<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-KA
MARK ONE
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED [ ]
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from June 1, 1994 to December 31, 1994
COMMISSION FILE NUMBER 0-18217
---------------------
TRICARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0378756
(State or other jurisdiction (I.R.S Employer
of incorporation) Identification No.)
</TABLE>
3353 PEACHTREE ROAD, N.E., SUITE 1000, ATLANTA, GEORGIA 30326
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(404) 364-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
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/
Aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed using the closing price on NASDAQ for the Registrant's
common stock on March 3, 1995 was $51,504,521.
Indicate the number of shares outstanding of the Registrant's common stock
as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT MARCH 3, 1995
----------------------------------------------------------------------------
<S> <C>
Common Stock, $.01 par value 17,533,454
</TABLE>
Documents Incorporated by Reference: Portions of the Proxy Statement
relating to the Annual Meeting of Stockholders scheduled to be held on or about
May 10, 1995 are incorporated in Part III.
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<PAGE> 2
ITEM 8 OF THE REGISTRANT'S FORM 10-K DATED MARCH 29, 1995, IS HEREBY AMENDED IN
ITS ENTIRETY AS FOLLOWS:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Transcend Services, Inc.:
We have audited the accompanying consolidated balance sheets of Transcend
Services, Inc. (a Georgia corporation) and subsidiary as of December 31, 1993
and 1994 and the related consolidated statements of loss, shareholders' equity,
and cash flows for the years then ended. 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 Transcend Services, Inc. and
subsidiary as of December 31, 1993 and 1994 and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 17, 1995
1
<PAGE> 3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Transcend Services, Inc.:
We have audited the accompanying balance sheet of Transcend Services, Inc.
(formerly Bottomley and Associates, Inc.) (a Georgia corporation) as of December
31, 1992 (not presented herein) and the related statements of loss,
shareholders' equity, and cash flows for the year ended December 31, 1992. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with 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 audit provides 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 Transcend Services, Inc. as
of December 31, 1992 and the results of its operations and its cash flows for
the year ended December 31, 1992 in conformity with generally accepted
accounting principles.
MILLER RAY HEALEY & HOUSER
Atlanta, Georgia
January 15, 1993
2
<PAGE> 4
TRANSCEND SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1993 1994
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.......................................................... $ 131,000 $ 150,000
Trade accounts receivable, net of allowance for doubtful
accounts of $29,000 and $15,000, respectively.............. 281,000 640,000
Other receivables............................................. 55,000 60,000
Prepaid expenses.............................................. 10,000 62,000
----------- -----------
Total current assets....................................... 477,000 912,000
OFFICE FURNITURE AND EQUIPMENT, at cost, less accumulated
depreciation of $152,000 and $298,000 for 1993 and 1994,
respectively.................................................. 174,000 558,000
DEPOSITS AND OTHER ASSETS....................................... 28,000 130,000
GOODWILL AND OTHER INTANGIBLE ASSETS, less accumulated
amortization of $310,000 and $381,000 for 1993 and 1994,
respectively.................................................. 512,000 1,080,000
----------- -----------
$ 1,191,000 $ 2,680,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................. $ 244,000 $ 783,000
Accrued salaries and commissions.............................. 441,000 223,000
Accrued benefits and group insurance.......................... 50,000 283,000
Accrued other expenses........................................ 241,000 550,000
Other current liabilities..................................... 53,000 28,000
Bank line of credit........................................... -- 1,025,000
Note payable.................................................. -- 1,000,000
Current portion of capital lease obligation................... -- 21,000
----------- -----------
Total current liabilities.................................. 1,029,000 3,913,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Class A common stock, no par value, $.05 stated value;
10,000,000 shares authorized, 3,038,000 and 3,184,000 shares
issued and outstanding as of December 31, 1993 and 1994,
respectively.................................................. 152,000 159,000
Class B nonvoting common stock, no par value, $.05 stated value;
5,000,000 shares authorized, 958,000 and 960,000 shares issued
and outstanding as of December 31, 1993 and 1994,
respectively.................................................. 48,000 50,000
Additional paid in capital...................................... 1,459,000 1,565,000
Warrants outstanding............................................ 104,000 --
Accumulated deficit............................................. (1,601,000) (3,007,000)
----------- -----------
Total shareholders' equity................................. 162,000 (1,233,000)
----------- -----------
$ 1,191,000 $ 2,680,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE> 5
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1992 1993 1994
---------- ---------- -----------
<S> <C> <C> <C>
SALES..................................................... $1,702,000 $6,208,000 $12,393,000
DIRECT COSTS.............................................. 893,000 5,125,000 10,787,000
---------- ---------- -----------
Gross Profit............................................ 809,000 1,083,000 1,606,000
MARKETING AND SALES EXPENSES.............................. 209,000 378,000 929,000
GENERAL AND ADMINISTRATIVE EXPENSES....................... 715,000 1,330,000 1,673,000
AMORTIZATION EXPENSE...................................... -- 310,000 357,000
---------- ---------- -----------
Operating loss.......................................... (115,000) (935,000) (1,353,000)
OTHER INCOME (EXPENSES):
Interest expense.......................................... (29,000) (135,000) (66,000)
Interest income........................................... 13,000 3,000 1,000
Gain on sale of software division (Note 11)............. -- 100,000 --
Other..................................................... (2,000) 1,000 25,000
---------- ---------- -----------
(18,000) (31,000) (40,000)
---------- ---------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES.................... (133,000) (966,000) (1,393,000)
PROVISION FOR INCOME TAXES (Notes 1 and 10)............... -- -- 13,000
---------- ---------- -----------
NET LOSS.................................................. $ (133,000) $ (966,000) $(1,406,000)
========= ========= ==========
Loss Per Common Share..................................... $ (.04) $ (.25) $ (.34)
========= ========= ==========
Weighted Average Common Shares Outstanding................ 3,061,000 3,789,000 4,096,000
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 6
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN WARRANTS ACCUMULATED SHAREHOLDERS'
CLASS A CLASS B CAPITAL OUTSTANDING DEFICIT EQUITY
-------- ------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1991...................... $152,000 $ 1,000 $ 760,000 $ -- $ (502,000) $ 411,000
Purchase of 4,600 shares
of Class B stock....... -- -- (1,000) -- -- (1,000)
Net loss.................. -- -- -- -- (133,000) (133,000)
-------- ------- ---------- ----------- ----------- -------------
BALANCE, December 31,
1992...................... 152,000 1,000 759,000 -- (635,000) 277,000
Issuance of 899,080 shares
of Class B common stock
in stock offering...... -- 45,000 690,000 -- -- 735,000
Other issuances of Class B
common stock........... -- 3,000 26,000 -- -- 29,000
Purchase of shares of
Class B common stock... -- (1,000) (16,000) -- -- (17,000)
Issuance of warrants...... -- -- -- 104,000 -- 104,000
Net loss.................. -- -- -- -- (966,000) (966,000)
-------- ------- ---------- ----------- ----------- -------------
BALANCE, December 31,
1993...................... 152,000 48,000 1,459,000 104,000 (1,601,000) 162,000
Issuance of 145,960 shares
of Class A common stock
from exercise of
warrants............... 7,000 -- 97,000 (104,000) -- --
Other issuance of Class B
common stock........... -- 2,000 9,000 -- -- 11,000
Net loss for the period... -- -- -- -- (1,406,000) (1,406,000)
-------- ------- ---------- ----------- ----------- -------------
BALANCE, December 31,
1994...................... $159,000 $50,000 $1,565,000 $ -- $(3,007,000) $ (1,233,000)
======== ======= ========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 7
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1992 1993 1994
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(133,000) $ (966,000) $(1,406,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 30,000 396,000 530,000
Loss on disposal of assets..................... 1,000 12,000 --
Loss on forgiveness of note receivable......... -- 60,000 --
Gain on sale of software division.............. -- (100,000) --
Interest expense............................... -- 104,000 --
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable......................... (54,000) 166,000 (226,000)
Prepaid expenses............................ 12,000 4,000 (51,000)
Deposits and other assets................... (6,000) (20,000) (101,000)
