EX-99.1 3 dex991.htm AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF MPBP HOLDINGS INC. Audited Consolidated Financial Statements of MPBP Holdings Inc.

Exhibit 99.1

MPBP HOLDINGS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Independent Auditors’ Report

     2   

Consolidated Balance Sheets as of March 31, 2010 and 2009

     3   

Consolidated Statements of Operations for the years ended March 31, 2010, 2009 and 2008

     4   

Consolidated Statements of Stockholders’ Equity (Deficiency) for the years ended March 31, 2010, 2009 and 2008

     5   

Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and 2008

     6   

Notes to Consolidated Financial Statements

     7   


Independent Auditors’ Report

The Board of Directors and Stockholders

MPBP Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of MPBP Holdings, Inc. and subsidiaries as of March 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal years ended March 31, 2010, 2009 and 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MPBP Holdings, Inc. and subsidiaries as of March 31, 2010 and 2009, and the results of its operations and cash flows for the years ended March 31, 2010, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America.

As more fully described in Notes 3 and 4 to the consolidated financial statements, MPBP Holdings, Inc. and subsidiaries incurred $46,259,000 and $160,885,000 of goodwill and intangible asset impairment charges during the years ended March 31, 2010 and 2009, respectively, which, net of income tax effects, results of operations and other items, generated a net stockholders’ deficiency as of March 31, 2010.

As more fully described in Note 15, negotiations are taking place that could result in a change of ownership and settlement of existing debt. The consolidated financial statements do not include any adjustments for the carrying values of assets, liabilities or stockholders’ deficiency that would be affected by such a transaction.

/s/ Carter & Balsam

Sherman Oaks, California

February 28, 2011


MPBP HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except number of shares)

 

     March 31,  
     2010     2009  

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 3,788      $ 3,840   

Accounts receivable, net of allowances for doubtful accounts of $1,033 and $791, respectively

     13,365        10,823   

Inventories

     6,965        6,572   

Deferred income taxes

     6,285        5,489   

Prepaid expenses and other current assets

     2,748        2,582   
                

Total current assets

     33,151        29,306   

Property and equipment, net

     5,057        4,284   

Intangible assets

     33,873        50,560   

Goodwill

     100,383        135,636   

Deferred financing costs

     3,949        5,230   
                

Total assets

   $ 176,413      $ 225,016   
                

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

    

Current liabilities

    

Current portion of long-term debt

   $ 1,400      $ 1,400   

Current portion of capital lease obligations

     640        519   

Accounts payable

     13,648        10,135   

Accrued expenses

     11,604        10,519   

Income taxes payable

     792        114   

Derivative obligation, at fair value

     —          2,329   

Deferred revenues

     9,158        9,546   
                

Total current liabilities

     37,242        34,562   

Long-term debt, less current portion

     166,400        167,800   

Capital lease obligations, net of current portion

     1,354        1,303   

Deferred income taxes

     8,917        14,279   

Other liabilities

     75        139   

Commitments and contingencies

    

Stockholders' equity (deficiency)

    

Common stock, $0.001 par value, 2,000,000 shares authorized, 1,699,912 shares issued and outstanding

     1,700        1,700   

Additional paid-in capital

     170,175        169,304   

Other comprehensive income

     4        —     

Accumulated deficiency

     (209,454     (164,071
                

Net stockholders' equity (deficiency)

     (37,575     6,933   
                

Total liabilities and stockholders' equity (deficiency)

   $ 176,413      $ 225,016   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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MPBP HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

 

     Years Ended March 31,  
     2010     2009     2008  

Revenues

   $ 132,353      $ 138,689      $ 161,279   

Direct operating expenses

     (94,219     (101,328     (117,523
                        

Gross margin

     38,134        37,361        43,756   

Selling, general and administrative expenses

     (25,852     (25,389     (27,782

Depreciation and amortization expenses

     (7,349     (9,044     (10,620

Goodwill and intangible asset impairments

     (46,259     (160,885     —     
                        

Operating income (loss)

     (41,326     (157,957     5,354   

Interest income

     —          38        106   

Interest expense

     (10,918     (12,432     (16,090

Decrease (increase) in fair value of derivative obligation

     2,329        116        (2,445

Litigation settlement

     (645     —          —     
                        

(Loss) before income taxes

     (50,560     (170,235     (13,075

Income tax benefit

     5,177        15,316        3,563   
                        

Net (loss)

   $ (45,383   $ (154,919   $ (9,512
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

4


MPBP HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)

(in thousands, except number of shares)

 

     Common Stock      Additional
Paid-in
Capital
    Other
Comprehensive
Income
     Retained
Earnings
(Accumulated
Deficiency)
    Net
Stockholders'
Equity
(Deficiency)
 
     Number of
Shares
     Par
Value
           

Balance at March 31, 2007

     1,699,412       $ 1,699       $ 168,421      $ —         $ 360      $ 170,480   

Share purchase

     500         1         49        —           —          50   

Share-based compensation, net of forfeitures

     —           —           1,183        —           —          1,183   

Net (loss)

     —           —           —          —           (9,512     (9,512
                                                   

Balance at March 31, 2008

     1,699,912         1,700         169,653        —           (9,152     162,201   

Share-based compensation, net of forfeitures

     —           —           (349     —           —          (349

Net (loss)

     —           —           —          —           (154,919     (154,919
                                                   

Balance at March 31, 2009

     1,699,912         1,700         169,304        —           (164,071     6,933   

Capital contribution

     —           —           657        —           —          657   

Share-based compensation, net of forfeitures

     —           —           214        —           —          214   

Foreign currency translation adjustment

     —           —           —          4         —          4   

Net (loss)

     —           —           —          —           (45,383     (45,383
                                                   

Balance at March 31, 2010

     1,699,912       $ 1,700       $ 170,175      $ 4       $ (209,454   $ (37,575
                                                   

The accompanying notes are an integral part of these consolidated financial statements.

