<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file 02-25856
CRA MANAGED CARE, INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2658593
(State or other jurisdiction of (I.R.S. employer identification No.)
incorporation or organization)
312 Union Wharf, Boston Massachusetts 02109
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code)
(617) 367-2163
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
the filing requirements for the past 90 days. Yes /X/ No/ /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K /X/.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant totaled $313,209,000 (based on the closing price of the Company's
Common Stock on The Nasdaq National Market on March 19, 1997).
As of March 19, 1997, the Registrant had outstanding an aggregate of
8,961,985 shares of its Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Registrant's 1996 Annual Report to Stockholders are
incorporated by reference into Part II and IV of this report.
Certain parts of the Registrant's definitive Proxy Statement dated April 4,
1997 are incorporated by reference into Part III of this report.
<PAGE>
This Form 10-K/A is being filed solely to file the amended Exhibit 13
attached hereto. Accordingly, the remainder of the Registrant's Form 10-K as
originally filed is unaffected by this filing.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 30th day
of July, 1997.
CRA MANAGED CARE, INC.
By: /s/ Joseph F. Pesce
--------------------------
Joseph F. Pesce
Senior Vice President-Finance and
Administration, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This document contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Reference is hereby made
to the Company's Annual Report on Form 10-K for the year ended December 31,
1996 filed with the Securities and Exchange Commission for certain
considerations that could cause actual results to differ materially from
those contained in this document.
Overview
CRA provides field case management and specialized cost containment
services designed to reduce workers' compensation costs. Field case
management services involve working on a one-on-one basis with injured
employees and their various health care professionals, employers and
insurance company adjusters to assist in maximizing medical improvement and,
where appropriate, to expedite return to work. Specialized cost containment
services include various techniques designed to reduce the cost of workers'
compensation claims and automobile accident injury claims.
The Company operates one of the largest field case management
organizations in the United States, consisting of 118 field case management
offices with approximately 1,125 field case managers who provide medical
management and return to work services in 49 states and the District of
Columbia. CRA also provides a broad range of specialized cost containment
services, including utilization management, telephonic case management and
retrospective medical bill review services, that are designed to reduce costs
associated with work-related injuries. The Company markets its services to
workers' compensation insurers, third-party administrators and self-insured
employers through a direct sales and marketing organization consisting of
over 150 dedicated personnel. CRA currently has over 1,250 customers
nationwide.
The Company was founded in 1978 to provide field case management services
to workers' compensation payors. In 1990, as part of its strategy to provide
a comprehensive range of managed care services to its customers and to
leverage its national organization and local office network in field case
management, CRA began introducing specialized cost containment services
designed to reduce the cost of workers' compensation claims. The Company
believes that specialized cost containment services represent an important
growth opportunity for CRA and that the majority of such services generate
higher gross margins than traditional field case management services.
Historically, the Company's field case management revenue growth has
resulted from both local market share gains as well as geographic office
expansion. The Company opened 15 new field case management offices in 1994,
eight in 1995, all of which were in connection with the acquisition of Alta
Pacific Corporation and eight in 1996. The Company believes that its field
case management office network is of sufficient size to serve adequately the
needs of its nationwide customers. As a result, the Company expects that it
will need to open only a few new field case management offices per year to
satisfy client needs in selected regions.
Since 1990, the Company has offered specialized cost containment services
which in 1996 represented approximately 33.8% of revenues. The Company
provides specialized cost containment services from 70 service locations
across the country. The Company opened 13 new specialized cost containment
locations in 1994, two in 1995 and 20 in 1996.
Set forth below for each of the three most recent years is the percentage
of the Company's revenues generated from its field case management services
and its specialized cost containment services.
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
Field case management services 76.0% 72.9% 66.2%
Specialized cost containment services 24.0% 27.1% 33.8%
On March 8, 1994, the Company completed a recapitalization
("Recapitalization"), pursuant to which the Company redeemed an aggregate of
49.0% of the then outstanding shares of Common Stock from the Company's
principal stockholders for a total consideration of $50,412,000 in cash and
$5,000,000 in junior subordinated notes ("Junior
<PAGE>
Subordinated Notes"). To finance these redemptions and related expenses, the
Company issued an aggregate of $10,000,000 of Preferred Stock, borrowed
$17,000,000 in term loans ("Term Loans")and $5,000,000 in revolving credit
("Former Revolving Credit Facility")and issued $21,000,000 in senior
subordinated notes ("Senior Subordinated Notes").
On May 10, 1995, the Company completed the sale of 2,515,625 shares of
its Common Stock, including the exercise of the underwriters over-allotment
option, at a price of $16.00 per share, generating net proceeds to the
Company of $36,507,000. These proceeds, supplemented by borrowings under a
new credit facility ("Credit Facility") ($5,000,000) were used to repay fully
the Term Loan ($16,250,000), the Former Revolving Credit Facility
($4,226,000) and the Senior Subordinated Notes ($21,000,000). The early
repayment of this debt resulted in a loss on the retirement of debt of
$2,460,000.
<PAGE>
On October 23, 1995, the Company acquired Alta Pacific Corporation, a
workers' compensation case management company with eight offices in the state
of Washington, with revenues of approximately $3,000,000, in a pooling of
interests for 136,150 shares of Common Stock, or approximately $2,900,000 in
value, based upon the market value of the stock on the acquisition date. This
acquisition was not material to the Company's financial statements and the
Company restated its opening retained earnings as of the acquisition date to
reflect the net assets of Alta Pacific Corporation. As such, the results for
the year ended December 31, 1995 only include the operating results of Alta
Pacific Corporation subsequent to the acquisition date.
On April 2, 1996, the Company purchased FOCUS HealthCare Management, Inc.
("FOCUS") from United HealthCare Corporation for $21,000,000 in cash. FOCUS,
based in Brentwood, Tennessee, has built and maintains one of the nation's
largest workers' compensation preferred provider organization ("PPO")
networks, and had annual revenues of approximately $9,900,000 for the year
ended December 31, 1995. In order to finance this acquisition, the Company
and First Union Bank signed an amendment to expand the Company's borrowing
capacity under the Credit Facility to $40,000,000 under similar terms and
conditions.
On May 29, 1996, the Company acquired all the outstanding capital stock of
QMC3, Inc. ("QMC3") in exchange for 230,441 shares of the Company's Common
Stock in a pooling of interests, which was valued at approximately $8,500,000
as of the date of the acquisition agreement. QMC3, based in Denver, Colorado,
is a leading managed care services company serving the automobile liability
insurance market, and has been instrumental in helping to obtain the passage
of legislation in Colorado and New York enabling the mandatory direction of
medical care for automobile accident victims. QMC3 had annual revenues in
1995 of approximately $2,000,000. This acquisition, which was accounted for
as a pooling of interests, was not material to the Company's financial
statements and the Company restated its opening retained earnings as of the
acquisition date to reflect the net assets of QMC3. As such, the results for
the year ended December 31, 1996 only include the operating results of QMC3
subsequent to the acquisition date.
On June 7, 1996, the Company completed the sale of 2,875,000 shares of its
Common Stock, including the exercise of the underwriters' over-allotment
option, at a price of $46.00 per share. Of the aggregate shares of Common
Stock sold, 1,200,000 shares were sold for the account of the Company
generating net proceeds to the Company of approximately $51,840,000 and
1,675,000 shares were sold for account of certain stockholders of the
Company. The Company used approximately $29,000,000 of the net proceeds to
repay borrowings under the expanded Credit Facility with First Union Bank.
On October 29, 1996, the Company purchased Prompt Associates, Inc. ("Prompt")
for approximately $30,000,000 in cash. Prompt, which is based in Salt Lake
City, Utah, is one of the leading providers of hospital bill audit services
to the group health payor community for claims that fall outside of an
indemnity carrier's, third-party administrator's ("TPA") or health
maintenance organization's ("HMO") network of hospital or outpatient
facilities. Prompt had annual revenues of approximately $10,000,000 for the
year ended December 31, 1995. In order to finance this acquisition, the
Company utilized approximately $25,000,000 of its existing cash, supplemented
by borrowings of approximately $5,000,000 under the Company's Credit Facility.
As a result of the acquisitions of Focus and Prompt, the Company recorded
approximately $49.5 million purchase price in excess of net tangible assets
acquired. The Company assigned approximately $1.4 million to assembled
workforce and customer lists based upon the expected costs to replace these
assets. The remaining $48.1 million was allocated to goodwill. The Company
periodically reviews whether changes have occurred, either specific to the
business or generally in the industry, which might result in an impairment of
a portion or all of the goodwill or other long-lived assets. In connection
with any required review, management compares undiscounted future cash flows
from the businesses to the carrying value of the long-term assets. If the
undiscounted future cash flows are less than carrying value of assets, the
Company would record a write-down in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of."
Each of the FOCUS and Prompt acquisitions constituted a strategic opportunity
to expand CRA's product line. Neither of the acquired companies is
asset-intensive, neither owns its facilities, and neither is dependent on
technology. Each of these acquisitions was the product of an arms-length
negotiation conducted within a highly competitive bidding process, and in
each case the ultimate purchase price was based on the strategic value of the
acquired business, rather than the value of its assets.