Accounts payable............................ 29,000 109,000 539,000
Accrued expenses............................ 28,000 619,000 255,000
Other....................................... -- 53,000 (119,000)
--------- ----------- -----------
Total adjustments......................... 40,000 1,403,000 827,000
--------- ----------- -----------
Net cash provided by (used in) operating
activities............................. (93,000) 437,000 (579,000)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................ (33,000) (126,000) (440,000)
Proceeds from sale of assets........................ -- 21,000 --
Proceeds from note receivable....................... -- 12,000 --
Proceeds from sale of software division............. -- 100,000 --
Purchase of dataLogix, net of cash received......... -- (1,050,000) --
Purchase of Script-Ease............................. -- -- (1,000,000)
--------- ----------- -----------
Net cash used in investing activities..... (33,000) (1,043,000) (1,440,000)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from short-term debt..................... -- 200,000 1,000,000
Borrowings under line of credit agreement........... -- 401,000 1,025,000
Principal payments on long-term debt................ (53,000) (26,000) --
Principal payments on short-term debt............... -- (200,000) --
Principal payment on capital lease obligations...... (10,000) (25,000) --
Repayments of line of credit........................ -- (651,000) --
Purchase of common stock............................ (1,000) (17,000) --
Proceeds from common stock issuance................. -- 735,000 11,000
Proceeds from additional common stock issuances..... -- 23,000 --
Proceeds from exercise of stock options............. -- 6,000 --
Note receivable -- from shareholder................. (60,000) -- --
--------- ----------- -----------
Net cash provided by (used in) financing
activities............................. (124,000) 446,000 2,036,000
--------- ----------- -----------
NET INCREASE (DECREASE) IN CASH....................... (250,000) (160,000) 17,000
CASH RECEIVED FROM SCRIPT-EASE
ACQUISITION......................................... -- -- 2,000
CASH AT BEGINNING OF PERIOD........................... 541,000 291,000 131,000
--------- ----------- -----------
CASH AT END OF PERIOD................................. $ 291,000 $ 131,000 $ 150,000
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE> 8
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1992, 1993 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Transcend Services, Inc. (formerly called Bottomley and Associates, Inc.)
(the "Company"), established in 1984, is engaged in the field of contract
management of the health information management/medical records functions of
hospitals. The Company offers operations evaluation, consulting, reimbursement
coding, transcription, and other services generally resident in the medical
records department of hospitals. Currently, it emphasizes three- to five-year
contractual relationships for management of the entire hospital medical records
department. Three hospital contracts accounted for approximately 58% of sales in
1993. Four hospital contracts accounted for approximately 65% of sales in 1994.
BASIS OF PRESENTATION
The preparation of financial statements in conformity 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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
An allowance for doubtful accounts has been established to provide for
losses on uncollectible accounts based on management's estimates and historical
collection. Bad debt expense amounted to $14,000, $30,000 and $9,000 in 1992,
1993 and 1994, respectively.
REVENUE AND COST RECOGNITION
Revenue is recognized monthly as the work is performed. One-time
nonrefundable contract implementation fees are amortized over the first three
months of a contract to match when the costs are incurred for implementation.
Direct costs are expensed as incurred. Gross margins do vary by contract. Direct
costs include contract labor costs related to medical records processing and
transcription and coding costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are computed using the straight-line and
accelerated methods over the estimated useful lives of the respective assets.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109
("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax
7
<PAGE> 9
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are currently being amortized over
periods ranging from three to thirty years. The Company periodically evaluates
whether events and circumstances since acquisition have occurred that indicate
that the remaining estimated useful life of goodwill may warrant revision or
that the remaining balance of goodwill may not be recoverable. When factors
(such as a change in law or regulatory environment or forecasts showing changing
long-term profitability) indicate that goodwill should be evaluated for possible
impairment, the Company uses an estimate of the related business unit's
undiscounted net income over the remaining life of the goodwill to measure
whether the goodwill is recoverable.
NET LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENT
Net loss per common share has been computed based on the weighted average
number of the Company's common shares and common share equivalents (dilutive
stock options) outstanding as of December 31, 1992, 1993, and 1994. The number
of shares used in the computation of net loss per share is 3,061,000, 3,789,000,
and 4,096,000 in fiscal 1992, 1993 and 1994, respectively. The common stock
equivalents related to stock options were not included in the computation due to
their antidilutive effect.
On a proforma basis, based on the number of TriCare shares issued in
conjunction with the merger, the loss per common share would be $.01, $.10, and
$.14 for the years ended December 31, 1992, 1993 and 1994, respectively. The
number of shares used in the proforma computation of net loss per share is
9,733,000.
RESTATEMENT OF PRIOR YEAR BALANCES
Certain prior year balances have been restated to conform with current year
presentation.
2. OFFICE FURNITURE AND EQUIPMENT
The summary of office furniture and equipment at December 31, 1993 and 1994
is as follows:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Furniture and fixtures..................................... $ 326,000 $ 856,000
Less accumulated depreciation.............................. (152,000) (298,000)
--------- ---------
$ 174,000 $ 558,000
========= =========
</TABLE>
8
<PAGE> 10
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INDEBTEDNESS
The bank line of credit and promissory note at December 31, 1993 and 1994
is summarized as follows:
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
$1,200,000 revolving line of credit, interest computed at
prime; interest is payable quarterly; the line is
secured by accounts receivable and personal guarantees
of two shareholders; at December 31, 1994, the unused
portion of the line of credit was $175,000..... $ -- $1,025,000
Promissory note, interest computed at prime; interest was
payable December 1, 1994 and at maturity, January 3,
1995........................................... $ -- $1,000,000
---------- ----------
$ -- $2,025,000
========= =========
</TABLE>
Management renewed the $1,200,000 revolving line of credit referred to
above in November, 1994. It expired in January 1995 and was not renewed. The
lender also extended the due date of the promissory note to January 10, 1995.
The outstanding balance of both credit facilities at the time of the merger of
TriCare and Transcend was $2,200,000 and was paid off with cash received in the
merger. See Note 12 -- "Subsequent Events" below for further information.
The Company has issued a letter of credit for $95,000, which expires in
October 1995, related to its office lease.
4. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $29,000, $31,000 and $36,000 for 1992, 1993 and
1994, respectively.
5. LEASE COMMITMENTS
The Company has entered into operating leases for certain office
facilities. At December 31, 1994, the minimum rental payments due under
noncancelable operating lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-----------------------------------------------------------------------
<S> <C>
1995............................................................ $ 377,000
1996............................................................ 208,000
1997............................................................ 228,000
1998............................................................ 184,000
1999............................................................ 184,000
Thereafter...................................................... 123,000
----------
$1,304,000
=========
</TABLE>
Rental expense for the operating leases amounted to approximately $53,000,
$97,000 and $150,000 for 1992, 1993 and 1994, respectively.
The Company is the sublessor of office space it previously occupied in
Norcross. The payments due to the original lessor from the Company are $67,000
for 1995. These amounts are included in the minimum future lease payments above.
The Company's expected future lease income under the sublease is $67,000 for
1995. The loss on the sublease arrangement of approximately $17,000 was
recognized in 1993.
9
<PAGE> 11
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. RETIREMENT PLAN
The Company sponsors a 401(k) retirement plan that covers substantially all
employees after satisfying certain requirements as to length of service.
Employees are eligible to contribute amounts to the plan subject to certain
minimum and maximum limitations. The Company is obligated to match the first 6%
of employee contributions at a rate of 10%. For 1992, 1993 and 1994, the amount
of expense under this plan was approximately $1,000, $6,000 and $17,000,
respectively.