 

5


MPBP HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Years Ended March 31,  
     2010     2009     2008  

Cash flows from operating activities

      

Net (loss)

   $ (45,383   $ (154,919   $ (9,512

Adjustments to reconcile net (loss) to net cash provided by operating activities

      

Goodwill and intangible asset impairments

     46,259        160,885        —     

Depreciation and amortization

     7,349        9,044        10,620   

Deferred income tax benefit

     (6,158     (15,732     (3,664

Bad debt expense

     288        380        14   

Increase (decrease) in fair value of derivative obligation

     (2,329     (116     2,445   

Amortization of deferred financing costs

     1,391        1,404        1,371   

Share-based compensation charge (benefit)

     214        (349     1,183   

Changes in assets and liabilities

      

Accounts receivable, excluding bad debt expense

     (2,831     (1,310     1,960   

Refundable income taxes

     —          —          1,540   

Inventories

     (393     (362     (1,622

Prepaid expenses and other current assets

     (166     1,202        (385

Accounts payable

     3,513        (464     (5,622

Accrued expenses

     1,085        (5,459     3,390   

Income taxes payable

     678        87        21   

Deferred revenues

     (388     8,611        817   
                        

Net cash provided by operating activities

     3,129        2,902        2,556   
                        

Cash flows used in investing activities

      

Business combination activity

     —          —          899   

Purchases of property and equipment

     (2,795     (1,701     (1,986

Other

     353        100        (106
                        

Net cash used in investing activities

     (2,442     (1,601     (1,193
                        

Cash flows from financing activities

      

Borrowings under line of credit

     —          —          5,200   

Repayments of borrowings under line of credit

     —          —          (6,200

Repayments of term notes

     (1,400     (1,400     (1,400

Proceeds from sale/leaseback transactions

     —          —          1,365   

Capital contribution

     657        —          50   
                        

Net cash used in financing activities

     (743     (1,400     (985
                        

Net increase (decrease) in cash

     (56     (99     378   

Cash and cash equivalents at beginning of year

     3,840        3,939        3,561   

Foreign currency translation adjustment

     4        —          —     
                        

Cash and cash equivalents at end of year

   $ 3,788      $ 3,840      $ 3,939   
                        

Supplemental disclosures of cash flow information

      

Cash paid during the year for

      

Income taxes

   $ 173      $ 182      $ 82   
                        

Interest

   $ 9,490      $ 11,668      $ 13,356   
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

6


MPBP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2010 AND 2009

AND FOR THE YEARS ENDED MARCH 31, 2010, 2009 AND 2008

(in thousands)

1. Organization and Nature of Operations

MPBP Holdings, Inc., a Delaware corporation (“MPBP”), was formed in January 2007. The principal operating subsidiaries of MPBP are Cohr Inc. dba Masterplan (“Masterplan”) and ReMedPar, Inc. (“ReMedPar”), Delaware corporations, and Medical Equipment Solutions and Applications SAGL (“MESA”), a Swiss limited liability company formed in December 2009. These wholly-owned entities are altogether referred to as the “Company” herein. Masterplan, ReMedPar and MESA are the Company’s three reporting units.

The Company services and maintains medical equipment under contracts or on a time and materials basis throughout the United States and, since January 2010, in Europe. Additionally, the Company sells and installs diagnostic imaging equipment and remanufactures and distributes replacement parts for diagnostic imaging equipment principally in the United States. As of and for the year ended March 31, 2010, European operations and assets represent approximately 1% of consolidated operations.

2. Significant Accounting Policies

Presentation – Management is responsible for evaluating the effects of events occurring after March 31, 2010 upon these consolidated financial statements. See Note 15.

Principles of Consolidation – The consolidated financial statements of the Company include the accounts of MPBP and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Currency Translation Adjustments – The U.S. dollar is the functional currency for the Company’s consolidated operations except for its MESA subsidiary, which uses the Euro as its functional currency. MESA assets and liabilities are translated into U.S. dollars based upon the current exchange rate in effect at the balance sheet date. MESA revenues and expenses are translated at weighted average rates for the period presented. Translation adjustments have no effect on net income and are included as the only item in accumulated other comprehensive income in stockholders’ equity.

Revenue Recognition – Service revenue is principally generated from equipment maintenance contracts. Service revenue is recognized ratably over the contract period, which can extend from one to five years. Billings to certain service customers may be adjusted pursuant to contractual performance guarantees. Losses, if any, on service contracts are recorded when known. Equipment sale and parts revenue is generally recognized upon shipment from Company premises or upon direct shipment from vendors to customers. ReMedPar occasionally bills and holds at its facility certain products sold to customers at those customers’ explicit direction. In each instance wherein revenue is recognized in advance of

 

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shipment, management determines that ownership has fully transferred to the customer and no deferral of revenue recognition is warranted. Installation revenue is generally recognized upon customer acceptance of installation. When equipment sale and installation services are combined, management allocates and recognizes the revenue based upon the discrete and separable terms of the transaction. Other operating revenues are recognized when services are performed.

Revenue is recognized net of sales and similar transactional taxes. Such taxes aggregated $2,294, $3,194 and $4,121 for the years ended March 31, 2010, 2009 and 2008, respectively.