The Company currently derives less than 2% of its revenue on a case rate
or capitated basis. Although risk sharing arrangements are not common in
today's workers' compensation managed care services industry, the Company
believes that these arrangements may become more prevalent in the future.
Result of Operations
Years Ended December 31, 1996 and 1995
Revenues
Revenues increased 23.0% in 1996 to $179,652,000 from $146,055,000
in 1995. Field case management revenues increased 11.6% in 1996 to
$118,864,000 from $106,462,000 in 1995, while specialized cost containment
revenues increased 53.5% in 1996 to $60,788,000 from $39,593,000 in 1995. The
field case management revenue growth is primarily attributable to the
acquisition of Alta Pacific Corporation in the fourth quarter of 1995, the
opening of eight offices during 1996 and growth in revenues from existing
service locations. The specialized cost containment revenue growth is
primarily attributable to the acquisition of FOCUS on April 2, 1996, QMC3 on
May 29, 1996 and Prompt on October 29, 1996. Excluding these acquisitions,
cost containment revenues would have increased
<PAGE>
approximately 27.0% over 1995. This revenue growth is attributable to the
addition of 15 service locations during 1996, excluding the service locations
associated with the FOCUS, QMC3 and Prompt acquisitions, and continued growth
in retrospective bill review and telephonic case management services in
existing service locations. The Company expects to experience substantial
revenue growth from its specialized cost containment offerings in 1996 due to
its acquisitions and continued growth in its other cost containment product
offerings.
<PAGE>
Cost Of Services
Cost of services increased 20.5% in 1996 to $147,747,000 from $122,615,000 in
1995 due to an increase in revenues and the acquisitions of FOCUS, QMC3 and
Prompt. Cost of services as a percentage of revenue decreased to 82.2% in
1996 compared to 84.0% in 1995. This improvement in gross margin is primarily
the result of productivity gains in field case management services coupled
with a shift in the Company's revenue mix towards specialized cost
containment services, including the services provided by FOCUS, QMC3 and
Prompt, which historically have had higher gross profit margins than revenues
derived from field case management services. The Company's cost of services
consists primarily of salaries and related benefits, rent, travel, marketing,
telephone expenses and other office-related costs.
General and Administrative Expenses
General and administrative expenses increased 31.0% in 1996 to $14,439,000
from $11,021,000 in 1995, or to 8.0% from 7.5% as a percentage of revenue for
1996 and 1995, respectively. The increase in general and administrative
expenses in 1996 primarily was due to increased expenditures for marketing
initiatives, additional investments in the information technology group and
general and administrative expense associated with FOCUS and Prompt.
Other Expense
Other expense for 1996 consisting entirely of interest income and expense,
decreased by $2,285,000 to $199,000 in 1996 from $2,484,000 in 1995. The
Company recorded interest income of $571,000 which was the result of the
investment of excess proceeds from the sale of Common Stock in June of 1996
until such cash was utilized for the purchase of Prompt in October 1996.
Interest expense decreased $1,714,000 in 1996 to $770,000 compared to
interest expense of $2,484,000 in 1995. The decrease in interest expense in
1996 was due primarily to the repayment of the Term Loan and Senior
Subordinated Notes with the proceeds from the sale of Common Stock in May
1995. This decrease in interest expense was partially offset by interest
expense associated with Credit Facility borrowings utilized to finance the
FOCUS acquisition in April of 1996 (until repaid with a portion of the
proceeds from the Company's sale of Common Stock in June of 1996) and
additional Credit Facility borrowings utilized to finance the Prompt
acquisition in October 1996.
Provision for Income Taxes
The Company's provision for income taxes for 1996 was $7,166,000, or an
effective tax rate of 41.5%, compared to a tax provision for 1995 of
$3,974,000, or an effective tax rate of 40.3%. The Company expects its
effective tax rate to increase to approximately 44% for 1997 due to the
non-deductibility of goodwill amortization associated with the FOCUS and
Prompt acquisitions.
Years Ended December 31, 1995 and 1994
Revenues
Revenues increased 20.4% in 1995 to $146,055,000 from $121,295,000
in 1994. Field case management revenue increased 15.4% in 1995 to
$106,462,000 from $92,232,000 in 1994, while specialized cost containment
revenue grew by 36.2% in 1995 to $39,593,000 from $29,063,000 in 1994. This
growth is attributable to the opening of 23 new field case management and 15
new specialized cost containment service locations throughout 1994 and 1995
as well as growth in revenues from existing service locations. The Company
experienced significant revenue growth from its specialized cost containment
offerings in 1995, as revenues from the Company's bill review, telephonic
case management and precertification services increased by over 60% from the
prior year.
Cost of Services
Cost of services increased 18.1% in 1995 to $122,615,000 from $103,796,000 in
1994. Cost of services increased in 1995 primarily due to expenses associated
with the opening of additional service locations and compensation of related
personnel. Cost of services as a percentage of revenue for 1995 decreased to
84.0% from 85.6% in 1994. This improvement is the result of increased field
case management gross profit margins due to productivity gains coupled with a
further shift in the Company's revenue mix towards the specialized cost
containment services, especially bill review, which historically have had
higher gross profit margins than field case management services.
General and Administrative Expenses
General and administrative expenses increased 25.9% in 1995 to $11,021,000
from $8,753,000 in 1994, or 7.5% and 7.2% as a percentage of revenue for 1995
and 1994, respectively. This increase was due primarily to increased expenses
for additional senior corporate management and to significant investments in
the information technology
<PAGE>
group, national marketing, PPO network development and other administrative
functions. These additions and investments occurred primarily in the second
half of 1994.
<PAGE>
Other Expense
Other expense for 1995 consisted entirely of interest expense. Interest
expense for 1995 decreased $1,603,000 to $2,484,000 in 1995 from $4,087,000
in 1994 due to the repayment of debt in connection with the sale of Common
Stock on May 10, 1995.
Provision for Income Taxes
The Company's effective tax rate was 40.3% for 1995 which resulted in a tax
provision of $3,974,000. In connection with the Recapitalization during 1994,
the Company converted from S to C corporation status and was required to
report income on an accrual basis for tax purposes rather than on a cash
basis.
Loss on Retirement of Debt
The Company used the net proceeds ($36,507,000) from the sale of Common
Stock, supplemented by borrowings under the New Credit Facility ($5,000,000)
to fully repay the Term Loan ($16,250,000), the Former Revolving Credit
Facility ($4,226,000) and the Senior Subordinated Notes ($21,000,000). The
early repayment of this debt resulted in the Company recording a loss on the
retirement of debt of $2,460,000 comprised of the write-off of associated
deferred finance costs ($1,772,000), debt discount on the Senior Subordinated
Notes ($2,140,000) and fees associated with the termination of the interest
rate swaps previously required by the loan agreement ($158,000), offset by a
tax benefit of $1,610,000.
Liquidity and Capital Resources
The Company has historically funded its working capital requirements and
capital expenditures primarily from cash flow generated from operations
supplemented by short-term borrowings under revolving credit facilities and
the proceeds of its public offerings of Common Stock. Cash flows generated
from operations were $5,594,000, $4,114,000 and $2,723,000 for the years
ended December 31, 1994, 1995 and 1996, respectively. During 1996, working
capital used $10,368,000 of cash primarily due to an increase in accounts
receivable of $8,299,000 and a decrease in accounts payable and accrued
expenses of $2,494,000, offset by a decrease in prepaid expenses of $425,000.
Accounts receivable increased due to continued revenue growth while accounts
payable and accrued expenses decreased due to the timing of payments,
especially those associated with the Company's acquisition of FOCUS and
Prompt. Prepaid expenses decreased primarily due to the decrease in prepaid
income taxes.
The Company used net cash of $49,973,000 in connection with the acquisitions
of FOCUS and Prompt. The Company purchased FOCUS in April 1996 for
approximately $21,000,000 in cash and Prompt in October 1996for approximately
$30,000,000 in cash. The Company also used $3,907,000 of cash to purchase
property and equipment during 1996, the majority of which was spent on new
computers and software packages.
On January 16, 1996, the Company utilized borrowings under the Credit
Facility to retire the $5,000,000 10% Junior Subordinated Notes issued in
connection with the Recapitalization.
In June of 1996, the Company sold an aggregate of 1,200,000 shares of its
Common Stock, including the exercise of the underwriters' over-allotment
option, at a price of $46.00 per share generating net proceeds to the Company
of approximately $51,840,000. The Company used approximately $29,000,000 of
the net proceeds to repay all of the outstanding borrowings under the Credit
Facility with First Union Bank.
The Company has a $40,000,000 Credit Facility with First Union Bank. The
Company's obligations under the Credit Facility are secured by a first
priority security interest in substantially all of the Company's properties
and assets. At December 31, 1996, the Company had borrowings under the Credit
Facility of $5,700,000 at an average rate of interest of 7.61%.