7. TRANSACTIONS WITH RELATED PARTIES
During 1992, the Company loaned a shareholder $60,000, interest free,
payable on demand and in 1993, the Company forgave this note and recorded the
related expense.
During 1992 and 1993, the Company paid $30,000 and $91,000, respectively,
in management fees to a shareholder.
The sublessor of the Norcross office space, as discussed in Note 6, is a
related party.
8. SHAREHOLDERS' EQUITY
On December 20, 1991, the Company granted a senior executive an incentive
option to purchase 109,000 shares of non-voting Class B common stock at $0.22
per share. The option is exercisable in 25% increments on January 1, 1993
through 1996.
During 1992, the Company purchased 4,600 shares of Class B common stock
which was retired.
During 1993, the Company issued 899,080 shares of Class B common stock in a
private placement offering. The proceeds from this issuance were approximately
$735,000, net of issuance expenses.
The Company declared a 20-for-1 stock split for all shareholders of record
at September 1, 1993. As a result of this stock split, the stated value at
December 31, 1993 is $.05 per share. All share amounts have been restated for
the split.
On August 25, 1993, the Company increased authorized common stock from
5,000,000 shares, no par value with a $.05 stated value to 15,000,000 shares, no
par value with a $.05 stated value. The new authorized shares consist of
10,000,000 shares Class A common stock and 5,000,000 Class B common stock.
10
<PAGE> 12
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTIONS AND WARRANTS
The Company has established a stock option plan for the employees of the
Company. The plan authorizes the grant of "incentive stock options" and
"nonstatutory options." Under this plan, options are granted for the Company's
Class B common stock at the approximate fair value, as defined in the option
agreement. The following is a summary of transactions:
<TABLE>
<CAPTION>
OPTIONS PRICE RANGE
-------- ------------
<S> <C> <C>
OPTIONS OUTSTANDING, January 1, 1992........................ 109,400 $.22
Options granted during the year........................... 353,440 .16 to $.22
Options canceled during the year.......................... -- --
Options exercised during the year......................... -- --
--------
OPTIONS OUTSTANDING, December 31, 1992...................... 462,840 $.16 to $.22
Options granted during the year........................... 125,660 . 16 to .71
Options canceled during the year.......................... (251,650) .21 to .22
Options exercised during the year......................... (27,360) .22
--------
OPTIONS OUTSTANDING, December 31, 1993...................... 309,490 $.16 to $.71
Options canceled during the year.......................... (13,215) .17
Options exercised during the year......................... (4,555) .17
--------
OPTIONS OUTSTANDING, December 31, 1994...................... 291,720 $.16 to $.71
========
Options eligible for exercise at December 31, 1994........ 118,999 $.16 to $.71
========
</TABLE>
At December 31, 1994 there were a total of 600,000 shares of Class B common
stock reserved for this plan.
During 1993, the Company issued warrants to purchase 146,000 shares to the
controlling shareholders in consideration of such shareholders' personal
guarantee of the loan to purchase dataLogix (Note 11). The warrants are
exercisable at $.01 per warrant and were exercised during 1994. The difference
between fair value and exercise price of these warrants of $104,000 was expensed
in 1993.
10. INCOME TAXES
During 1991, the Company adopted SFAS 109. A reconciliation of the
components of income tax expense computed at the statutory federal income tax
rate with the Company's effective income tax rates for December 31, 1992, 1993
and 1994 is as follows:
<TABLE>
<CAPTION>
1992 1993 1994
-------- --------- ---------
<S> <C> <C> <C>
Tax computed at statutory rates...................... $(45,000) $(232,000) $(478,000)
State income taxes, net of federal benefit........... (5,000) (27,000) (56,000)
Other................................................ -- (12,000) (9,000)
Increase in valuation allowance...................... 50,000 271,000 543,000
-------- --------- ---------
$ -- $ -- $ --
======== ========= =========
</TABLE>
11
<PAGE> 13
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax (liability) asset as of December 31,
1993 and 1994 were as follows:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Cash-basis deferral...................................... $ -- $ --
Deferred tax assets:
Tax net operating loss................................... 107,000 454,000
Cash-basis deferral...................................... 284,000 453,000
Other.................................................... -- 27,000
Valuation allowance...................................... (391,000) (934,000)
--------- ---------
$ -- $ --
========= =========
</TABLE>
At December 31, 1994, the Company had net operating loss carryforwards of
approximately $1,195,000 which can be used to reduce future income taxes. If not
utilized these carryforwards will expire in 2007.
11. ACQUISITION/SALE
On April 29, 1993, the Company acquired dataLogix, a supplier of medical
record transcription services, for $1,100,000. The Company accounted for the
acquisition under the purchase method of accounting. The results of operations
for dataLogix are included in the statement of loss of the Company beginning on
the date of acquisition. The fair value of tangible assets acquired and
liabilities assumed was $315,000 and $37,000, respectively. The majority of the
excess purchase price over net tangible assets relate to non-compete agreements
and customer contracts which are being amortized over three years, using an
accelerated method of amortization.
On September 30, 1994, the Company acquired the assets of Script-Ease,
Inc., a Pittsburgh-based medical transcription business for $1,000,000. The
Company accounted for the acquisition under the purchase method of accounting.
The results of operations for Script-Ease are included in the statement of loss
of the Company beginning on the date of the acquisition. The fair value of
tangible assets acquired and liabilities assumed was $259,000 and $161,000,
respectively. The majority of the excess purchase price over net tangible assets
related to customer lists, which is being amortized over seven years and a
non-compete agreement that is being amortized over a three year period. The
balance of the additional intangibles is goodwill which is being amortized over
thirty years.
The following summarizes on a pro forma basis the consolidated results of
operations as though dataLogix and Script-Ease had been acquired at the
beginning of each period (unaudited):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1992 1993 1994
---------- ---------- -----------
<S> <C> <C> <C>
Sales......................................... $2,963,000 $7,712,000 $13,301,000
Net income (loss)............................. (347,000) (788,000) (1,269,000)
Net loss per common share..................... $ (.11) $ (.21) $ (.31)
</TABLE>
During 1993, the Company sold its software division for $100,000. The
Company earned additional proceeds based upon the successful conversion of
certain customers to the purchaser of the software division.
12. SUBSEQUENT EVENTS
On January 10, 1995, TriCare acquired Transcend by merger of Transcend into
First Western Health Corporation for approximately 9,733,000 shares of TriCare
Common Stock. Inasmuch as the merger is being treated for financial accounting
purposes as the acquisition of TriCare by Transcend, following the merger, the
12
<PAGE> 14
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
historical financial statements of Transcend shall become the financial
statements of TriCare and shall include the business of both companies. See Note
16 "Subsequent Events" in TriCare's financial statements for Proforma
statements.
On January 31, 1995, Transcend acquired the assets of International
Dictating Services, Inc., a Boston-based transcription service company for an
acquisition price of approximately $790,000.
13
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of TriCare, Inc.:
We have audited the accompanying combined balance sheets of TriCare, Inc.