The Company occasionally includes cash incentives in service and equipment sale contracts with customers. During the years ended March 31, 2010, 2009 and 2008 payments aggregating $503, $386 and $554, respectively, were made to customers under such rebate arrangements. See Note 9.

During the year ended March 31, 2009 Masterplan accelerated by one month its contractual billing arrangements with customers. The accelerated billings for each month are deferred, and revenue is recognized in the subsequent month when billed contracted services are performed.

Direct Operating Expenses – Equipment maintenance costs are expensed as incurred. Certain maintenance services are outsourced to third parties principally on a time and materials basis. Warranty costs on equipment and parts sales are estimated based upon prior experience and accrued at the time of sale. Through March 31, 2010 actual warranty costs have been immaterial. Other direct operating costs, including shipping and handling, are expensed in the period services are rendered or parts are shipped to customers.

Income Taxes – Income tax amounts are recognized using the liability method. Under this method, deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. Interest and penalties, if any, owed to taxing authorities are accrued in selling, general and administrative expenses. For the years ended March 31, 2010, 2009 and 2008, $124, $0 and $4 of such interest and penalties were accrued, and $110 and $0 was included in income taxes payable as of March 31, 2010 and 2009, respectively.

Tax benefits from any uncertain tax positions are recognized as reductions of income tax expense when it is more likely than not, based on the technical merits of the positions, that the positions will be sustained on examination by the taxing authorities, including resolution of any related appeals or litigation processes. Additionally, the amount of the tax benefits to be recognized is the largest amount of tax benefits that have a greater than fifty percent likelihood of being realized upon ultimate settlements with the taxing authorities.

Concentration of Credit Risk – Accounts receivable are unsecured and, accordingly, are stated at net estimated collectible amounts. Accounts receivable are due principally from hospital chains and hospitals in the United States. Management monitors the creditworthiness of its customers and provides allowances for doubtful accounts when considered appropriate. Payment is due when the services begin, and considered past due one month thereafter. Upon exhaustion of collection efforts, uncollected receivables are written off against the allowances.

Additionally, management evaluates the creditworthiness of the financial institutions in which it invests its idle cash. At March 31, 2010 and 2009, cash account balances at financial institutions exceeded the federally insured limits by $3,368 and $3,392, respectively.

 

8


Cash and Cash Equivalents – Cash equivalents include highly liquid investments maturing within three months after purchase.

Financial Instruments – The Company is exposed to fluctuations of interest rates and foreign currency translation rates. Management addresses certain financial exposures through a controlled program of risk management that may include the use of derivative instruments. The types of derivative instruments permitted for such risk management are specified in policies set by management.

In 2007 the Company entered into an interest rate swap contract to reduce interest rate risks and to modify the interest rate characteristics of its outstanding debt. The swap contract expired in February 2010. An affiliate of the Company’s first lien lender was counterparty to the swap contract. Through February 2010 the Company recognized the swap contract as a derivative on its consolidated balance sheets at fair value. The Company may designate the derivative as either a hedge of the variability of cash flows to be paid or not. Changes in the fair value of a derivative that is designated as, and meets all of the required criteria for, a cash flow hedge are recorded in accumulated other comprehensive income and reclassified into earnings as the underlying hedged item affects earnings. The Company did not designate the derivative as a hedge. A change in the fair value of a derivative that is not designated as a hedge is recognized as a non-operating item in the statement of operations.

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, receivables, borrowings under secured line of credit arrangements, payables and accrued expenses, approximate their fair values at March 31, 2010 due to the short-term nature of these instruments. See Note 7 for discussion of the fair value of the Company’s debt.

Inventories – Inventories, primarily consisting of medical equipment and parts, are stated at the lower of specific cost, on an average cost basis, or market (net realizable value). In most instances specific cost includes the purchase price and all other costs incurred in restoring the inventory item to a saleable condition.

Property and Equipment – Property and equipment is recognized at cost less accumulated depreciation and amortization. Depreciation and amortization is recorded using the straight-line method with no residual value and over the following useful lives:

Computer equipment – 3 years

Computer software – 2 to 7 years

Technical equipment – 5 years

Furniture and fixtures – 7 years

Leasehold improvements – shorter of 10 years or remaining term of lease

Goodwill and Intangible Assets – Goodwill is assessed for impairment at least annually as of September 30. Management evaluates the recoverability of investments in long-lived assets on an ongoing basis and recognizes any impairment in the year of determination. The significant estimates and assumptions used by management in assessing the recoverability of goodwill and intangible assets include present value discount rates, fair value estimates for other assets and liabilities, and comparable business financial performance multiples (only for goodwill), future revenues and cash flows, future rates of customer contract renewal and other factors. Any change in these estimates or assumptions could result in an impairment charge. The estimates, based upon management’s reasonable and supportable assumptions and projections, require management’s subjective judgment. Evaluations of long-lived assets can vary within a range of outcomes depending upon the assumptions and projections used.

 

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The future occurrence of a potential indicator of impairment would require an interim assessment for either or both of the Masterplan and ReMedPar reporting units prior to the scheduled annual tests. Examples of such potential indicators include a significant adverse change in business climate, unanticipated competition, a material negative change in relationships with significant customers, an adverse action or assessment by a regulator, a strategic decision made in response to economic or competitive conditions, the loss of key personnel, or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of.