The Company's long-term liquidity needs consist of working capital and
capital expenditure requirements, repayment of borrowings under the Credit
Facility and the funding of any future acquisitions. The Company intends to
fund these long-term liquidity needs from cash generated from operations,
available borrowings under the Credit Facility and, if necessary, future debt
or equity financing. There can be no assurance that any future debt or equity
financing will be available on terms favorable to the Company.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
CRA Managed Care, Inc.:
We have audited the accompanying consolidated balance sheets of CRA Managed
Care, Inc. (a Massachusetts corporation) as of December 31, 1996 and 1995,
and the related consolidated statements of operations, cash flows and
stockholders' equity (deficit) for each of the three years in the period
ended December 31, 1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 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 CRA Managed Care, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 27, 1997
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
<S> <C> <C>
ASSETS 1995 1996
- ------------------------------------------- ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $3,005,000 $2,596,000
Accounts receivable, less allowance for
doubtful accounts of $430,000 and
$2,167,000 respectively 26,380,000 36,446,000
Prepaid expenses 629,000 1,012,000
Prepaid taxes 319,000 --
----------- -----------
Total current assets 30,333,000 40,054,000
PROPERTY AND EQUIPMENT, AT COST 11,732,000 20,906,000
Less: Accumulated depreciation and
amortization 5,864,000 12,016,000
----------- -----------
Net property and equipment 5,868,000 8,890,000
OTHER ASSETS:
Goodwill, net of amortization -- 47,529,000
Assembled workforce and customer
lists -- 1,259,000
Other assets 355,000 396,000
----------- -----------
Total other assets 355,000 49,184,000
----------- -----------
$36,556,000 $98,128,000
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------
CURRENT LIABILITIES:
Revolving credit facilities $4,300,000 $5,700,000
Current portion of long-term debt 5,000,000 56,000
Accrued interest expense 18,000 --
Accounts payable and accrued expenses 5,927,000 7,975,000
Accrued payroll and related
expenses 7,595,000 6,663,000
Accrued income taxes -- 315,000
----------- -----------
Total current liabilities 22,840,000 20,709,000
LONG-TERM DEFERRED TAX LIABILITIES 2,056,000 841,000
COMMITMENTS AND CONTINGENCIES (Notes 8 and 12)
STOCKHOLDERS' EQUITY:
Preferred Stock -- $.01 par value;1,000,000
authorized; none issued and outstanding -- --
Common stock-- $.01 par value; 10,000,000
and 40,000,000 authorized; 7,372,424 and
8,921,403 shares issued and outstanding,
respectively 74,000 89,000
Paid-in capital 36,839,000 91,234,000
Retained deficit (25,253,000) (14,745,000)
----------- -----------
Total stockholders' equity 11,660,000 76,578,500
----------- -----------
$36,556,000 $98,128,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1994 1995 1996
------------ ------------ ------------
REVENUES............................... $121,295,000 $146,055,000 $179,652,000
COST OF SERVICES....................... 103,796,000 122,615,000 147,747,000
------------ ------------ ------------
GROSS PROFIT....................... 17,499,000 23,440,000 31,905,000
GENERAL AND ADMINISTRATIVE EXPENSES.... 8,753,000 11,021,000 14,439,00
------------ ------------ ------------
OPERATING INCOME....................... 8,746,000 12,419,000 17,466,000
OTHER (INCOME) EXPENSE:
Interest (income)..................... (62,000) -- (571,000)
Interest expense...................... 4,087,000 2,484,000 770,000
Other expense......................... 132,000 -- --
------------ ------------ ------------
Total other (income) expense....... 4,157,000 2,484,000 199,000
INCOME BEFORE INCOME TAXES......... 4,589,000 9,935,000 17,267,000
PROVISION FOR INCOME TAXES
Current year operations............... 1,530,000 3,974,000 7,166,000
Change in tax status.................. 3,772,000 -- --
------------ ------------ ------------
Total provision for income taxes... 5,302,000 3,974,000 7,166,000
------------ ------------ ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS................................ (713,000) 5,961,000 10,101,000
LOSS ON RETIREMENT OF DEBT, NET OF
TAXES OF $1,610,000.................. -- (2,460,000) --
------------ ------------ ------------
NET INCOME (LOSS)...................... ($713,000) $3,501,000 $10,101,000
------------ ------------ ------------
------------ ------------ ------------
ACTUAL AND PRO FORMA EARNINGS PER SHARE:
Pro forma net income (Note 2)........ 2,753,000
------------
------------
Net income before extraordinary
items............................... $0.57 $0.91 $1.19
Loss on retirement of debt, net of
taxes............................... -- (0.37) --
------------ ------------ ------------
Net income............................ $0.57 $0.54 $1.19
------------ ------------ ------------
Weighted average shares outstanding... 4,815,000 6,540,000 8,475,000
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1994 1995 1996
---------- ---------- -----------
CASH FLOWS FROM OPERATIONS:
Net income (loss)................. ($713,000) $3,501,000 $10,101,000
Items not requiring cash:
Depreciation of property and equipment 1,274,000 1,601,000 2,330,000
Amortization of intangibles....... -- -- 662,000
Provision for doubtful accounts... 353,000 186,000 1,213,000
Amortization of deferred finance
costs and debt discount......... 521,000 228,000 --
Loss on retirement of debt........ -- 3,912,000 --
Loss on disposal of fixed
assets.......................... 134,000 -- --
Provision for deferred taxes...... 2,758,000 208,000 (1,215,000)
Change in assets and liabilities:
Accounts receivable............... (4,730,000) (5,570,000) (8,299,000)
Prepaid expenses and deposits..... (1,407,000) 344,000 425,000
Accounts payable, accrued expenses
and income taxes................ 7,404,000 (296,000) (2,494,000)
---------- ---------- -----------
Cash flows from operations...... 5,594,000 4,114,000 2,723,000
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of FOCUS, QMC3 and
Prompt, net of cash acquired.... -- -- (49,973,000)
Purchase of property and
equipment....................... (2,788,000) (2,492,000) (3,907,000)
Other investing activities........ (10,000) (12,000) (8,000)
---------- ---------- -----------
Cash flows used for investing
activities................... (2,798,000) (2,504,000) (53,888,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under
revolving credit facilities,
net............................. 4,716,000 (416,000) 1,400,000
Proceeds from the issuance of Term
Loan............................ 17,000,000 -- --
Payments on Term Loan............. (750,000) (16,250,000) --
Proceeds (payment) on Senior
Subordinated Notes.............. 21,000,000 (21,000,000) --
Proceeds (payment) on Junior
Subordinated Notes.............. 5,000,000 -- (5,000,000)
Payments on other long-term
debt............................ -- -- (52,000)
Net proceeds from the issuance of
Preferred Stock................. 9,249,000 -- --
Net proceeds from the sale of
Common Stock..................... -- 36,507,000 51,840,000
Proceeds for the sale of Common
Stock under the employee stock
purchase plan and stock option
plans........................... -- 357,000 2,568,000
Costs associated with the issuance
of debt......................... (2,154,000) -- --
Repurchase of common stock........ (55,412,000) -- --
---------- ---------- -----------
Cash flows provided by (used for)
financing activities........... (1,351,000) (802,000) 50,756,000
---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS.............. 1,445,000 808,000 (409,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR................. 752,000 2,197,000 3,005,000
---------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................ $2,197,000 $3,005,000 $2,596,000
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid...................... $2,902,000 $2,865,000 $987,000
Income taxes paid.................. $3,690,000 $3,392,000 $6,579,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE CLASS A $0.01 PAR VALUE
PREFERRED STOCK COMMON STOCK COMMON STOCK
-------------------------- ----------------------- -----------------------
NUMBER NUMBER NUMBER PAID-IN RETAINED
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE CAPITAL EARNINGS
------------ ------------ ----------- ----------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE --
DECEMBER
31, 1993.. $ -- 4,700,000 $ 1,000 -- $ -- $ -- $ 15,855,000
Treasury --
Stock
Purchase.. -- -- -- -- -- -- --
Treasury --
Stock
Reissuance.. -- -- -- -- -- -- (12,039,000)
Issuance of 1,698,463
Preferred
Stock..... 9,249,000 -- -- -- -- -- --
Net Loss.... -- -- -- -- -- -- -- (713,000)
BALANCE 1,698,463
DECEMBER
31,1994... 9,249,000 4,700,000 1,000 -- -- -- 3,103,000
Conversion (1,698,463)
of
Convertible
Preferred
Stock into
Class A
Common
Stock..... -- (9,249,000) -- -- -- -- -- (31,617,000)
Conversion
of Class A
into $0.01
par value
Common
Stock..... -- -- (4,700,000) (1,000) 4,700,000 47,000 -- (46,000)
Sale of Common
Stock..... -- -- -- -- 2,515,625 25,000 36,482,000