(a Delaware corporation) and affiliates (see Note 1) as of May 31, 1993 and 1994
and December 31, 1994, and the related combined statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended May 31, 1994 and the seven month period ended December 31, 1994. 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 combined financial position of TriCare, Inc. and
affiliates as of May 31, 1993 and 1994 and as of December 31, 1994, and the
combined results of their operations and their cash flows for each of the three
years in the period ended May 31, 1994, and for the seven month period ended
December 31, 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 17, 1995
14
<PAGE> 16
TRICARE, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
------------------------- DECEMBER 31,
1993 1994 1994
----------- ----------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 7,429,000 $ 9,002,000 $ 7,481,000
Accounts receivable, net of allowance for
administrative discounts of $67,000................ -- -- 585,000
Prepaid expenses, supplies and other.................. 176,000 88,000 82,000
----------- ----------- ------------
Total current assets.......................... 7,605,000 9,090,000 8,148,000
NET ASSETS RELATED TO DISCONTINUED OPERATIONS (Note
3).................................................... 15,221,000 7,482,000 3,923,000
SECURITIES FROM SALE OF OCCU-CARE (Note 7).............. -- -- 2,050,000
EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
at cost, net of accumulated depreciation and
amortization.......................................... -- 33,000 292,000
OTHER ASSETS............................................ -- 438,000 1,182,000
GOODWILL AND OTHER INTANGIBLE ASSETS, net............... -- -- 2,442,000
----------- ----------- ------------
Total assets.................................. $22,826,000 $17,043,000 $ 18,037,000
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and financing
leases............................................. $ -- $ -- $ 6,000
Accounts payable...................................... 68,000 314,000 522,000
Accrued compensation and employee benefits............ 148,000 69,000 159,000
Other accrued liabilities............................. 253,000 273,000 437,000
Accrued liabilities related to sale of Occu-Care (Note
7)................................................. -- -- 498,000
Obligation related to acquisition of Sullivan (Note
6)................................................. -- -- 285,000
Deferred income taxes (Note 13)....................... -- -- 46,000
----------- ----------- ------------
Total current liabilities..................... 469,000 656,000 1,953,000
----------- ----------- ------------
DEFERRED INCOME TAXES RELATED TO DISCONTINUED
OPERATIONS............................................ 2,077,000 893,000 873,000
----------- ----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value:
Authorized -- 21,000,000 shares
No shares issued and outstanding
Common stock, $.01 par value:
Authorized -- 20,000,000 shares issued and
outstanding -- 7,688,000 shares at May 31, 1993
and 7,792,000 shares at May 31, 1994 and December
31, 1994, respectively........................... 77,000 78,000 78,000
Additional paid-in capital............................ 23,041,000 23,179,000 23,179,000
Retained earnings (deficit)........................... (2,838,000) (7,763,000) (8,046,000)
----------- ----------- ------------
Total stockholders' equity.................... 20,280,000 15,494,000 15,211,000
----------- ----------- ------------
Total liabilities and stockholders' equity.... $22,826,000 $17,043,000 $ 18,037,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
15
<PAGE> 17
TRICARE, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
YEAR ENDED MAY 31, DECEMBER 31,
--------------------------------------- ------------
1992 1993 1994 1994
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
NET REVENUES................................ $ -- $ -- $ -- $2,524,000
COST OF EARNED REVENUES..................... -- -- -- 1,684,000
---------- ------------ ----------- ------------
GROSS PROFIT.............................. -- -- -- 840,000
MARKETING & SALES EXPENSE................... -- -- -- 145,000
GENERAL & ADMINISTRATION EXPENSE............ 812,000 830,000 833,000 1,157,000
AMORTIZATION EXPENSE........................ -- -- -- 118,000
---------- ------------ ----------- ------------
OPERATING INCOME (LOSS)..................... (812,000) (830,000) (833,000) (580,000)
OTHER INCOME (EXPENSES):
Interest Expense.......................... -- -- -- (2,000)
Interest Income........................... 554,000 253,000 171,000 138,000
---------- ------------ ----------- ------------
TOTAL OTHER INCOME................ 554,000 253,000 171,000 136,000
---------- ------------ ----------- ------------
LOSS BEFORE INCOME TAXES.................... (258,000) (577,000) (662,000) (444,000)
BENEFIT FROM INCOME TAX..................... (187,000) (269,000) (300,000) (130,000)
---------- ------------ ----------- ------------
LOSS FROM CONTINUING OPERATIONS, NET OF
INCOME TAX................................ (71,000) (308,000) (362,000) (314,000)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX......................... 3,887,000 (7,187,000) (563,000) 31,000
PROVISION FOR DISCONTINUED OPERATIONS, NET
OF INCOME TAX............................. -- (6,000,000) (4,000,000) --
---------- ------------ ----------- ------------
NET INCOME (LOSS)................. $3,816,000 $(13,495,000) $(4,925,000) $ (283,000)
========= =========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE AND
COMMON SHARE EQUIVALENT
Continuing operations..................... $ (.01) $ (.04) $ (.05) $ (.04)
Discontinued operations................... .51 (1.72) (.59) --
---------- ------------ ----------- ------------
$ .50 $ (1.76) $ (.64) $ (.04)
========= =========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................... 7,671,000 7,668,000 7,711,000 7,792,000
========= =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
16
<PAGE> 18
TRICARE, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL RETAINED
NUMBER PAID-IN EARNINGS
OF SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, May 31, 1991............... 5,619,000 $ 37,000 $ 7,089,000 $ 6,866,000 $13,992,000
Proceeds from exercise of stock
options........................ 280,000 2,000 759,000 -- 761,000
Proceeds from issuance of common
stock, net..................... 1,737,000 12,000 14,308,000 -- 14,320,000
Tax benefit from disqualified
stock options.................. -- -- 750,000 -- 750,000
Stock split effected in form of
dividend....................... -- 25,000 -- (25,000) --
Net income........................ -- -- -- 3,816,000 3,816,000
--------- -------- ----------- ----------- -----------
BALANCE, May 31, 1992............... 7,636,000 76,000 22,906,000 10,657,000 33,639,000
Proceeds from exercise of stock
options........................ 36,000 500 69,500 -- 70,000
Proceeds from issuance of common
stock, net..................... 16,000 500 65,500 -- 66,000
Net loss.......................... -- -- -- (13,495,000) (13,495,000)
--------- -------- ----------- ----------- -----------
BALANCE, May 31, 1993............... 7,688,000 77,000 23,041,000 (2,838,000) 20,280,000
Medical Group repurchase of common
stock.......................... -- -- (63,000) -- (63,000)
Proceeds from exercise of stock
options........................ 100,000 1,000 191,000 -- 192,000
Proceeds from issuance of common
stock, net..................... 4,000 -- 10,000 -- 10,000
Net loss.......................... -- -- -- (4,925,000) (4,925,000)
--------- -------- ----------- ----------- -----------
BALANCE, May 31, 1994............... 7,792,000 78,000 23,179,000 (7,763,000) 15,494,000
Net loss.......................... -- -- -- (283,000) (283,000)
--------- -------- ----------- ----------- -----------
BALANCE, December 31, 1994.......... 7,792,000 $ 78,000 $23,179,000 $(8,046,000) $15,211,000
======== ======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
17
<PAGE> 19
TRICARE, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN
MONTHS
ENDED
DECEMBER
YEAR ENDED MAY 31, 31,
------------------------------------ ----------
1992 1993 1994 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers............... $ -- $ -- $ -- $2,898,000
Cash paid to suppliers and employees....... (702,000) (478,000) (688,000) (3,604,000)
Income tax paid............................ -- -- -- (162,000)
Interest paid.............................. -- -- -- (2,000)
Interest received.......................... 554,000 253,000 171,000 138,000
---------- ---------- ---------- ----------
Net cash used in continuing operations..... (148,000) (225,000) (517,000) (732,000)
---------- ---------- ---------- ----------
Net cash provided by (used in) discontinued
operations.............................. (2,140,000) (624,000) 1,929,000 462,000
---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities.............................. (2,288,000) (849,000) 1,412,000 (270,000)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net.................. (2,000) (2,000) (41,000) (48,000)
Sale of Occu-Care (Note 7)................. -- -- -- 1,500,000
Acquisitions (Note 6)...................... (5,617,000) -- -- (3,000,000)
---------- ---------- ---------- ----------
Net cash used in investing
activities....................... (5,619,000) (2,000) (41,000) (1,548,000)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock,
net........................................ 14,320,000 66,000 10,000 --
Proceeds from exercise of stock options...... 761,000 70,000 192,000 --