Goodwill and trademarks are not amortized as their lives are considered to be indefinite. Other intangible assets are amortized using the following estimated useful lives and methods with no residual value:

 

    

Estimated Useful Lives

   Method
Customer contracts and relationships    7 years    Declining balance
Internally-created computer software    3 years    Straight-line
Non-competition agreements    2 years    Straight-line

As of March 31, 2010 the weighted average period prior to the next renewal or extension of Masterplan’s major customer contracts was 3 years. ReMedPar customers contract via purchase order, so there is a nominal contractual duration, generally less than 3 months including the customers’ returns of exchanged parts. Costs incurred to renew customer contracts for the years ended March 31, 2010, 2009 and 2008 were nominal. During the year ended March 31, 2010, management determined that the remaining estimated useful lives of all customer contracts and relationships assets would be shortened from 10 to 7 years. During the year ended March 31, 2009, management determined that the remaining estimated useful lives of all customer contracts and relationships assets would be shortened from 20 to 10 years. For the year ended March 31, 2008, customer contracts and relationships were amortized using a declining-balance method over 20 year estimated useful lives.

Share-Based Compensation – The Company recognizes in selling, general and administrative expenses and as adjustments to additional paid-in capital the current period effects of awards of stock or options in exchange for goods or services benefiting the Company. The Company uses the Black-Scholes model to estimate fair market values of stock options on the dates of grant.

New Accounting Standards Updates – In December 2010 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-28, pursuant to which certain reporting units’ goodwill impairments may be reported earlier than under current standards. Management expects to implement this standard on April 1, 2011. Management is currently assessing the impact of this new standard.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, which establishes the accounting and reporting guidance for arrangements under which the Company performs multiple revenue-generating activities, including how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The Company implemented this standard on April 1, 2010. Management has determined that the financial statement impact will be minimal, although disclosures will be enhanced.

 

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3. Operational and Financing Issues

During the year ended March 31, 2008 Masterplan’s largest customer gave notice of its intent to seek competitive bids for maintenance services. Management determined that there was no impairment to either the customer contracts and relationships intangible asset or to goodwill through March 31, 2008. During the year ended March 31, 2009, the customer declined to accept Masterplan’s bid to continue. Masterplan’s services to that customer are included in results of operations for the first five months of the year ended March 31, 2009. ReMedPar’s largest customer cancelled its existing purchase orders during the year ended March 31, 2009. During the year ended March 31, 2010, a large customer of Masterplan sought competitive bids for maintenance services, and subsequently declined Masterplan’s bid to continue. Masterplan’s services to that customer are included in results of operations for the year ended March 31, 2010. ReMedPar’s revenues for the year ended March 31, 2010 were less than management had previously estimated.

Management determined that impairment events had occurred at the Masterplan and ReMedPar reporting units and recognized the following non-cash impairment charges in the Company’s March 31, 2010 and March 31, 2009 consolidated results of operations:

 

          March 31,
2010
    March 31,
2009
 

Masterplan:

  

Goodwill

   $ 28,865      $ 126,719   
  

Trademark

     800        7,700   
  

Customer contracts and relationships

     10,206        25,836   
                   
        39,871        160,255   
                   

ReMedPar:

  

Goodwill

     6,388        —     
  

Trademark

     —          630   
                   
        6,388        630   
                   
  

Total

     46,259        160,885   
  

Deferred income tax benefit

     (6,254     (13,195
                   
  

Impairments, net

   $ 40,005      $ 147,690   
                   

See Note 4 for the impacts of these impairments upon the long-term assets’ carrying values.

During the years ended March 31, 2010 and 2009 management took actions to replace lost revenues and to reduce costs, including terminating direct and indirect staff, suspending employer matching retirement plan contributions, curtailing outside purchased services, and downsizing and moving its corporate offices. The Company’s board of directors also hired two new Chief Executive Officers for Company subsidiaries during the year ended March 31, 2009.

As a result of the effect of recognized impairments on the Company’s stockholders’ equity, it would be difficult for the Company to draw on its line of credit or obtain incremental term loans from its lending syndicate without violating a debt covenant (see Note 7). The Company’s future cash flows could be adversely affected should any major hospital group cancel their contract with Masterplan, customers fail to continue payment to the Company in a timely manner, or interest rates under variable-rate borrowings increase significantly. Management has instituted revenue growth and cost reduction actions and has adopted contingency plans to further reduce its cost infrastructure should any further adverse cash flow

 

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events occur. Management is satisfied that the execution of these actions and plans will provide sufficient cash flows if the previously described adverse cash flow events do occur.

Management believes that its actions and alternative courses of action will permit the Company to meet its business objectives and fulfill its anticipated current obligations.

4. Goodwill and Intangible Assets

During the years ended March 31, 2010 and 2009 several impairment events were identified by management. As a result of management’s assessments, impairment charges aggregating $46,259 and $160,885, respectively, were recognized in the accompanying consolidated statements of operations. See Note 3.

A summary of goodwill activity by the Masterplan and ReMedPar reporting units follows:

 

     Masterplan     ReMedPar     Total  

Balance at March 31, 2008

   $ 255,967      $ 6,388      $ 262,355   

Impairment

     (126,719     —          (126,719
                        

Balance at March 31, 2009

   $ 129,248      $ 6,388      $ 135,636   

Impairment

     (28,865     (6,388     (35,253
                        

Balance at March 31, 2010

   $ 100,383      $ —        $ 100,383   
                        

A summary of intangible assets activity by the Masterplan and ReMedPar reporting units follows:

 

     Masterplan     ReMedPar     Total  

Balance at March 31, 2008

   $ 82,517      $ 9,662      $ 92,179   

Amortization

     (6,631     (822     (7,453

Impairment

     (33,536     (630     (34,166
                        

Balance at March 31, 2009

   $ 42,350      $ 8,210      $ 50,560   

Amortization

     (4,731     (950     (5,681

Impairment

     (11,006     —          (11,006
                        

Balance at March 31, 2010

   $ 26,613      $ 7,260      $ 33,873   
                        

 