Common Stock --
issued for
the
acquisition
of Alta
Pacific
Corporation.. -- -- -- 136,150 2,000 -- (194,000)
Common Stock --
issued
under
employee
stock
purchase
and option
plans..... -- -- -- 20,649 -- 357,000 --
Net Income.. -- -- -- -- -- -- -- 3,501,000
---------- --------- --------- ---------- --------- -------- ----------- -----------
BALANCE --
DECEMBER
31, 1995.. -- -- -- 7,372,424 74,000 36,839,000 (25,253,000)
---------- --------- --------- ---------- --------- -------- ----------- -----------
---------- --------- --------- ---------- --------- -------- ----------- -----------
Sale of Common
Stock..... -- -- -- -- 1,200,000 12,000 51,828,000
Common Stock
issued for
the
acquisition
of QMC3... -- -- -- -- 230,441 2,000 -- 407,000
Common Stock
issued
under
employee
stock
purchase
and option
plans..... -- -- -- -- 118,538 1,000 2,567,000 --
Net Income.. -- -- -- -- -- -- -- 10,101,000
---------- --------- --------- ---------- --------- -------- ----------- -----------
BALANCE
DECEMBER
31, 1996.. -- $ -- -- $ -- 8,921,403 $ 89,000 $ 91,234,000 ($ 14,745,000)
---------- --------- --------- ---------- --------- -------- ----------- -----------
---------- --------- --------- ---------- --------- -------- ----------- -----------
<CAPTION>
SERIES A
TREASURY STOCK STOCK-
------------------------- HOLDERS'
NUMBER EQUITY
OF SHARES VALUE (DEFICIT)
------------ ----------- -------------
<S> <C> <C> <C>
BALANCE
DECEMBER
31, 1993.. -- $ -- $ 15,856,000
Treasury
Stock
Purchase.. (2,303,000) (55,412,000) (55,412,000)
Treasury
Stock
Reissuance.. 604,537 14,546,000 2,507,000
Issuance of
Preferred
Stock..... -- -- 9,249,000
Net Loss.... -- -- (713,000)
----------- ------------ ------------
BALANCE
DECEMBER
31, 1994.. (1,698,463) (40,866,000) (28,513,000)
----------- ------------ ------------
----------- ------------ ------------
Conversion
of
Convertible
Preferred
Stock into
Class A
Common
Stock..... 1,698,463 40,866,000 --
Conversion
of Class A
into $0.01
par value
Common
Stock..... -- -- --
Sale of Common
Stock..... -- -- 36,507,000
Common Stock
issued for the
acquisition
of Alta
Pacific
Corporation -- -- (192,000)
Common Stock
issued
under
employee
stock
purchase
and option
plans..... -- -- 357,000
Net Income.. -- -- 3,501,000
----------- ------------ ------------
BALANCE
DECEMBER
31, 1995.. -- -- 11,660,000
----------- ------------ ------------
----------- ------------ ------------
Sale of Common
Stock..... -- -- 51,840,000
Common Stock
issued for the
acquisition
of QMC3... -- -- 409,000
Common Stock
issued
under
employee
stock
purchase
and option
plans..... -- -- 2,568,000
Net Income.. -- -- 10,101,000
----------- ------------ ------------
BALANCE
DECEMBER
31, 1996.. -- $ -- $ 76,578,000
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Organization, Capitalization and Acquisitions
CRA Managed Care, Inc. (the "Company") was founded in 1978 and is a provider
of field case management and specialized cost containment services designed to
reduce workers' compensation costs. On March 8, 1994 the Company completed a
recapitalization (the "Recapitalization"), which included the repurchase of
2,303,000 shares of Common Stock from the two principal stockholders of the
Company for $55,412,000; and the sale of 1) 1,698,463 shares of Series A
Preferred Stock for $10,000,000 to J.H. Whitney & Co. and affiliated companies
("Whitney", $9,000,000) and the First Union Corporation ("First Union",
$1,000,000), with each share being convertible into one share of Common Stock,
2) $17,000,000 principal amount of term loans (the "Term Loan") and a
$10,000,000 revolving credit facility (the "Former Revolving Credit Facility")
due March 31, 1999 at an interest rate of the Base Rate plus 1 1/2% or LIBOR
plus 3% to First Union Bank of North Carolina ("First Union Bank"), 3)
$21,000,000 principal amount of senior subordinated promissory notes (the
"Senior Subordinated Notes") due March 8, 2001 at an interest rate of the
10.101% to Whitney ($19,000,000) and First Union ($2,000,000), and 4) $5,000,000
principal amount of junior subordinated notes (the "Junior Subordinated Notes")
due March 9, 2002 at an interest rate of 10.0% to the Company's two principal
stockholders.
The Company incurred costs of $2,905,000 in connection with the
Recapitalization of which $751,000 was assigned to the issuance of the Preferred
Stock and $2,154,000 to the issuance of the debt. Furthermore, the Company
issued 604,538 shares of Common Stock from its treasury stock to Whitney
(546,963 shares) and First Union (57,575 shares) in connection with the issuance
of the Senior Subordinated Notes. The Company assigned a value of $2,507,000 to
these shares which was recorded as debt discount on the Senior Subordinated
Notes.
On March 15, 1995 the Board of Directors voted to restate the Company's
Amended and Restated Articles of Organization. The effect of the restatement was
(i) to increase to 10,000,000 the number of authorized shares of Common Stock,
to change the par value of the Common Stock to $.01 per share and to create a
new class of preferred stock, $.01 par value and (ii) to effect a 4.7 to 1.0
stock split.
On May 10, 1995, the Company completed its initial public offering of
2,515,625 shares of its Common Stock, including the exercise of the underwriters
over-allotment option, at a price of $16.00 per share, generating net proceeds
to the Company of $36,507,000. These proceeds, supplemented by borrowings of
$5,000,000 under a new $25,000,000 credit facility (the "Credit Facility") with
First Union Bank were used to repay fully the Term Loan ($16,250,000) and the
Former Revolving Credit Facility ($4,226,000) with First Union Bank and the
Senior Subordinated Notes ($21,000,000) issued to Whitney and First Union. The
early repayment of this debt resulted in a loss on the retirement of debt of
$2,460,000 comprised of the write-off of associated deferred finance costs
($1,772,000), debt discount on the Senior Subordinated Notes ($2,140,000) and
fees associated with the termination of the interest rate swaps required by the
former loan agreement ($158,000), offset by a tax benefit of $1,610,000.
On October 23, 1995, the Company acquired Alta Pacific Corporation, a
workers' compensation case management company with eight offices in the state of
Washington, with revenues of approximately $3,000,000, in a pooling transaction
for 136,150 shares of Common Stock, or approximately $2,900,000 in value, based
upon the market value of the stock on the acquisition date. This acquisition was
not material and the Company restated its opening retained earnings as of the
acquisition date to reflect the net assets of Alta Pacific Corporation. As such,
the results for the year ended December 31, 1995 include the operating results
of Alta Pacific Corporation subsequent to the acquisition date.
On April 2, 1996, the Company purchased FOCUS HealthCare Management, Inc.
("FOCUS") from United HealthCare Corporation for $21,000,000 in cash. FOCUS,
based in Brentwood, Tennessee, has built and maintains one of the nation's
and had annual revenues of approximately $9,900,000 for the year ended
December 31, 1995. In order to finance this acquisition, the Company and
First Union Bank signed an amendment to expand the Company's borrowing
capacity under the Credit Facility to $40,000,000 under similar terms and
conditions.
<PAGE>
On May 21, 1996, at the Company's Stockholder Meeting, the Stockholders voted
to restate the Company's Amended and Restated Articles of Organization to
increase to 40,000,000 the number of authorized shares of Common Stock.
On May 29, 1996, the Company acquired all the outstanding capital stock of
QMC3, Inc. ("QMC3") in exchange for 230,441 shares of the Company's Common Stock
in a pooling of interest transaction, which was valued at approximately
$8,500,000 as of the date of the acquisition agreement. QMC3, based in Denver,
Colorado, is a leading managed care services company serving the automobile
liability insurance market which was instrumental in helping to obtain the
passage of legislation in Colorado and New York enabling the mandatory direction
of medical care for automobile accident victims. QMC3 had annual revenues of
approximately $2,000,000 for the year ended December 31, 1995. This acquisition,
which was accounted for as a pooling of interests, was not material to the
Company's financial statements and the Company restated its opening retained
earnings as of the acquisition date to reflect the net assets of QMC3. As such,
the results for the year ended December 31, 1996 include the operating results
of QMC3 subsequent to the acquisition date.
On June 7, 1996, the Company completed the sale of 2,875,000 shares of its
Common Stock, including the exercise of the underwriters' over-allotment option,
at a price of $46.00 per share. Of the aggregate shares of Common Stock sold,
1,200,000 were sold for the account of the Company generating net proceeds to
the Company of approximately $51,840,000 and 1,675,000 shares were sold for the
account of certain stockholders of the Company. The Company used approximately
$29,000,000 of the net proceeds to repay borrowings under the expanded Credit
Facility with First Union Bank.