Principal payment on debt.................... -- -- -- (12,000)
---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities............. 15,081,000 136,000 202,000 (12,000)
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 7,174,000 (715,000) 1,573,000 (1,830,000)
CASH AND CASH EQUIVALENTS, at beginning of
period..................................... 880,000 8,144,000 7,429,000 9,002,000
CASH ACQUIRED FROM ACQUISITIONS (Note 6)..... 90,000 -- -- 309,000
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, at end
of period........................ $8,144,000 $7,429,000 $9,002,000 $7,481,000
========= ========= ========= =========
RECONCILIATION OF NET INCOME (LOSS) OF
CONTINUING OPERATIONS TO NET CASH PROVIDED
BY CONTINUING OPERATIONS:
Income (loss) from continuing operations... $ (71,000) $ (308,000) $ (362,000) $ (314,000)
---------- ---------- ---------- ----------
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
SEVEN
MONTHS
ENDED
DECEMBER
YEAR ENDED MAY 31, 31,
------------------------------------ ----------
1992 1993 1994 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) OF
CONTINUING OPERATIONS TO NET CASH PROVIDED
BY CONTINUING OPERATIONS:
Depreciation and amortization.............. 6,000 7,000 8,000 166,000
CHANGES IN ASSETS AND LIABILITIES, NET OF
EFFECTS FROM PURCHASE OF IPHN AND SULLIVAN:
Accounts receivable, net..................... -- -- -- 270,000
Prepaid expenses, supplies and other......... (83,000) 7,000 (350,000) (737,000)
Accounts payable............................. 5,000 23,000 246,000 112,000
Accrued compensation and employee benefits... (10,000) 18,000 (79,000) 20,000
Other accrued liabilities.................... 5,000 28,000 20,000 53,000
Deferred income taxes........................ -- -- -- (302,000)
---------- ---------- ---------- ----------
Total adjustments.......................... (77,000) 83,000 (155,000) (418,000)
---------- ---------- ---------- ----------
NET CASH PROVIDED BY CONTINUING
OPERATIONS:................................ $ (148,000) $ (225,000) $ (517,000) $ (732,000)
========= ========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capitalization of retained earnings for par
value of shares issued in stock split...... $ 25,000 $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
19
<PAGE> 21
TRICARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
MAY 31, 1992, 1993 AND 1994 AND DECEMBER 31, 1994
1. BUSINESS
TriCare ("TriCare" or the "Company") was incorporated in California in 1976
and was reorganized as a Delaware corporation in 1988. Through the fiscal year
ended May 31, 1990, TriCare's sole operating subsidiary was First Western Health
Corporation ("First Western"), which, in association with its managed medical
group, provided applicant medical/legal evaluation services. Commencing in
fiscal 1991, TriCare entered the related medical services business through a
subsidiary, Veritas Healthcare Management ("Veritas") and its managed medical
group. In May of 1990, TriCare, through its subsidiary Occu-Care, Inc.
("Occu-Care"), entered into the industrial medical business in association with
its managed medical group. The Company's applicant related service businesses of
First Western and Veritas were discontinued on April 30, 1993 and substantially
all of the assets and liabilities of Occu-Care were sold on September 30, 1994.
See Note 3 "Discontinued Operations" and Note 7 "Sale of Subsidiary" below for
further information.
Subsequent to discontinuance, the primary services provided by First
Western and Veritas have been the collection of accounts receivable and
accounting functions, which will continue until the collection of their accounts
receivable is completed. First Western's and Veritas' related managed medical
groups have ceased providing medical services.
On June 15, 1994 TriCare acquired Sullivan Health & Rehabilitation
Management, Inc. ("Sullivan") for an adjusted purchase price of $3,285,000.
Sullivan is a provider of healthcare case management, cost containment and
rehabilitation services to the insurance and risk management industry primarily
in the Southeast. See Note 6 "Acquisitions" below for further information.
On January 10, 1995, TriCare completed its merger with Transcend Services,
Inc. (formerly known as Bottomley and Associates, Inc. and referred to herein as
"Transcend"), an Atlanta based hospital services company with and into First
Western for approximately 10,447,866 shares of TriCare Common Stock. Transcend
currently operates, on a contract management basis, the medical records
departments of nine general acute care hospitals. Transcend also provides,
through outsourcing as well as other contracts, medical records transcription
services through computer and telephone links to centralized facilities.
Transcend also serves as an independent consultant to hospitals with respect to
health information management and reimbursement coding. Inasmuch as the merger
is being treated for financial accounting purposes as the acquisition of TriCare
by Transcend, following the merger, the historical financial statements of
Transcend have become the financial statements of TriCare and include the
business of both companies after the effective date of the merger (January 10,
1995) and the fiscal year will end on December 31 instead of May 31. Accordingly
reference to fiscal 1993 and 1994 refer to the years ended May 31.
On September 30, 1994, Transcend acquired the assets of Script-Ease, Inc.,
a medical transcription business based in Pittsburgh, Pennsylvania, for an
acquisition price of approximately $1,000,000.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The preparation of financial statements in conformity 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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company has presented its combined balance sheets, statements of
operations, changes in stockholders' equity and cash flows for all prior periods
to exclude the effect of the discontinued operations of
20
<PAGE> 22
TRICARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
First Western, Veritas and Occu-Care. The net assets of discontinued operations
is shown on the combined balance sheets and the statements of cash flows as a
separate line item.
All interentity accounts and transactions have been eliminated in the
accompanying combined financial statements.
NET REVENUES
The Company currently derives substantially all of its revenues from fees
related to healthcare case management and cost containment and rehabilitation
services provided to the insurance and risk management industry by Sullivan.
Approximately 80% of the revenues of Sullivan for the seven months ended
December 31, 1994, were paid by Fireman's Fund, Inc.
Net revenues are recorded on the date services are rendered and are equal
to billed charges less a provision for administrative discounts. Such discounts
arise when fee reductions are negotiated with payors.
SUPPLIES
Supplies are stated at cost and charged to income as used.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost, net of accumulated
depreciation and amortization. Expenditures for renewals and improvements which
increase the useful lives or capacity of equipment are capitalized. Expenditures
for repairs and maintenance are charged directly to operating expenses as
incurred. Cost and related accumulated depreciation and amortization of
equipment and leasehold improvements sold or otherwise disposed of are
eliminated from the accounts, and any gains or losses resulting from such
dispositions are recognized in the combined statements of operations.
The Company provides depreciation and amortization for financial statement
purposes using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Equipment............................................................ 3 to 12 years
Leasehold improvements............................................... Term of lease
</TABLE>
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are currently being amortized over
periods up to twenty years. The Company periodically evaluates whether events
and circumstances since acquisitions have occurred that indicate that the
remaining estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may warrant revision or that the remaining balance
of goodwill may not be recoverable. When factors (such as a change in law or
regulatory environment or forecasts showing changing long-term profitability)
indicate that goodwill should be evaluated for possible impairment, the Company
uses an estimate of the related business unit's discounted net income over the
remaining life of the goodwill to measure whether the goodwill is recoverable.
NET INCOME (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT
Net income (loss) per common share has been computed based on the weighted
average number of the Company's common shares and common share equivalents
(dilutive stock options) outstanding as of May 31, 1992, 1993, 1994 and December
31, 1994. The number of shares used in the computation of net income (loss) per
share is 7,671,000, 7,668,000, 7,711,000 and 7,792,000 in fiscal 1992, 1993,
1994, and for the seven month period ended December 31, 1994, respectively. In
1993 and 1994, the common stock equivalents related to stock options were not
included in the computation due to their antidilutive effect. Fully diluted net
income
21
<PAGE> 23
TRICARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(loss) per share has not been presented since it is not materially different
from primary net income (loss) per share.
CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposit accounts and
highly liquid debt instruments with a maturity of three months or less.
RECLASSIFICATIONS
Certain prior year amounts in the accompanying financial statements have
been reclassified to conform to the current period presentation.
3. DISCONTINUED OPERATIONS
During fiscal 1993, the Company experienced negative trends in its
applicant related service businesses, First Western and Veritas. As a result, in
November 1992 the Company incurred a restructuring charge of $1,300,000 in an
attempt to reposition such businesses. The restructuring charge related to
downsizing of staff personnel and related costs of approximately $375,000, and
closing of offices and reduction of office space with costs of approximately
$925,000 to reposition such businesses. As conditions further deteriorated
within the industry, the Company's applicant related service businesses were
discontinued on April 30, 1993. As a result, in fiscal 1993, the Company
incurred a loss of $712,000 from the discontinued operations of First Western
and Veritas and recorded a provision for discontinued operations, net of tax, of
$6,000,000. These businesses accounted for 80% of the Company's net revenues in
fiscal 1992 and 61% in fiscal 1993.
During the fourth quarter of fiscal 1993 the Company reevaluated its
carrying amount for intangible assets based upon the criteria noted above. Based
upon the Company's fourth quarter 1993 discontinuance of its applicant
medical/legal and related services business, the recoverability of the
intangible assets has been impaired. Discontinuing these businesses has
increased the allocation of overhead expenses to Occu-Care and caused a decrease
in the estimated discounted net income over the remaining life of its goodwill.
The Company determined the net realizable value to be approximately $2,300,000
as of April 30, 1993 resulting in a writedown of intangible assets (primarily
goodwill) in the amount of $7,115,000 during fiscal 1993.
Prior to the decision to discontinue these businesses, there was heightened
media attention given to the worker's compensation industry and at the same time
a new and lower fee schedule created confusion over the appropriate pricing of
services provided during a prior time period. The Company believes insurance
carriers used this environment to delay or refuse payment which overloaded the
resolution system causing greater delay in collections of outstanding invoices.
The Company evaluated this information and the historical trend of payments from
the insurance carriers, the length of time in the payment cycle, and the cost of
collection related to receiving these payments. TriCare maintained an in-house
collection department to pursue payments from the insurance carriers and other
payors related to certain cases. Under these circumstances the Company with its
related managed medical groups determined that it was in the best interests of
its stockholders for the Company to discontinue all applicant related services.
The Company studied costs and expenses related to this business and took a
$6,000,000, net of tax, charge related to discontinued operations of the
medical/legal evaluation services businesses in the fourth quarter of fiscal
1993. All but $2,000,000 of this charge related to the accrual for future costs,
including costs of collections, rental obligations and other future expenses.
The remaining $2,000,000 of the charge related to a writedown of fixed assets
that were to be abandoned or sold.
On September 17, 1993, TriCare and its healthcare subsidiaries and the
physician-owned medical groups that have contracts with the healthcare
subsidiaries initiated a lawsuit against twenty-two insurance carriers seeking
$115 million in compensatory damages claiming abuse of process, intentional
interference with
22
<PAGE> 24
TRICARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
contractual and prospective economic relations and unfair business practices
which led to the discontinuation of the business of TriCare's healthcare
subsidiaries and their contracting associated medical groups in April 1993. See
Note 9 "Commitments and Contingencies" below for further information.
During the fourth quarter of fiscal 1994, the Company re-evaluated the
estimated realizable value of the accounts receivable portfolio based on current
payment experience and length of time to receive payment as well as discussions
held with a third party regarding estimated market value of the portfolio in a
bulk sale. As a result of this analysis (described in detail in the following
paragraph), management determined that it was necessary to record a loss
provision for discontinued operations of $4,000,000, net of a $542,000 benefit
for income taxes. This loss provision provided for an additional write-down of
the accounts receivable assets and provided additional accrued expense for the
related collection cost of those assets. At December 31, 1994, the net assets
related to the discontinued operations were $3,923,000 which consisted primarily
of accounts receivable, net of allowance for administrative discounts, less
amounts accrued for the cost of collections, rental obligations and
miscellaneous future obligations and liabilities of First Western and Veritas.
As part of its evaluation of a $6 million write-off in fiscal 1993, the
Company did not anticipate even slower payments from the insurance carriers due
to the lawsuit filed against them. Beginning in the January 1994 time period,
TriCare noticed significant reductions in payments and reduction in settlements
from the insurance carriers. The Company began to re-evaluate this and also the
additional costs that were now being incurred by its collectors in connection
with the settlements. Carriers refused to negotiate and settle telephonically,
which had been the standard method for settlement of claims and started forcing
providers to have their collectors make numerous personal appearances throughout
the State of California to settle individual invoices. The Company's evaluation
had been ongoing. The $4 million charge, net of tax, that the Company took in
1994 was primarily due to decreased projected payments on its receivables, the
fact that carriers were giving extremely low settlement offers, the revised cost
of the lawsuit against the insurance carriers and additional costs for increased
collection efforts. Due to the shut-down, TriCare incurred additional costs to
retain its collectors, above and beyond what a collection department would
normally expend.
The Company intends to continue vigorously pursuing the collection of its
accounts receivable and expects to realize substantially all of its net assets
over the next several years. Cash is received as accounts are settled or when
the injured workers case is resolved. The delinquency of payments from insurance
carriers has caused the settlement of claims to extend beyond two years. The
Company believes that the net realizable value of accounts receivable is
properly reflected in the financial statements. However, there can be no
assurance that new laws or interpretations of administrative rules or other
events will not occur that would result in continued delays in payment or have
an adverse impact on the ultimate amount of collectibility of the receivables.
Income (loss) from discontinued operations, net of tax, was $3,887,000,
($7,187,000), ($563,000) and $31,000 for fiscal 1992, 1993 and 1994 and for the
seven month period ended December 31, 1994, respectively. The loss provision for
discontinued operations was $6,000,000, net of a $3,850,000 benefit for income
tax and $4,000,000, net of a $542,000 benefit for income tax for fiscal 1993 and
1994, respectively. These loss provisions included the write-off of assets and
the provision for the cost of collections and future obligations as noted above.
23
<PAGE> 25
TRICARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized results of operations and financial position data of
discontinued operations of First Western, Veritas and Occu-Care are as follows:
<TABLE>
<CAPTION>
SEVEN
YEAR ENDED MAY 31, MONTHS ENDED
---------------------------------------- DECEMBER 31,
1992 1993 1994 1994
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Results of operations:
Net revenues.................... $46,795,000 $ 31,117,000 $ 8,617,000 $2,522,000
========== =========== ========== ===========
Income (loss) from discontinued
operations, net of income
taxes........................ $ 3,887,000 $ (7,187,000) $ (563,000) $ 31,000
Provision for discontinued
operations, net of income
taxes........................ -- (6,000,000) (4,000,000) --
----------- ------------ ----------- ------------
Net income (loss) from
discontinued operations...... $ 3,887,000 $(13,187,000) $(4,563,000) $ 31,000
========== =========== ========== ===========
Financial position:
Net assets related to
discontinued operations of
Occu-Care.................... $10,601,000 $ 4,214,000 $ 2,589,000 $ --
----------- ------------ ----------- ------------
First Western and Veritas:
Accounts receivable, net........ $25,012,000 $ 21,758,000 $ 9,726,000 $6,874,000
Property and other assets....... 2,627,000 -- -- --
Total Liabilities............... (5,896,000) (10,751,000) (4,833,000) (2,951,000)
----------- ------------ ----------- ------------
Net assets related to
discontinued operations of
First Western and Veritas.... $21,743,000 $ 11,007,000 $ 4,893,000 $3,923,000
----------- ------------ ----------- ------------
Net assets related to
discontinued operations...... $32,344,000 $ 15,221,000 $ 7,482,000 $3,923,000
========== =========== ========== ===========
</TABLE>
As of December 31, 1994, the $2,951,000 of liabilities related to the
discontinued operations of First Western and Veritas include the costs of
collections of approximately $2,550,000 and rental obligations of $400,000.