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Intangible assets are detailed as follows:

 

     Original
Carrying
Amount
     Accumulated
Amortization
    Impairments     Net
Carrying
Amount
 

March 31, 2010

         

Amortized intangible assets:

         

Customer contracts and relationships

   $ 81,490       $ (20,675   $ (36,042   $ 24,773   

Software

     2,304         (2,304     —          —     

Non-competition agreements

     1,013         (1,013     —          —     
                                 
     84,807         (23,992     (36,042     24,773   

Unamortized intangible assets:

         

Trademarks

     18,230         —          (9,130     9,100   
                                 

Total intangible assets

   $ 103,037       $ (23,992   $ (45,172   $ 33,873   
                                 

March 31, 2009

         

Amortized intangible assets:

         

Customer contracts and relationships

   $ 81,490       $ (15,634   $ (25,836   $ 40,020   

Software

     2,304         (1,664     —          640   

Non-competition agreements

     1,013         (1,013     —          —     
                                 
     84,807         (18,311     (25,836     40,660   

Unamortized intangible assets:

         

Trademarks

     18,230         —          (8,330     9,900   
                                 

Total intangible assets

   $ 103,037       $ (18,311   $ (34,166   $ 50,560   
                                 

Amortization expense for intangible assets totaled $5,680, $7,453 and $9,288 for the years ended March 31, 2010, 2009 and 2008, respectively. Absent any future changes in estimated useful lives or recognition of any impairment of intangible assets, amortization expense of $6,704, $4,863, $3,534, $2,616, and $2,232 is expected to be recognized in each of the next five fiscal years.

 

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5. Inventories

Inventories consist of the following:

 

     March 31,
2010
    March 31,
2009
 

Unfinished goods

   $ 1,298      $ 2,133   

Work-in-progress

     3,460        2,538   

Finished goods

     4,389        3,737   
                

Total

     9,147        8,408   

Less allowance for obsolescence

     (2,182     (1,836
                

Net

   $ 6,965      $ 6,572   
                

6. Property and Equipment

Property and equipment, including assets under capital leases (see Note 8), consist of the following:

 

     March 31,
2010
    March 31,
2009
 

Computer equipment and software

   $ 1,906      $ 1,534   

Technical equipment

     6,380        5,255   

Furniture and fixtures

     710        256   

Leasehold improvements and other

     1,190        741   
                

Total

     10,186        7,786   

Less accumulated depreciation and amortization

     (5,129     (3,502
                

Net

   $ 5,057      $ 4,284   
                

Depreciation and amortization expense relating to property and equipment for the years ended March 31, 2010, 2009 and 2008 totaled $1,668, $1,591 and $1,333, respectively.

 

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7. Financial Obligations

The Company’s subsidiaries are obligated under a first lien term loan credit facility to a syndicated group of institutional lenders. The loan balances outstanding as of March 31, 2010 and 2009 were $135,800 and $137,200, respectively. Interest on the first lien term loan has been calculated using a selected Eurodollar rate (0.25% at March 31, 2010) plus 2.50%, and is payable at least quarterly. The subsidiaries have not used a prime rate-based interest calculation option available to them. The subsidiaries originally capitalized $3,884 of deferred financing costs in the accompanying consolidated balance sheets. These and other deferred financing costs are being amortized to interest expense using the interest method over the duration of the term loan. During the years ended March 31, 2010, 2009 and 2008, interest expense of $4,024, $6,705 and $12,316, respectively, was incurred pursuant to the first lien term loan credit facility. First lien term loan principal payments of $350 are due quarterly. Additional principal payments are required annually if consolidated cash flows exceed certain minimum thresholds.

The subsidiaries have a $20,000 secured revolving credit facility from the same syndicated group of institutional lenders. Advances may take the form of cash or draws pursuant to letters of credit. Interest on revolving loan advances is calculated at either the prime rate plus 1% to 1.50% or a selected Eurodollar rate plus 2% to 2.50%, and is payable at least quarterly. The subsidiaries pay the institutional lender a quarterly commitment fee of 0.25% to 0.375% per year of the unborrowed commitment. During the years ended March 31, 2010, 2009 and 2008, commitment and other fees included in interest expense aggregated $101, $105 and $75, respectively. Since March 31, 2008, the subsidiaries’ secured revolving credit facility has not been available due to a financial ratio covenant that would be violated if advances were obtained. During the year ended March 31, 2008, interest expense of $129 (at an average annual rate of 9.8%) was incurred pursuant to the secured revolving credit facility. No advances or letters of credit were outstanding on March 31, 2010 or March 31, 2009.

The first lien term loan credit facility and the secured revolving credit facility expire in 2013. Loans are secured by first priority liens and security interests in all of the common stock of all of the Company’s subsidiaries, by all of their assets, and by a guarantee of MPBP. The Company must adhere to various loan covenants including financial performance covenants. Covenants limit other debt arrangements, sales of assets, investments, capital expenditures and cash dividends. The Company is in compliance with all such covenants.

The subsidiaries are obligated under a $32,000 second lien term loan credit facility to a financial institution. Interest has been calculated using a selected Eurodollar rate (0.23% at March 31, 2010) plus 6.25% and is payable at least quarterly. The subsidiaries have not used a prime rate-based interest calculation option available to them. The subsidiaries paid $420 in loan origination costs, which are capitalized as deferred financing costs in the accompanying consolidated balance sheets. These costs are being amortized to interest expense using the interest method over the duration of the second lien term loan. Additionally, the subsidiaries pay the lender an annual fee of $50. During the years ended March 31, 2010, 2009 and 2008, interest expense of $2,220, $2,981 and $3,740, respectively, was incurred pursuant to the second lien term loan credit facility. This financial institution also owns a minor stock interest in MPBP.