On October 29, 1996, the Company purchased Prompt Associates, Inc.
("Prompt") for $30,000,000 in cash. Prompt, which is based in Salt Lake City,
Utah, is one of the leading providers of hospital bill audit services to the
group health payor community for claims that fall outside of an indemnity
carrier's, third-party administrator's ("TPA") or health maintenance
organization's ("HMO") network of hospital or outpatient facilities and had
annual revenues of approximately $10,000,000 for the year ended December 31,
1995. In order to finance this acquisition, the Company utilized approximately
$25,000,000 of its existing cash, supplemented by borrowings of approximately
$5,000,000 under the Company's Credit Facility.
The acquisitions of FOCUS and Prompt have been accounted for by the Company
as purchases whereby the basis for accounting for FOCUS' and Prompt's assets
and liabilities are based upon their fair values at the dates of acquisition.
The allocation of the purchase price to these assets and liabilities is as
follows with the excess of cost over fair value of net assets acquired
(goodwill) being amortized over forty years:
<TABLE>
<CAPTION>
FOCUS PROMPT
-------------- -------------
<S> <C> <C>
Purchase price including fees and expenses:.................... $ 21,555,000 $ 30,594,000
Purchase price allocated to:
Current assets................................................. 1,795,000 2,181,000
Property and equipment......................................... 929,000 450,000
Other long term assets......................................... 5,000 --
Assembled workforce and customer lists......................... 683,000 759,000
Current liabilities............................................ (711,000) (1,587,000)
Long-term deferred tax liabilities............................. (324,000) --
Other long-term debt........................................... (39,000) --
------------- -------------
Net assets acquired............................................ 2,338,000 1,803,000
------------- -------------
Excess of cost over fair value of net assets acquired
(goodwill)................................................... $ 19,217,000 $ 28,791,000
------------- -------------
------------- -------------
</TABLE>
<PAGE>
(2) Actual, Pro Forma and Supplemental Pro Forma Earnings Per Share
(a) Earnings per share
Earnings per share for the years ended December 31, 1995 and 1996 has been
calculated based on the weighted average number of shares of Common Stock and
Common Stock equivalents outstanding during the year.
(b) Pro forma earnings per share
Pro forma earnings per share for the year ended December 31, 1994 has been
calculated as if the Company had been subject to federal and state income taxes
for the period based upon an effective tax rate indicative of the statutory
rates in effect during the period (prior to the Recapitalization on March 8,
1994, the Company elected to be taxed as an S corporation on a cash basis, and
accordingly, was not subject to federal income taxes and certain state income
tax jurisdictions).
(c) Supplemental Pro Forma Earnings Per Share--1996 (Unaudited) Supplemental
pro forma earnings per share for 1996 has been calculated as if (i) the
acquisitions of FOCUS and Prompt had been consummated on January 1, 1996,
(ii) the Company repaid all its outstanding debt at the beginning of 1996
utilizing the net proceeds of $51,840,000 from the sale of 1,200,000 shares
of Common Stock in June, 1996 and (iii) the Company borrowed under its
Revolving Credit Facility at an interest rate of 7.0% for its remaining
borrowing requirements. Supplemental pro forma revenue, net income and
earnings per share for the year ended December 31, 1996 would have been
$194,508,000 and $10,972,000 and $1.22, respectively. The supplemental pro
forma weighted average number of shares of 8,975,000 is the actual weighted
average number of shares of Common Stock and Common Stock equivalents
outstanding plus the impact of the 1,200,000 shares of Common Stock that were
sold.
(3) Summary of Significant Accounting Policies
(a) Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
(b) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents. The carrying
amount approximates fair value due to the short maturity of those instruments.
(c) Revenue Recognition
The Company recognizes revenue as services have been rendered based upon time
and expenses incurred. A certain portion of the Company's revenues are
derived from fee schedule auditing which is based on the number of charges
reviewed, and to a limited extent, based on a percentage of savings achieved
for the Company's customers. In these circumstances, the customer is
obligated to pay the Company when the services have been rendered and the
savings have been identified. During the fee schedule audit process (i.e.
bill review), each bill reviewed and audited is returned to the customer
accompanied by an Explanation of Benefits ("EOB"). The EOB details the total
savings with respect to the bill being reviewed as well as the amounts owed
to the Company as a percentage of savings identified and the line charge
associated with the bill being reviewed. Historically, the Company has
experienced insignificant disputes regarding the total savings achieved
during the bill review process, and therefore, has not deemed it necessary to
establish a reserve for such disputes. Accounts receivable at December 31,
1995 and 1996 include $4,350,000 and $4,500,000, respectively, of unbilled
accounts receivable relating to services rendered but not invoiced until
after the period-end. These unbilled accounts receivable relate primarily to
field case management services, which are billed on a hourly basis, whereby
the Company has not yet provided sufficient enough services which would
warrant an invoice to be generated. The customers are obligated to pay for
services once performed. The Company estimates unbilled accounts receivable
by tracking actual unbilled hours and associated hourly rates.
<PAGE>
A portion of the allowance for doubtful accounts attributable to Prompt is
based on historical experience of ineligible claims which are either charged
back or given a negotiated discount. Prompt utilizes several methods to project
unpresented discounts and chargebacks including a tracking of the actual
experience of contractual discounts. Other factors that affect collectibility
and bad debts for each service line are also evaluated and additional allowance
amounts may be provided.
Insurance claims are modeled by Prompt prior to the insurance company's
internal review procedures to determine if the claims should be modeled by
Prompt or are payable by the insurance company. During the insurance
company's review process, some claims have pre-existing PPO or HMO
arrangements, or other pre-existing conditions and disqualifying situations.
When these situations occur, a refund (chargeback) is requested for the
amounts paid (invoiced) on these claims.
Prompt's policy is to record a sales allowance as an offset to revenues and
accounts receivable based on the historical tracking of discounts and/or
chargebacks at the time the claims are modeled. Prompt recorded net
provisions to the allowance for the two months ended December 31, 1996 of
$689,000.
(d) Depreciation
The Company provides for depreciation on property and equipment using
straight-line and accelerated methods by charges to operations in amounts that
allocate the cost of depreciable assets over their estimated lives as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Furniture and fixtures 7 Years
Office and computer equipment 3--5 Years
Automobiles 5 Years
Leasehold improvements The shorter of the life of lease or asset life
</TABLE>
(e) Intangible assets
The value of goodwill, assembled workforce, and customer lists are recorded
at cost at the date of acquisition. Goodwill, including any excess arising
from earnout payments, is being amortized on a straight-line basis over a
40-year period. The assembled workforce and customer lists are being
amortized over a five-year and seven-year period, respectively. Accumulated
amortization of these intangibles was $659,000 at December 31, 1996. The
Company periodically reviews whether changes have occurred either, specific
to the business or generally in the industry, which might require revision of
the remaining estimated useful life of the assigned goodwill or render all or
a portion of the goodwill non-recoverable. In accordance with Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of," impairments are determined by
comparing undiscounted estimated future cash flows to the carrying value of
long-lived assets.
(f) Deferred finance costs
Costs of $2,154,000 associated with the debt issued in connection with the
Recapitalization was allocated to each debt instrument and was being amortized
as interest expense over the life of the debt instruments with lives ranging
from five to six years. All deferred finance costs were written off as a result
of the early retirement of debt in connection with the sale of Common Stock on
May 10, 1995.
(g) Income Taxes
Prior to the Recapitalization, the Company had elected "S" corporation
status under Section 1362 of the Internal Revenue Code. Accordingly, the Company
was not liable for federal income taxes as income was taxed directly to the
Company's stockholders. However, certain states in which the Company conducts
its operations did not recognize "S" corporation status. As a result, the
Company had provided for state income tax for these states.
In connection with the Recapitalization, the Company was required to change
from an "S" corporation to a "C" corporation and to report income on an accrual
basis for tax purposes as opposed to a cash basis. This change resulted in the
Company recording an incremental tax provision of $3,772,000 in 1994.
8
<PAGE>
(h) Foreign Currency Translation
All assets and liabilities of the Company's Canadian offices are translated
at the year-end exchange rate while revenues and expenses are translated at the
average exchange rate for the year.
(i) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(4) Revolving Credit Facilities
(a) Credit Facility
On April 28, 1995, the Company entered into the $25,000,000 Credit Facility
with First Union Bank. On March 29, 1996, the Company and First Union Bank
signed an amendment to expand the Company's borrowing capacity under the Credit
Facility to $40,000,000 under similar terms and conditions in order to finance
the acquisition of FOCUS. Interest on borrowings under the Credit Facility is
payable, at the Company's option, at First Union Bank's prime rate plus an
additional percentage of up to .375%, or LIBOR plus an additional percentage of
up to 1.875%, depending on certain financial criteria. At December 31, 1995 and
1996, the Company had borrowings under the Credit Facility of $4,300,000 and
$5,700,000, respectively, at an average rate of interest of 7.36% and 7.61%,
respectively.