Management has estimated cash payments on these obligations of $1,600,000 in
1995 and $1,350,000 in 1996.
4. PUBLIC OFFERING
On July 30, 1991, the Company completed a second public offering of its
common stock. Including the exercise of an over-allotment option by the
underwriters, 1,725,000 shares were sold to the public at $9.00 per share. Net
proceeds to the Company from the offering amounted to approximately $14,200,000.
5. STOCK DIVIDEND
On October 16, 1991, the Board of Directors declared a three-for-two stock
split effected in the form of a 50% stock dividend, payable to the holders of
record of common stock issued and outstanding at the close of business on
October 28, 1991. Per share data for all prior periods presented have been
restated to reflect this split.
24
<PAGE> 26
TRICARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACQUISITIONS (See Also Note 16)
On March 1, 1992, a subsidiary of the Company, Occu-Care, acquired all of
the outstanding stock of Industrial Plus Health Network ("IPHN"). The purchase
price was $5,617,000 and has been accounted for under the purchase method of
accounting. See Note 7 "Sale of Subsidiary" below for further information.
On June 15, 1994 TriCare completed the acquisition of Sullivan for an
adjusted purchase price of $3,285,000. On January 13, 1995, TriCare issued a
final payment of $285,000 in lieu of the $1,260,000 obligation which was payable
in stock in January 1995 and July 1995, to the former owners of Sullivan Health
and Rehabilitation in full satisfaction of its long-term obligation related to
the acquisition of Sullivan and gave the former owners a release from any and
all further liabilities in connection therewith.
Sullivan's operations are reflected in TriCare's financial statements
commencing June 15, 1994. Outlined below are the combined pro forma results of
operations combining TriCare and Sullivan's results of operations for the years
ended May 31, 1993 and 1994, as if the acquisition of Sullivan had occurred at
the beginning of the period. The following pro forma financial data is not
necessarily indicative of future operating results or financial position that
would have occurred had the acquisition been consummated during the periods
presented.
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL YEAR FISCAL YEAR
ENDED MAY ENDED MAY
31, 1993 31, 1994
------------ ------------
(UNAUDITED)
<S> <C> <C>
Net revenues..................................................... $4,341,000 $5,454,000
========== ==========
Net income (loss) from continuing operations..................... $ 245,000 $ (190,000)
========== ==========
Net income (loss) per common share and common share equivalent
from continuing operations..................................... $ .03 $ (.02)
========== ==========
</TABLE>
7. SALE OF SUBSIDIARY
Pursuant to an Asset Acquisition Agreement dated September 16, 1994,
TriCare sold substantially all of the assets and liabilities of its wholly-owned
subsidiary, Occu-Care to AmHealth, Inc. ("AmHealth") for a sales price of
$4,000,000. The sales price included $1,500,000 in cash paid at closing;
AmHealth's Series A Note in the face amount of $1,500,000 bearing interest of 8%
per annum commencing December 1, 1994, payable quarterly thereafter, with the
principal payable on or prior to December 1, 1995; and AmHealth's Series B Note
in the face amount of $1,000,000 bearing interest of 8% per annum commencing
December 1, 1994, payable quarterly thereafter, with the principal payable in
equal quarterly installments starting December 1, 1995 and continuing until
September 1, 2000.
TriCare did not receive its first interest payment on its $2,500,000 notes
receivable from its sale of the assets of Occu-Care, which constituted an event
of default. Therefore, TriCare has deferred recognition of the gain from the
transaction in the amount of $450,000. Any recognition of the deferred gain will
be determined under the cost recovery method. The Company also has not
recognized any interest income from the notes receivable. TriCare entered into
negotiations with the buyer, and on December 30, 1994, the Company entered into
an agreement to exchange its notes receivable of $2,500,000 for 2,500,000 shares
of $1.00 convertible redeemable preferred stock. The dividend is cumulative at a
rate of 6.5% per annum. Under certain circumstances and at TriCare's option, the
preferred stock is convertible into common stock of AmHealth, Inc. The preferred
stock is subject to mandatory redemption as follows: 1,500,000 shares (less any
shares previously converted) are to be redeemed on December 1, 1995, and the
balance redeemed in nineteen quarterly installments commencing December 1, 1995
which was consistent with the payment schedule of the original notes. The
Company is aware that AmHealth is currently seeking additional financing
resources that
25
<PAGE> 27
TRICARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
will be needed to fund its current operations and rapid expansion. The amount
the company will ultimately realize could differ materially from the carrying
value of the investments as reflected in the financial statements due to changes
in the financial condition of the purchaser.
8. STOCKHOLDERS' EQUITY
On January 10, 1995, the stockholders approved an amendment to TriCare's
Certificate of Incorporation that increased the number of authorized shares of
TriCare common stock from 20,000,000 to 30,000,000.
9. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following at May 31,
1993, 1994 and December 31, 1994:
<TABLE>
<CAPTION>
MAY 31, MAY 31, DECEMBER 31,
1993 1994 1994
------- ------- ------------
<S> <C> <C> <C>
Furniture & Fixtures............................... $25,000 $66,000 $631,000
Less Accumulated Depreciation and Amortization..... 25,000 33,000 339,000
------- ------- ------------
$ -- $33,000 $292,000
======= ======= ==========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases general office space and equipment under various
non-cancelable operating leases which expire at various dates through 1998.
As of December 31, 1994, future minimum payments of continuing operations
under these agreements are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING DECEMBER 31
--------------------------------------------------------------------------
<S> <C>
1995............................................................ $231,000
1996............................................................ 225,000
1997............................................................ 215,000
1998............................................................ 54,000
1999............................................................ 19,000
--------
$744,000
========
</TABLE>
LEGAL MATTERS
The Company is subject to certain claims in the ordinary course of
business.
On September 17, 1993, TriCare and its healthcare subsidiaries and the
physician-owned medical groups that have contracts with the healthcare
subsidiaries initiated a lawsuit in the Superior Court of the State of
California, County of Los Angeles, against twenty-two insurance carriers seeking
$115 million in compensatory damages claiming abuse of process, intentional
interference with contractual and prospective economic relations and unfair
business practices which led to the discontinuation of the business of TriCare's
healthcare subsidiaries and their contracting associated medical groups in April
1993 (the "Lawsuit"). Certain of the defendants in the Lawsuit have filed cross
complaints seeking restitution from TriCare, its healthcare subsidiaries and
their associated managed medical groups for funds previously paid to the medical
groups and other damages. The costs associated with the above claims cannot be
ascertained with any certainty but are expected to be substantial. The Company
intends to defer such costs until resolution of the litigation. There
26
<PAGE> 28
TRICARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
can be no assurance as to the outcome of this litigation, including potential
recovery, if any of the Company's claims, or damages if any. Based upon facts
and circumstances known to date, in the opinion of management, final resolution
of this matter will not have a material adverse effect on the Company's
financial condition or results of operations.
GOVERNMENT REGULATIONS
Certain employees and independent contractors of Sullivan are registered
nurses. These individuals are subject to certain licensing standards in the
states in which they practice, and are responsible for maintaining their
licenses. Sullivan is not subject to any material governmental regulation,
although certain states in which Sullivan operates have established fee
schedules under their workers' compensation laws which apply to certain services
provided by Sullivan.