The second lien term loan credit facility expires in 2014. No principal payments are required prior to maturity. The second lien term loan is secured by second priority liens and security interests in all of the common stock of the Company’s subsidiaries, by all of their assets, and by a guarantee of MPBP. The Company must adhere to various loan covenants including financial performance covenants. Covenants

 

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limit other debt arrangements, sales of assets, investments, capital expenditures and cash dividends. The Company is in compliance with all such covenants.

The first and second lien term loans are scheduled to be repaid as follows:

 

Fiscal Year Ending

   Scheduled
Amount
 

March 31, 2011

   $ 1,400   

March 31, 2012

     1,400   

March 31, 2013

     133,000   

March 31, 2014

     32,000   
        

Total due

     167,800   

Less current portion

     (1,400
        

Non-current portion

   $ 166,400   
        

The estimated fair values of the first and second lien term loans total $84,900 at March 31, 2010. Management has estimated these fair values based upon a limited number of transactions occurring in the secondary syndicated debt market (deemed to be a Level 2 assessment pursuant to FASB Statement No. 157) and assumed transfers of certain of the liabilities to a theoretical market participant (deemed to be a Level 3 assessment). The latter estimate includes management’s assessment of the Company’s non-performance risk and other factors.

Through February 2010 the Company had a fixed income derivative instrument with an affiliate of its first lien term loan credit facility agent. The derivative was designed to manage the Company’s risk relating to floating rate interest on its first lien term loan credit facility. It established minimum and maximum ranges of net interest expense on $100,000 of the Company’s total indebtedness. The instrument was not designated by management as a cash flow hedge. As of March 31, 2010 and 2009, $0 and $2,329 of fair values, respectively, were attributed to the derivative instrument and included in consolidated current liabilities. Changes in fair value were charged or credited as non-operating items in the accompanying consolidated statements of operations. The derivative’s fair value was estimated using a market-based interest swap valuation model (deemed to be a Level 3 assessment).

 

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The following table presents for the years ended March 31, 2010 and 2009 the level within the fair value hierarchy in which the fair value measurements fall:

 

     Quoted Prices in
Active Markets
for Identical
Liabilities:

Level 1
     Significant
Other
Observable
Inputs:

Level 2
    Significant
Other
Unobservable
Inputs:

Level 3
 

Balance at March 31, 2008

   $ —         $ 138,600      $ 34,445   

Changes in fair values

     —           (80,500     (20,773

Settlements

     —           (1,400     (143
                         

Balance at March 31, 2009

     —           56,700        13,529   

Changes in fair values

     —           26,400        (7,286

Settlements

     —           (1,400     (3,043
                         

Balance at March 31, 2010

   $ —         $ 81,700      $ 3,200   
                         

The following table presents the changes in fair values of financial instruments for which Level 3 inputs were significant to their valuation for the years ended March 31, 2010 and 2009:

 

     Second Lien
Term Loan
Credit Facility
    Fixed Income
Derivative
Instrument
 

Balance at March 31, 2008

   $ 32,000      $ 2,445   

Change in fair market value

     (20,800     27   

Net settlements

     —          (143
                

Balance at March 31, 2009

     11,200        2,329   

Change in fair market value

     (8,000     714   

Net settlements

     —          (3,043
                

Balance at March 31, 2010

   $ 3,200      $ —     
                

 

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8. Capital Leases

During the year ended March 31, 2008, ReMedPar sold to a third party and leased back a medical imaging system valued at $1,250. As of March 31, 2010 and 2009, $111 and $157, respectively, of gain on the sale was deferred and included in current and non-current liabilities in the accompanying consolidated balance sheets. During the year ended March 31, 2008, ReMedPar sold to a third party and leased back a medical imaging system valued at $115. No gain or loss was recognized or deferred on this sale-leaseback. During the year ended March 31, 2010, ReMedPar leased equipment from third parties valued at $677. Each such lease, which is treated as a capital lease, includes a bargain purchase option exercisable by ReMedPar at the end of the lease. Monthly lease payments include base rent and relevant taxes. ReMedPar previously entered into certain minor capital lease transactions. Assets obtained under capital leases aggregate to $2,996 and $2,319 at cost, and are included in property and equipment, net of $972 and $430 of accumulated amortization, in the accompanying consolidated balance sheets as of March 31, 2010 and March 31, 2009, respectively.

Future minimum rental payments required as of March 31, 2010 under capital leases which have initial or remaining non-cancelable lease terms in excess of one year are as follows:

 

Fiscal Year Ending

   Scheduled
Amount
 

March 31, 2011

   $ 750   

March 31, 2012

     641   

March 31, 2013

     547   

March 31, 2014

     190   

March 31, 2015

     103   
        

Total minimum lease payments

     2,231   

Less amount representing interest at rates of 8% to 9.5%

     (237
        

Present value of minimum lease payments

     1,994   

Less current portion

     (640
        

Capital lease obligations, less current portion

   $ 1,354   
        

Rental expenditures pertaining to capital leases for the year ended March 31, 2010, 2009 and 2008 totaled $727, $387 and $269, respectively.