The Credit Facility contains customary covenants, including, without
limitation, restrictions on the incurrence of indebtedness, the sale of assets,
certain mergers and acquisitions, the payment of dividends on the Company's
capital stock, the repurchase or redemption of capital stock, transactions with
affiliates, investments, capital expenditures and changes in control of the
Company. Under the Credit Facility, the Company is also required to satisfy
certain financial covenants, such as cash flow, capital expenditures and other
financial ratio tests including current ratios and interest expense coverage
ratios. The Company was in compliance with all such covenants during 1996. The
ability of the Company to meet its debt service requirements and to comply with
such covenants is dependent upon the Company's future performance, which is
subject to financial, economic, competitive and other factors affecting the
Company, some of which are beyond its control. The entire $40,000,000 of
revolving credit is available for borrowing by the Company provided that the
Company is prohibited from borrowing under the Credit Facility in order to
finance the acquisition of other businesses unless the Company will have,
immediately following any such acquisition, at least $5,000,000 available for
additional working capital borrowings under the Credit Facility. The Company's
obligations under the Credit Facility are secured by a first priority security
interest in substantially all of the Company's properties and assets.
The Company is required to pay First Union Bank a facility fee of .25% to
.375% per annum, depending on certain financial criteria, on the unused portion
of the Credit Facility as well as a quarterly agent fee of $3,750, payable in
advance.
<PAGE>
(b) Former Revolving Credit Facility
As part of the Recapitalization, the Company obtained the Former Revolving
Credit Facility of $10,000,000 and the Term Loan of $17,000,000 (see below)
through First Union Bank pursuant to a loan agreement (the "Former Loan
Agreement"). The Former Revolving Credit Facility permitted borrowings by the
Company of up to a maximum of $10,000,000, subject to certain borrowing base
requirements, until maturity on March 31, 1999 at an interest rate of the Base
Rate plus 1 1/2% or LIBOR plus 3%.
The Company was required to pay First Union Bank a facility fee of .5% per
annum on the unused portion of the Former Revolving Credit Facility, quarterly
in arrears, as well as a yearly agent fee of $25,000.
For the years ended December 31, 1994, 1995 and 1996, the weighted average
borrowings under these revolving credit facilities were $3,404,000, $4,903,000
and $8,184,000, respectively, and the weighted average interest rates were
7.39%, 8.55% and 6.94%, respectively.
(5) Long-term Debt
(a) Term Loan
Pursuant to the Former Loan Agreement with First Union Bank, the Company
obtained a $17,000,000 Term Loan due March 31, 1999 at an interest rate of the
base rate plus 1 1/2% or LIBOR plus 3% (9.375% at December 31, 1994). The Term
Loan required quarterly principal payments of $250,000 beginning June 30, 1994
through March 31, 1995, $750,000 beginning June 30, 1995 through March 31, 1997,
$1,000,000 beginning June 30, 1997 through December 31, 1998 and a final payment
of $3,000,000 on March 31, 1999. The Term Loan was repaid in full on May 10,
1995.
(b) Senior Subordinated Notes
The Company issued $21,000,000, principal amount, of 10.101% Senior
Subordinated Notes due March 8, 2001 to Whitney ($19,000,000) and First Union
($2,000,000). Furthermore, the Company issued 604,538 shares of its treasury
stock to Whitney (546,963 shares) and First Union (57,575 shares) in connection
with the issuance of the Senior Subordinated Notes, to which the Company
assigned a value of $2,507,000 at the date of issuance, which was reflected as
debt discount on the Senior Subordinated Notes and was being amortized as
interest expense over the life of the debt. The Senior Subordinated Notes were
repaid in full on May 10, 1995 and the associated debt discount was written off
and was included in Loss on Retirement of Debt.
(c) Junior Subordinated Notes
In connection with the repurchase of 2,303,000 shares of Common Stock from
the two principal stockholders of the Company as part of the Recapitalization,
the Company issued $5,000,000, principal amount, of 10% Junior Subordinated
Notes due March 9, 2002. On January 16, 1996 the Company retired the 10% Junior
Subordinated Notes utilizing borrowings under the Credit Facility.
<PAGE>
(6) Income Taxes
The provision for income taxes consists of the following for the years ended
December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
-------------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal................................................................. $ 1,777,000 $ 1,658,000 $ 6,713,000
State................................................................... 767,000 498,000 1,668,000
------------ ------------ ------------
2,544,000 2,156,000 8,381,000
Deferred:
Federal................................................................. 2,822,000 166,000 (964,000)
State................................................................... (64,000) 42,000 (251,000)
------------ ------------ ------------
2,758,000 208,000 (1,215,000)
------------ ------------ ------------
Total................................................................... $ 5,302,000 $ 2,364,000 $ 7,166,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Significant items making up deferred tax liabilities and deferred tax assets
were as follows at December 31:
<TABLE>
<CAPTION>
1995 1996
-------------- ------------
<S> <C> <C>
Deferred Tax Assets:
Allowance for doubtful............................................ $ 169,00 $ 312,000
Accrued expenses.................................................. 452,000 543,000
------------ ------------
$ 621,000 $ 855,000
------------ ------------
------------ ------------
Deferred Tax Liabilities:
Book to tax depreciation.......................................... $ 180,000 $ 418,000
Change in tax status.............................................. 2,497,000 1,278,000
------------ ------------
$ 2,677,000 $ 1,696,000
------------ ------------
------------ ------------
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
tax rate for the years ended December 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 % 1995 % 1996
----------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Tax provision at federal statutory rate.................... $ 1,560,000 34.0% $ 1,994,000 34.0% $ 6,044,000
Income prior to Recapitalization, taxed as an "S"
corporation.............................................. (352,000) -7.7% -- -% --
State taxes, net of federal income tax benefit............. 228,000 5.0% 356,000 6.1% 898,000
Items not deductible for tax purposes...................... 94,000 2.0% 14,000 0.2% 224,000
------------ --- ------------ --- ------------
$ 1,530,000 33.3% $ 2,364,000 40.3% $ 7,166,000
------------ --- ------------ --- ------------
------------ --- ------------ --- ------------
<CAPTION>
%
----------
<S> <C>
Tax provision at federal statutory rate.................... 35.0%
Income prior to Recapitalization, taxed as an "S"
corporation.............................................. -%
State taxes, net of federal income tax benefit............. 5.2%
Items not deductible for tax purposes...................... 1.3%
---
41.5%
---
---
</TABLE>
Prior to the Recapitalization, the Company was an "S" corporation under
Section 1362 of the Internal Revenue Code. In connection with the
Recapitalization, the Company was required to change from an "S" corporation to
a "C" corporation and to report income on a accrual basis for tax purposes as
opposed to a cash basis. This change resulted in an incremental tax provision of
$3,772,000 in 1994.
<PAGE>
(7) Stockholders' Equity
(a) Convertible Preferred Stock
Each share of the Series A Convertible Preferred Stock could have been
converted by the holder into a share of Class A Common Stock, subject to certain
anti-dilution adjustments. The holders of the Series A Convertible Preferred
Stock were entitled to receive dividends or distributions on an as-converted
basis equal to amounts declared by the Company on its Common Stock. The holders
of Series A Convertible Preferred Stock were entitled to vote with the holders
of Class A Common Stock on an as converted basis.
The Company could require the conversion of all outstanding Series A
Convertible Preferred Stock in connection with a qualified initial public
offering. The Company exercised this option in connection with the sale of
Common Stock on May 10, 1995 and subsequently canceled, retired and eliminated
all shares of Series A Convertible Preferred Stock from the Company's authorized
shares.
(b) Class A Common Stock
All shares of Class A Common Stock were converted into $.01 par value Common
Stock in connection with the sale of Common Stock on May 10, 1995 and the
Company subsequently canceled, retired and eliminated all shares of Class A
Common Stock from the Company's authorized shares.
(8) Commitments
The Company leases certain office facilities from related parties under
leases that expire on various dates through December 31, 2003. Certain leases
require the Company to pay increases in operating costs and real estate taxes.
In addition, the Company leases certain office facilities from unrelated parties
under operating lease agreements that expire on various dates to July 31, 2000.
Motor vehicles and office equipment are leased from unrelated parties under
non-cancelable operating leases that expire on various dates through December
31, 1999.
