, Inc. ("KMS") was incorporated on April 8, 1994 in the
State of Indiana and has a fiscal year ending December 31.
KMS offers healthcare providers a comprehensive array of technology-based
revenue cycle services. These services include identifying third-party
resources, submitting timely and accurate bills to third-party payers and
patients, recovering and properly accounting for the amounts due, and securing
the appropriate cost-based reimbursement from entitlement programs.
REVENUE RECOGNITION
- --------------------
KMS recognizes revenues in accordance with the provisions of Statement of
Position, or SOP, No. 97-2, "Software Revenue Recognition," as amended by SOP
98-9 and clarified by Staff Accounting Bulletin, or SAB, 101 "Revenue
Recognition in Financial Statements." SOP No 97-2, as amended, generally
requires revenue earned on software arrangements involving multiple elements to
be allocated to each element based on the relative fair values of those
elements.
KMS' contractual arrangements are evaluated on a contract-by-contract basis and
often require judgment and estimates that affect the timing of revenue
recognized in KMS' statements of operations. Specifically, KMS may be required
to make judgments about:
- - whether the fees associated with KMS products and services are fixed
or determinable;
- - whether or not collection of KMS' fees is reasonably assured;
- - whether professional services are essential to the functionality of
the related software product;
- - whether KMS has the ability to make reasonably dependable estimates in
the application of the percentage-of-completion method; and
- - whether KMS have verifiable objective evidence of fair value for KMS
products and services.
ESTIMATES
- ---------
In preparing financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities in the balance sheet
and revenue and expenses in the statement of expenses. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS
- ----------------------------
All highly liquid investments with an original maturity from the date of
purchase of three months or less are considered to be cash equivalents. These
short-term investments are stated at cost, which approximates market. There are
none as of December 31, 2004.
Page 9
ALLOWANCE FOR DOUBTFUL ACCOUNTS
- ----------------------------------
Bad debt expense is recognized based on management's estimate of likely losses
per year, based on past experience and an estimate of current year uncollectible
amounts. There was $36,362 in allowance for doubtful accounts as of December
31, 2004.
LONG-LIVED ASSETS
- ------------------
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful life of the related asset, generally three to twelve years for equipment.
Leasehold improvements and equipment acquired under capital leases are
depreciated over the shorter of the lease term or the estimated useful life of
the related asset. Expenditures for maintenance, repair and renewals of minor
items are charged to expense as incurred. Major betterments are capitalized.
IMPAIRMENT
- ----------
KMS reviews the carrying value of its long-lived assets annually or whenever
events or changes in circumstances indicate that the historical cost-carrying
value of an asset may no longer be appropriate. KMS assesses recoverability of
the carrying value of the asset by estimating the future net cash flows expected
to result from the asset, including eventual disposition. If the future net
cash flows are less than the carrying value of the asset, an impairment loss is
recorded equal to the difference between the asset's carrying value and fair
value.
INCOME TAXES
- -------------
Prior to December 31, 2004, the financial statements of KMS did not include a
provision for Income Taxes because the taxable income of KMS was included in the
Income Tax Returns of the Stockholders under the Internal Revenue Service "S"
Corporation elections.
Once the proposed transactions with PaperFree Medical Solutions, Inc. as more
fully described in Note 7 are complete, KMS will no longer be treated as a
chapter "S" Corporation for Income Tax purposes.
KMS recognizes deferred tax assets and liabilities based on differences between
the financial reporting and tax bases of assets and liabilities using the
enacted tax rates and laws that are expected to be in effect when the
differences are expected to be recovered. KMS provides a valuation allowance
for deferred tax assets for which it does not consider realization of such
assets to be more likely than not.
(LOSS) PER SHARE
- ------------------
The basic net loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Diluted net loss per
common share is computed by dividing the net loss adjusted on an "as if
converted" basis, by the weighted average number of common shares outstanding
plus potential dilutive securities. For the years ended December 31, 2004 and
2003, potential dilutive securities had an anti-dilutive effect and were not
included in the calculation of diluted net loss per common share.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
KMS does not expect the adoption of recently issued accounting pronouncements to
have a significant impact on KMS' results of operations, financial position or
cash flow.
Page 10
NOTE 2 - GOING CONCERN
- --------------------------
As shown in the accompanying financial statements, KMS incurred recurring net
losses of $600,949 and $275,368 in fiscal2004 and 2003, respectively, has an
accumulated deficit of $837,282 as of December 31, 2004. These conditions raise
substantial doubt as to KMS' ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary if
KMS is unable to continue as a going concern.
NOTE 3 - FIXED ASSETS
- -------------------------
Property and equipment consisted of the following at December 31, 2004:
Description Life Amount
----------------------- ------- ----------
Leasehold improvements 20 years $ 49,508
Computer equipment & software 3 years 114,521
----------
164,029
Less: accumulated depreciation (89,514)
----------
$ 74,515
==========
Depreciation expense totalled $30,345 and $28,361 in fiscal 2004 and 2003,
respectively.
NOTE 4 - NOTES PAYABLE-RELATED PARTIES
- -------------------------------------------
KMS received loans to satisfy working capital requirements from shareholders of
KMS. They are as follows:
(1) $338,266 was borrowed through December 31, 2004 from PaperFree Medical
Solutions, Inc. in anticipation of the merger discussed in Note 7. The debt
is unsecured, bears no interest and is due on demand.
(2) KMS' majority shareholder loaned KMS $33,197 through December 31,
2004. The loan is unsecured, bears no interest and is due on demand.
Page 11
NOTE 5 - NOTES PAYABLE-THIRD PARTIES
- -----------------------------------------
Copier Lease:
Five year lease payout beginning August 2002;
interest rate of 15%; monthly payment of $87;
secured by copier $421
Bank credit line with Salin Bank:
One-year term beginning October 16, 2003; interest
rate of 4.25%; secured by all assets.
The loan is currently in default. 99,847
Bank credit line with Central Bank:
Two-year term beginning September 23, 2003;
interest rate of 7.5%; secured by all assets. 3,935
Bank credit line with Central Bank:
Three-year term beginning September 23, 2004;
interest rate of 8.1%; secured by all assets. 28,714
-----------
Total $132,917
===========
NOTE 6 - COMMITMENTS
- -----------------------
Office premises have been rented from KMS' majority shareholder. KMS leases its
office facility and certain equipment under operating leases that expire at
various dates through October 31, 2023.
Future minimum lease payments as of December 31, 2004 are as follows:
YEAR ENDING
2005 $ 120,000
2006 120,000
2007 120,000
2008 120,000
2009 120,000
Thereafter 1,660,000
---------
$2,260,000
==========
Rent expense was approximately $120,000 for the year ended December 31, 2004 and
$50,000 for the year ended December 31, 2003.
NOTE 7 - SUBSEQUENT EVENT
- -----------------------------
On March 1, 2005, KMS signed an Agreement and Plan of Merger with PaperFree
Medical Solutions, Inc. ("PaperFree"). PaperFree is a development stage,
publicly traded company. The acquisition of KMS was accomplished by issuance of
2,400,000 PaperFree common shares to the current KMS shareholders for 100% of
KMS' outstanding common stock. The transaction will result in KMS becoming a
wholly owned subsidiary of Paperfree.
Page 12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PAPERFREE MEDICAL SOLUTIONS, INC.
By: /s/ Ronald Cole
------------------------------
Ronald Cole, Jr., President
Date: July 12, 2005
Page 13