 

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9. Accrued Expenses

Accrued expenses included in current liabilities consist of the following:

 

     March 31,
2010
     March 31,
2009
 

Accrued trade obligations

   $ 5,473       $ 6,178   

Employment obligations

     4,194         2,435   

Customer rebates

     825         392   

Interest

     479         442   

Business taxes and licenses

     373         381   

Acquisition obligations

     135         691   

Related parties

     125         —     
                 

Total

   $ 11,604       $ 10,519   
                 

10. Related Party Transactions

The Company has a management and financial services arrangement with an affiliate of MPBP’s majority stockholders. Pursuant to the arrangement, the Company paid the affiliate $30, $367 and $501 during the years ended March 31, 2010, 2009 and 2008, respectively, and has included $2,008 and $939 owed to the affiliate in accounts payable in the accompanying consolidated balance sheets as of March 31, 2010 and 2009, respectively. Current period operating effects of these transactions are recognized in selling, general and administrative expenses.

Several executives of the Company own minor stock interests in MPBP.

Stock-Based Incentive Plan

Employees of the Company and others are eligible to participate in an equity incentive plan. An aggregate of 188,824 shares of authorized MPBP common stock are reserved for possible future issuance upon exercise of awards under the plan. As of March 31, 2010, MPBP had 102,154 shares of its common stock available for possible future grant under its plan.

All options granted to Company employees have $100 per MPBP common share exercise prices, ten-year terms, and vesting arrangements based upon either (a) 20% annual vesting requisite service requirements or (b) performance parameters linked to the internal rate of return which the principal shareholders of MPBP attain on their investment in the Company. Grantees received half of their awards with requisite service vesting terms and half with performance vesting terms.

Factors used in establishing the fair market value of the option grants include expectations of performance parameters not being fully met and, at grant date, fair values based upon the Black-Scholes model using MPBP stock price volatility of 60% (measured using an average of quoted stock prices of a group of five peer public companies), risk-free interest rates equal to five year U.S. treasury bill auction rates at the grant

 

19


dates (ranging from 3.05% to 3.17%), 3% annual forfeiture rates and five year expected option lives. For the years ended March 31, 2010 and 2009, it was determined that no performance options would vest.

A summary of MPBP stock option activity (not expressed in thousands) follows:

 

     Options     Weighted Average
Grant Date

Fair Values
 
     Nonvested     Vested      Total     Nonvested      Vested  

Outstanding at March 31, 2007

     135,953        —           135,953      $ 47.38         —     

Grants

     23,603        —           23,603      $ 47.90         —     

Vested

     (13,595     13,595         —          —         $ 47.38   
                              

Outstanding at March 31, 2008

     145,961        13,595         159,556      $ 47.46       $ 47.38   

Grants

     13,690        —           13,690        —           —     

Vested

     (11,613     11,613         —          —         $ 47.49   

Forfeitures

     (81,289     —           (81,289   $ 47.41         —     
                              

Outstanding at March 31, 2009

     66,749        25,208         91,957      $ 37.79       $ 47.43   

Vested

     (5,901     5,901         —          —         $ 34.66   

Forfeitures

     (5,287     —           (5,287   $ 16.92         —     
                              

Outstanding at March 31, 2010

     55,561        31,109         86,670      $ 40.11       $ 45.01   
                              

Weighted average remaining contractual years

       7.0         7.2        

Vested options are exercisable into newly-issued shares of MPBP common stock which are reserved for that purpose. Certain employees were permitted to retain vested options after leaving the Company’s employment. The aggregate grant date fair values of all options vested during the years ended March 31, 2010, 2009 and 2008 were $205, $551 and $644, respectively. No vested options were exercised. Of the remaining unvested options, 41,352 could become immediately exercisable in the event performance criteria were met.

During the years ended March 31, 2010, 2009 and 2008, the Company recognized $214, ($349) and $1,183 of compensation expense or (benefit), respectively, in selling, general and administrative expenses, and adjusted additional paid-in capital for the capital contribution or (withdrawal). No related compensation tax deduction benefits have been recognized. As of March 31, 2010 the Company had $400 of unrecognized compensation expense that is expected to be recognized over a weighted-average period of 2.2 years.

 

20


11. Commitments and Contingencies

The Company leases its corporate offices and a subsidiary warehouse and office facility under operating leases that expire from May 2010 through May 2012. The leases also provide for payments of the Company’s share of common area operating expenses. The Company also utilizes various property and equipment under operating leases.

At March 31, 2010, future minimum rental payments under operating lease agreements that expire after March 31, 2010 are as follows:

 

Fiscal Year Ending

   Amounts  

March 31, 2011

   $ 838   

March 31, 2012

     751   

March 31, 2013

     378   

March 31, 2014

     230   
        

Total

   $ 2,197   
        

Rent expense for the years ended March 31, 2010, 2009 and 2008 totaled $903, $890 and $806, respectively, and is included in selling, general and administrative expenses.

From time to time the Company is involved in various legal proceedings incidental to the normal conduct of its business. During the year ended March 31, 2010 the Company settled most aspects of one matter by agreeing with the claimant to a monthly payment arrangement extending through the year ending March 31, 2011. The $645 settlement is included in accrued expenses as of March 31, 2010. An additional $121 was settled after March 31, 2010, but the liability was not determined and therefore not accrued as of March 31, 2010. The Company also has received claims involving employment matters claiming discrimination and unpaid compensation. These matters have been referred to the Company’s insurance carriers for defense. Several matters seek damages, including punitive damages, which may not be insured. These matters are in preliminary stages and the outcomes are not predictable. Management believes that its insurance coverage is sufficient, has accrued no loss provision in addition to the settlement noted above, and does not believe that the legal proceedings are likely to have a material adverse effect upon the Company.