The following is a schedule of rent expense by major category for the years
ended December 31:
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Facilities--related parties............................................. $ 714,000 $ 726,000 $ 726,000
Facilities--unrelated parties........................................... 2,673,000 3,199,000 4,374,000
------------ ------------ ------------
3,387,000 3,925,000 5,100,000
Office equipment........................................................ 150,000 190,000 206,000
Automobiles............................................................. 2,181,000 2,638,000 2,729,000
------------ ------------ ------------
Total rent expense...................................................... $ 5,718,000 $ 6,753,000 $ 8,035,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<PAGE>
The following is a schedule of future minimum lease payments under
non-cancelable operating leases for the years ending December 31:
<TABLE>
<CAPTION>
RELATED UNRELATED
YEAR PARTIES PARTIES TOTAL
- ------------------------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
1998 726,000 3,094,000 3,820,000
1999 726,000 1,924,000 2,650,000
2000 726,000 922,000 1,648,000
2001 726,000 338,000 1,064,000
Thereafter............................................. 1,453,000 181,000 1,634,000
------------ ------------- -------------
$ 5,083,000 $ 10,620,000 $ 15,703,000
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
In addition, the Company, through its wholly owned subsidiary Prompt, has an
exclusive agreement with MEDSTAT Systems, Inc. ("MEDSTAT"), a provider of
researched data in the health care industry, to provide outpatient surgical
facility charge data. Amounts paid to MEDSTAT under this agreement for the year
ended December 31, 1996 were $706,000. Recurring minimum payments associated
with this agreement are approximately $831,000, $956,000 and $525,000 for the
years ended at December 31, 1997, 1998 and 1999, respectively.
(9) Employee Benefit Programs
(a) 401(k) Plan
The Company has a defined contribution plan (the "401(k) Plan") pursuant to
which employees who are at least 21 years of age and who have completed at least
six months of service are eligible to participate. Participants in the 401(k)
Plan may not contribute more than the lesser of a specified statutory amount or
15% of his or her pre-tax total compensation. The 401(k) Plan permits, but does
not require, additional contributions to the 401(k) Plan by the Company.
Employees are 100% vested in their own contributions while Company contributions
vest 20% after three years and vest an additional 20% each year thereafter.
Under the 401(k) Plan, the Company has the option of matching up to 50% of
participants' pretax contributions up to a maximum of 6% of compensation. For
the years ended December 31, 1994, 1995 and 1996, the Board of Directors has
elected to match 50% of up to 4% of compensation.
The Company made net contributions to this plan of $518,000, $581,000 and
$855,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
(b) Alta Pacific 401(k) Profit Sharing Plan
The Company's subsidiary, Alta Pacific Corporation has a defined
contribution plan (the "Alta Pacific 401(k) Profit Sharing Plan") pursuant to
which employees of Alta Pacific Corporation who are at least 21 years of age and
who have completed at least six months of service are eligible to participate.
Participants in the Alta Pacific 401(k) Plan may not contribute more than the
specified statutory amount. The Alta Pacific Profit Sharing 401(k) Plan permits,
but does not require, additional contributions to the Alta Pacific 401(k) Profit
Sharing Plan by Alta Pacific Corporation. Alta Pacific Corporation does not make
contributions for any employees unless they have worked at least 1,000 hours.
Employees are 100% vested in their own contributions while contributions by Alta
Pacific Corporation vest 20% after two years and 20% each year thereafter.
<PAGE>
Alta Pacific Corporation made contributions to this plan of $64,000 and
$73,000 for the years ended December 31, 1994 and 1995, respectively. This plan
was consolidated and combined with the 401(k) Plan effective January 1, 1996.
(c) Employment Agreements
Lois E. Silverman and Donald J. Larson are each party to separate employment
agreements with the Company, dated as of March 8, 1994 (the "Employment
Agreements"). The Employment Agreements have initial terms of five years unless
earlier terminated as provided therein. The terms of the Employment Agreements
may be automatically renewed for additional one year terms, subject to
limitations contained therein. The Company may terminate Ms. Silverman and/or
Mr. Larson for cause, as defined therein, and Ms. Silverman and Mr. Larson may
terminate their respective Employment Agreements for Good Reason, as defined
therein. The Employment Agreements contain provisions pursuant to which Ms.
Silverman and Mr. Larson agree not to disclose any proprietary information of
the Company and also agree not to compete with the Company (in the U.S., Canada
or any other country in which the Company does business, or took steps to do
business before termination of their employment), or solicit its employees, for
the term of the Employment Agreements and up to two years after termination of
employment, for any reason.
Three other executive officers have been afforded continuation of salary
protection for one year if their employment with the Company is terminated
without cause.
(10) Stock Purchase Plan and Stock Option Plans
(a) 1995 Employee Stock Purchase Plan
The 1995 Employee Stock Purchase Plan (the "1995 Purchase Plan") for
employees of the Company authorizes the issuance of a maximum of 235,000
shares of Common Stock pursuant to the exercise of nontransferable options
granted to participating employees.
The 1995 Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees of the Company whose customary employment is
20 hours or more per week and have been employed by the Company for at least six
months are eligible to participate in the 1995 Purchase Plan. Employees who own
5% or more of the Company's stock and directors who are not employees of the
Company may not participate in the 1995 Purchase Plan. To participate in the
1995 Purchase Plan, an employee must authorize the Company in writing to deduct
an amount (not less than 1% nor more than 10% of a participant's base
compensation and in any event not more than $12,500) from his or her pay during
six month periods commencing on January 1 and July 1 of each year (each a
"Purchase Period"). On the first day of each Purchase Period, the Company grants
to each participating employee an option to purchase up to 500 shares of Common
Stock. The exercise price for shares purchased under the 1995 Purchase Plan for
each Purchase Period is the lesser of 85% of the fair market value of the Common
Stock on the first or last business day of the Purchase Period. The fair market
value will be the closing selling price of the Common Stock as quoted. If an
employee is not a participant on the last day of the Purchase Period, such
employee is not entitled to purchase any shares during such Purchase Period ,
and the amount of his or her accumulated payroll deduction will be refunded to
the employee. An employee's rights under the 1995 Purchase Plan terminate upon
his or her voluntary withdrawal from the plan at any time or upon termination of
employment.
<PAGE>
Common Stock for the 1995 Purchase Plan will be made available either from
authorized but unissued shares of Common Stock or from shares of Common Stock
reacquired by the Company, including shares repurchased in the open market. The
Company issued the following shares of Common Stock for each of the Purchase
Periods:
<TABLE>
<CAPTION>
NUMBER PRICE
PURCHASE PERIOD ENDED OF SHARES PER SHARE
- ------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
December 31, 1995....................................................... 18,299 $ 18.73
June 30, 1996........................................................... 16,287 $ 18.92
December 31, 1996....................................................... 11,671 $ 38.04
</TABLE>
(b) 1994 Non-Qualified Stock Option Plan for Non-Employee Directors.
The Non-Employee Director Plan (the "Director Plan") provides for the grant
of options to acquire up to 94,000 shares of Common Stock, in such amounts, on
such terms and to such non-employee Directors as the administrators of the
Director Plan may select, in accordance with the terms of the Director Plan.
Options granted under the Director Plan are not intended to qualify as Incentive
Stock Options under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"). The Director Plan is administered by a committee of the Board of
Directors of the Company, consisting of two or more members appointed by the
Board of Directors of the Company, which selects the optionees and determines
the number of shares, vesting schedule and duration of each option (not to
exceed 10 years). Options granted under the Director Plan must have an exercise
price equal to the fair value of the Common Stock of the Company, as determined
by such committee, on the date of grant. As of December 31, 1995, options to
purchase 47,000 shares of Common Stock at an exercise price of $5.89 per
share had been granted under the Director Plan, all of which were outstanding
and 23,500 of which were exercisable.
Options granted under the Director Plan automatically vest no later than 10
years from the date of grant; however, pursuant to separate option agreements
between the Company and its optionees under the Director Plan, the options
granted to date become vested ratably over a three year period on the
anniversary of the grant date. Upon the sale of all stock or assets of the
Company, the options fully vest and become exercisable immediately.
(c) 1994 Time Accelerated Restricted Stock Option Plan.
The Company's 1994 Time Accelerated Restricted Stock Option Plan (the "1994
Stock Option Plan") provides for the grant of options to acquire up to 976,000
shares of Common Stock, in such amounts, on such terms and to such officers and
other key employees as the administrators of the 1994 Stock Option Plan may
select. Options granted under the 1994 Stock Option Plan are not intended to
qualify as Incentive Stock Options under the Code. The 1994 Stock Option Plan is
administered by the Board of Directors of the Company and provides that all of
the options shall have a per share exercise price equal to the fair market value
of the Common Stock on the date of such grant, as determined by the Board of
Directors. At December 31, 1996, options to purchase 840,689 shares of Common
Stock at an average exercise price of $32.92 per share were outstanding, of
which 148,991 were exercisable.
Options granted under the 1994 Stock Option Plan become fully exercisable no
later than the tenth anniversary of the date of grant, and no option may have a
term in excess of ten years and six months from the date of grant. The stock
option agreements pursuant to which options have been granted under the 1994
Stock Option Plan provide for accelerated vesting each year of 10% to 20% of the
shares subject to the option in the event certain financial tests are met,
commencing with respect to the fiscal year ended December 31, 1994. The Board of
Directors may accelerate all options upon a sale or conveyance of all or
substantially all of the assets, or a change in control of the Company, which
includes, among other events, the acquisition by any person who owned less than
10% of the outstanding Common Stock becoming the beneficial owner of at least
51% of the Common Stock. All recipients of options under the 1994 Stock Option
Plan to date were required to execute a Non-Competition and Non-Disclosure
Agreement as a condition to any such option grant.
