8-K/A 1 form8ka.txt PAPERFREE MEDICAL SOLUTIONS, INC. FORM 8K/A 7-12-2005 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:

Page 2 Pro forma Consolidated Condensed Statement of Operations:

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

See accompanying summary of accounting policies and notes to financial statements. Page 5

See accompanying summary of accounting policies and notes to financial statements. Page 6

See accompanying summary of accounting policies and notes to financial statements. Page 7

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:

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

PaperFree Medical Solutions, Inc. 8-K/A