12. Benefit Plans

Masterplan maintains a voluntary defined contribution 401(k) plan. Participation in the plan is available to all Masterplan employees after 90 days employment. Masterplan matched a portion of the employees’ contributions up to 3% for the years ended March 31, 2009 and 2008. Masterplan suspended employer contributions in April 2009, but has accrued $500 as of March 31, 2010. Masterplan’s contribution payments to its plan during the years ended March 31, 2010, 2009 and 2008 totaled $0, $536 and $521, respectively, and are included in selling, general and administrative expenses.

 

21


ReMedPar also maintains a 401(k) plan covering substantially all ReMedPar employees. ReMedPar contributions are made at management’s discretion. ReMedPar suspended employer contributions in April 2009. ReMedPar’s contributions to its plan during the years ended March 31, 2010, 2009 and 2008 totaled $0, $50 and $50, respectively, and are included in selling, general and administrative expenses.

13. Income Taxes

Income tax (benefit) consists of the following:

 

     Fiscal Year
Ended
March 31,
2010
    Fiscal Year
Ended
March 31,
2009
    Fiscal Year
Ended
March 31,
2008
 

Current federal income taxes

   $ 681      $ —        $ —     

Current state income taxes

     281        416        101   

Current foreign income taxes

     19        —          —     

Deferred income taxes

     (6,158     (15,732     (3,664
                        

Net income tax (benefit)

   $ (5,177   $ (15,316   $ (3,563
                        

The differences between federal income taxes computed at the statutory rate and at the actual rate provided consist of the following:

 

     Fiscal Year
Ended
March 31,
2010
    Fiscal Year
Ended
March 31,
2009
    Fiscal Year
Ended
March 31,
2008
 

Statutory rate

     34.0     34.0     34.0

Non-deductible goodwill impairment

     (23.7     (28.8     —     

State income taxes

     (0.4     (0.2     (1.0

Other

     0.3        4.0        (6.0
                        

Effective tax rate

     10.2     9.0     27.0
                        

 

22


Deferred income taxes reflect the impact of temporary differences between the financial statement and tax bases of assets and liabilities and tax loss carryforwards. The tax effects of temporary differences that create deferred tax assets and liabilities consist of the following:

 

     March 31,
2010
    March 31,
2009
    March 31,
2008
 

Deferred tax assets

      

Net operating loss carryforwards

   $ 3,488      $ 3,488      $ 3,488   

Accrued expenses

     2,380        1,641        1,061   

Derivative obligation

     —          900        944   

Doubtful accounts

     399        305        171   

Inventories

     843        709        531   

Other

     195        337        532   
                        

Total gross deferred tax assets

     7,305        7,380        6,727   

Less valuation allowance

     (991     (1,036     (355
                        

Net deferred tax assets

     6,314        6,344        6,372   
                        

Deferred tax liabilities

      

Intangible assets

     (8,735     (14,989     (30,534

Depreciation and amortization

     (211     (145     (360
                        

Net deferred tax liabilities

     (8,946     (15,134     (30,894
                        

Net deferred tax assets (liabilities)

   $ (2,632   $ (8,790   $ (24,522
                        
     March 31,
2010
    March 31,
2009
    March 31,
2008
 

Current deferred tax assets

   $ 6,285      $ 5,489      $ 5,067   

Net non-current deferred tax assets (liabilities)

     (8,917     (14,279     (29,589
                        

Net deferred tax assets (liabilities)

   $ (2,632   $ (8,790   $ (24,522
                        

The various entities within the Company have a tax-allocation agreement.

At March 31, 2010, the Company had net operating loss carryforwards of $26,000 for federal income tax reporting purposes and $8,000 for various state income tax reporting purposes. Should there be a change of ownership (see Note 15), there will be limits on the utilization of the net operating loss carryforwards to

 

23


offset taxable income. As of March 31, 2010, the valuation allowance does not take into account such a change of ownership. Certain states have deferred or limited the Company’s ability to utilize state net operating loss carryforwards. The Company’s federal net operating loss carryforwards expire beginning in 2022 and state net operating loss carryforwards began expiring in 2005. During the years ended March 31, 2010, 2009 and 2008, the deferred tax asset valuation allowance increased (decreased) by ($45), $681 and ($624), respectively.

Federal income tax returns for the fiscal years ended March 31, 2007 and later are open for examination by taxing authorities. State income tax returns for the fiscal years ended March 31, 2006 and later are similarly open for examination.

14. Major Customers

Four customers represented 13%, 13%, 9% and 7% of total revenue for the year ended March 31, 2010, and receivables from these four customers represented 0%, 11%, 6% and 8%, respectively, of net accounts receivable at March 31, 2010.

Four customers represented 13%, 13%, 8% and 7% of total revenue for the year ended March 31, 2009, and receivables from these four customers represented 11%, 1%, 3% and 3%, respectively, of net accounts receivable at March 31, 2009.

Four customers represented 22%, 11%, 10% and 7% of total revenue for the year ended March 31, 2008.

15. Subsequent Events

In April 2010 the Company’s board of directors engaged an investment banking firm to evaluate the Company. In September 2010 the Company’s board of directors engaged the investment banking firm to pursue strategic alternatives and hold discussions with lenders, and also approved severance agreements for seven Company executives. In January 2011 the Company’s board of directors authorized the investment banking firm to negotiate an exclusive arrangement with another business which could result in a change of ownership and settlement of existing debt, and to negotiate further with lenders. Such negotiations are taking place. Certain bonuses and severance payments would be triggered if there is a change of control. These consolidated financial statements do not include any adjustments for the carrying values of assets, liabilities or stockholders’ deficiency that would be affected by such a transaction.

 

24