<PAGE>
A summary of the status of the Company's two stock option plans at December
31, 1994, 1995 and 1996 and changes during the years then ended is presented in
the table below:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------------------------
<S> <C> <C> <C> <C>
WEIGHTED
RESERVED NUMBER PRICE PER AVERAGE PRICE
SHARES OF SHARES SHARE PER SHARE
---------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance December 31, 1993............................. -- -- $ -- $ --
Reserved.............................................. 470,000
Granted............................................... 251,450 $ 5.89 $ 5.89
Exercised............................................. -- -- --
Canceled.............................................. -- -- --
---------- -------------- -------------- ------
Balance December 31, 1994............................. 470,000 251,450 $ 5.89 $ 5.89
Reserved.............................................. --
Granted............................................... 145,500 $ 5.89-22.75 $ 16.76
Exercised............................................. (2,350) $ 5.89 $ 5.89
Canceled.............................................. (9,400) $ 5.89 $ 5.89
---------- -------------- -------------- ------
Balance December 31, 1995............................. 470,000 385,200 $ 5.89-$22.75 $ 10.00
Reserved.............................................. 600,000
Granted............................................... 656,169 $ 7.41-$48.75 $ 40.54
Exercised............................................. (90,580) $ 5.89-$22.75 $ 7.76
Canceled.............................................. (63,100) $ 5.89-$36.12 $ 28.52
---------- -------------- -------------- ------
Balance December 31, 1996............................. 1,070,000 887,689 $ 5.89-$48.75 $ 31.49
---------- -------------- -------------- ------
---------- -------------- -------------- ------
</TABLE>
A further breakdown of the outstanding options at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
EXERCISE PRICE WEIGHTED AVERAGE WEIGHTED AVERAGE OUTSTANDING EXERCISABLE
RANGE EXERCISE PRICE CONTRACTUAL LIFE OPTIONS OPTIONS
- ------------------- ----------------- ------------------- ----------- -----------
<S> <C> <C> <C> <C>
$5.89--$8.15....... $ 6.07 8.3 216,149 84,671
$22.12--$22.75..... $ 22.54 9.3 119,740 34,460
$36.12............. $ 36.12 9.8 196,800 39,360
$41.38--$48.50..... $ 47.41 10.3 355,000 14,000
</TABLE>
The Company accounts for these plans under APB No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with Financial Accounting Standards Board Statement
No. 123 "Accounting for Stock-Based Compensation" ("FASB 123"), the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts:
<TABLE>
<CAPTION>
1995 1996
------------- --------------
<S> <C> <C> <C>
Net Income Before Extraordinary Items:... As reported $ 5,961,000 $ 10,101,000
Pro forma $ 5,346,000 $ 4,093,000
Earnings Per Share:...................... As reported $ 0.91 $ 1.19
Pro forma $ 0.82 $ 0.48
</TABLE>
Because FASB 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. Additionally, the
1995 and 1996 pro forma amounts include $69,000 and $151,000, respectively
related to purchase discount offered on the 1995 Purchase Plan.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: risk-free interest
rates of 6.17% and 6.12%; expected dividend yield of zero for both years;
expected lives of 3.4 for the Director Plan and the 1994 Stock Option Plan; and
expected volatility of 47 percent for both years.
<PAGE>
(11) Related Party Transactions
The Company had the following related party transactions during the years
ended December 31, 1994, 1995 and 1996 (also see Footnote 4, "Revolving Credit
Facilities," Footnote 5, "Long-term Debt" and Footnote 8, "Commitments"):
(a) Colonial Realty Trust
The Company made rental payments to Colonial Realty Trust of $714,000,
$726,000 and $726,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. Colonial Realty Trust is a real estate company owned by two
stockholders of the Company.
(b) Whitney
Whitney was paid an equity placement fee of $500,000 in connection with the
issuance of the Series A Convertible Preferred Stock, a debt placement fee of
$630,000 in connection with the issuance of the Senior Subordinated Notes and
management fees of $100,000 for the year ended December 31, 1994. The Company
also reimburses Whitney for reasonable out-of-pocket expenses incurred in
connection with attending to the Company's business.
(c) First Union Bank
In connection with the Recapitalization, the Company paid First Union Bank a
commitment fee of $405,000 and an up front agent fee of $50,000. The Company
also paid First Union Bank a commitment fee of $63,000 in connection with the
establishment of the Credit Facility and an amendment fee of $88,500 associated
with the expansion of the Credit Facility's borrowing capacity to $40,000,000.
(12) Legal Matters
The Company is party to certain claims and litigation initiated in the
ordinary course of business. The Company is not involved in any legal proceeding
that it believes will result, individually or in the aggregate, in a material
adverse effect upon its financial condition or results of operations.
(13) Selected Financial Data
<TABLE>
<CAPTION>
Years ended December31,
-----------------------------------------------------------------------------
1992 1993 1994 1995 1996(4)
------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue......................... $ 80,851,000 $ 100,546,000 $ 121,295,000 $ 146,055,000 $ 179,652,000
Operating income (1)............ 4,990,000 4,533,000 8,746,000 12,419,000 17,466,000
Income before taxes (1)......... 4,984,000 4,533,000 4,589,000 9,935,000 17,267,000
Provision for income taxes
(2)........................... 307,000 355,000 5,302,000 3,974,000 7,166,000
Net income before extraordinary
items (1)(2).................. 4,677,000 4,178,000 (713,000) 5,961,000 10,101,000
Pro forma (3) and actual
earnings per share............ $ 0.57 $ 0.91 $ 1.19
Weighted average shares
outstanding................... 4,815,000 6,540,000 8,475,000
Balance Sheet:
Working capital................. $ 9,114,000 $ 12,126,000 $ 5,609,000 $ 7,493,000 $ 19,345,000
Total assets.................... 15,894,000 20,836,000 31,345,000 36,556,000 98,128,000
Total debt...................... 337,000 -- 44,716,000 9,300,000 5,756,000
</TABLE>
<PAGE>
1) Expenses for the period to the recapitalization include certain compensation
and other expenses, the levels of which are not comparable to the levels of
such expenses for 1994. Expenses for 1994 include increased investments in
management information systems, personnel and certain other items. See
"Management Discussion and Analysis of Financial Condition and Results of
Operations."
2) Prior to the Recapitalization, the Company elected to be taxed as an "S"
corporation. In connection with the Recapitalization, the Company was
required to change from an "S" to a "C" corporation. This change resulted
in the Company recording an incremental tax provision of $3,772,000 in
the first quarter of 1994.
3) The pro forma net income of $2,752,000 and earnings per share have been
computed as if the Company had been subject to federal and state income
taxes during the entire period based upon an effective tax rate
indicative of the statutory rate in effect during the period.
4) The Company purchased FOCUS on April 2, 1996 and Prompt on October 29,
1996 which affects the comparability of the data being presented for the
year ended December 31, 1996.
(14) Selected Quarterly Operating Results (Unaudited)
The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters ended December 31, 1996. In
management's opinion, this unaudited information has been prepared on the
same basis as the annual financial statements and includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the quarters presented, when read in
conjunction with the financial statements and notes thereto included
elsewhere in this document. The operating results for any quarter are not
necessarily indicative of results for any subsequent quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue..................................... $ 40,225,000 $ 44,759,000 $ 46,048,000 $ 48,620,000
Cost of sales............................... 33,422,000 36,747,000 37,812,000 39,766,000
------------- ------------- -------------- -------------
Gross Profit................................ 6,803,000 8,012,000 8,236,000 8,854,000
General and administrative expenses......... 3,109,000 3,636,000 3,746,000 3,948,000
------------- ------------- -------------- -------------
Operating income............................ 3,694,000 4,376,000 4,490,000 4,906,000
(313,000)
Other (income) expense...................... 194,000 331,000 (13,000)
Provision for income taxes.................. 1,453,000 1,678,000 1,993,000 2,042,000
------------- ------------- -------------- -------------
Net income.................................. $ 2,047,000 $ 2,367,000 $ 2,810,000 $ 2,877,000
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue............................................. $ 34,930,000 $ 36,125,000 $ 36,826,000 $ 38,174,000
Cost of sales....................................... 29,545,000 30,212,000 30,843,000 32,015,000
------------- ------------- ------------- -------------
Gross Profit........................................ 5,385,000 5,913,000 5,983,000 6,159,000
General and administrative expenses................. 2,677,000 2,744,000 2,759,000 2,841,000
------------- ------------- ------------- -------------
Operating income.................................... 2,708,000 3,169,000 3,224,000 3,318,000
Other expenses...................................... 1,354,000 655,000 251,000 224,000
Provision for income taxes.......................... 542,000 1,005,000 1,189,000 1,238,000
------------- ------------- ------------- -------------
Net income before extraordinary items............... 812,000 1,509,000 1,784,000 1,856,000
Loss on retirement of debt, net of taxes............ -- (2,460,000) -- --
Net income (loss)................................... $ 812,000 ($ 951,000) $ 1,784,000 $ 1,856,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