In addition, political, economic and regulatory influences are causing
fundamental changes in the healthcare industry in the United States. Congress
and various state legislatures are considering a number of legislative proposals
to reform the healthcare system. The Clinton administration has expressed a
commitment to increasing access to healthcare for the uninsured and controlling
healthcare expenditures by both the public (Medicare and Medicaid) and private
sectors. Reforms under consideration include mandated basic healthcare benefits,
controls on healthcare spending through limitations on increases in private
health insurance premiums and Medicare and Medicaid reimbursement, and
fundamental changes to the healthcare delivery and payment system. In addition,
some states in which TriCare operates are considering various healthcare reform
proposals. TriCare anticipates that Congress and state legislatures will
continue to review and assess alternative healthcare delivery systems and
payment methods and that public debate of these issues will likely continue in
the future. Due to uncertainties regarding the ultimate features of reform
initiatives and their enactment and implementation, no prediction can be made as
to which, if any, reform proposals will be adopted, when they may be adopted or
what impact they may have on the operations of TriCare. There can be no
assurance that such reforms, if enacted, will not have a material adverse effect
on TriCare.
The Company cannot predict the outcome of future legislation or reform or
the impact it might have on the Company's operations.
11. OBLIGATIONS UNDER FINANCING LEASES
The following is a schedule of minimum lease payments under financing
leases together with the present value of the net minimum lease payments as of
December 31, 1994:
<TABLE>
<S> <C>
Fiscal year ending December 31:
1995..................................................................... $7,000
Less -- Amount representing interest..................................... 1,000
------
Present value of net minimum lease payments................................ 6,000
Less -- Current portion.................................................. 6,000
------
$ --
======
</TABLE>
12. RELATED-PARTY TRANSACTIONS
On January 10, 1995, TriCare completed its merger with Transcend Services,
Inc. ("Transcend"), an Atlanta based hospital services company for approximately
10,447,866 shares of TriCare Common Stock. See Note 16 "Subsequent Events" for
further information. Transcend currently operates, on a contract management
basis, the medical records departments of nine general acute care hospitals.
Transcend also provides, through outsourcing as well as other contracts, medical
records transcription services through computer and
27
<PAGE> 29
TRICARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
telephone links to centralized facilities. Transcend also serves as an
independent consultant to hospitals with respect to health information
management and reimbursement coding.
During the fiscal year ended May 31, 1994, TriCare engaged in transactions
with Transcend as described below. Messrs. Gerdes and Huff, directors of
TriCare, are directors of Transcend. In addition, Mr. Gerdes and Mr. Huff
through their personal holdings and the holdings of Gerdes Huff Investments, a
private investment firm, were controlling stockholders of Transcend. Mr. Lucas,
Chairman of TriCare, and Mr. Klein, Chief Financial Officer of TriCare, were
stockholders of Transcend. Mr. Thoele, a director of TriCare since October 1993,
served on Transcend's advisory board from April 1993 until January 1994 and was
an investor in Transcend until September 1993.
During the seven months ended December 31, 1994, TriCare sublet office
space from Transcend for approximately $5,000. Also, during the seven months
ended December 31, 1994, TriCare utilized the secretarial services of Transcend
staff and paid Transcend approximately $21,000 for such services. Transcend
utilized the services of TriCare's financial and management staff and paid
TriCare approximately $117,000 for such services.
13. INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes" (and prior thereto SFAS No. 96)
which requires the use of the liability method in accounting for income taxes.
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statements and tax basis of assets and
liabilities given the provisions of the enacted tax laws.
The components of the Company's deferred income tax benefit (liability) as
of May 31, 1994 and as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
1994 1994
----------- ------------
<S> <C> <C>
Deferred tax liabilities:
Accrual to cash basis adjustment........................ $ 1,462,000 $ 1,200,000
Other................................................... 310,000 200,000
Deferred tax assets:
Net operating losses.................................... (1,254,000) (1,080,000)
Depreciation difference................................. (56,000) (49,000)
Accrued liabilities..................................... (1,990,000) (1,800,000)
Other................................................... (9,000) (10,000)
Valuation allowance....................................... 2,430,000 2,458,000
----------- ------------
Net Deferred Tax Liability................................ $ 893,000 $ 919,000
========== ==========
</TABLE>
28
<PAGE> 30
TRICARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's combined effective tax rate for net loss from continuing
operations which differs from the federal statutory rate for the years ended May
31, 1992, 1993, 1994 and for the seven month period ended December 31, 1994 is
as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
---------------------------------------------
MAY 31,
------------------------------ DECEMBER 31,
1992 1993 1994 1994
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Tax benefit at federal statutory rates.... $ 88,000 $196,000 $225,000 $151,000
State income tax (Provision) benefit, net
of federal income tax benefit........... 16,000 35,000 41,000 8,000
Amortization expense not deductible....... -- -- -- (40,000)
Other, primarily interest income exempt
from federal taxes...................... 83,000 38,000 34,000 11,000
-------- -------- -------- ------------
$187,000 $269,000 $300,000 $130,000
======== ======== ======== ==========
</TABLE>
The Company's combined effective tax rate for discontinued operations was
calculated using federal statutory rates, plus state income taxes net of the
federal income tax benefit. The income tax benefit (provision) was $(2,817,000),
$4,216,000, $876,000 and $0 for fiscal 1992, 1993, 1994 and for the seven month
period ended December 31, 1994 respectively. During fiscal 1993 and 1994, the
loss provisions for discontinued operations produced a tax benefit of $3,850,000
and $542,000, respectively. As of December 31, 1994, for federal income tax
purposes the Company has approximately $2,700,000 of net operating loss
carryforwards which begin expiring in 2002.
14. STOCK PLANS
STOCK OPTION PLANS
The Company's 1986 and 1992 Stock Option Plan (the "Plans") provide for the
grant of options to officers and key employees, as well as nondiscretionary
awards of non-qualified stock options to non-employee directors of the Company.
The options expire ten years from the dates of grant.
The maximum number of shares of stock that may be issued and sold under the
1992 Plan shall not exceed, in the aggregate, the sum of 945,000, representing
shares of stock not previously authorized for distribution, plus 655,000,
representing shares of stock subject to outstanding options awarded under the
1986 Plan which expire, terminate or are canceled after the effective date of
the 1992 Plan without having been exercised. There are no additional shares
available for grant under the 1986 Plan. Options to employees under the 1992
Plan may be either incentive stock options, in which case the option price may
not be less than the fair market value of a share on the date of grant, or
non-qualified stock options, in which case the option price may be less than the
fair market value on the date of grant.
At December 31, 1994, there were options outstanding for directors to
purchase 64,000 shares of the Company's common stock at prices ranging from
$2.63 to $3.75 per share, which were the market values at the dates of grant.
The options expire ten years from the date of grant.
At December 31, 1994, there were options outstanding to purchase 1,165,500
shares of the Company's common stock, of which options to purchase 605,168
shares were exercisable, at prices ranging from $1.87 to $3.75 per share, which
were the market values at the dates of grant. The weighted average exercise
price of the outstanding options was $2.22 at December 31, 1994.
29
<PAGE> 31
TRICARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the 1986 and 1992 Plan stock option activity
for the years ended May 31, 1992, 1993, 1994 and for the seven month period
ended December 31, 1994:
<TABLE>
<CAPTION>
STOCK OPTIONS
------------------------
NUMBER RANGE
--------- ----------
<S> <C> <C>
Outstanding, May 31, 1991.................................... 1,054,500 $1.33-9.50
Canceled................................................... (120,811) 3.33-9.50
Exercised.................................................. (242,313) 1.33-9.50
--------- ----------
Outstanding, May 31, 1992.................................... 691,376 1.33-9.50
Granted.................................................... 1,227,188 1.94-3.75
Canceled................................................... (639,122) 2.00-9.50
Exercised.................................................. (21,500) 1.67-2.00
--------- ----------
Outstanding, May 31, 1993.................................... 1,257,942 1.33-9.50
Granted.................................................... 167,125 1.94-3.75
Canceled................................................... (179,567) 2.00-9.50
Exercised.................................................. (100,250) 1.67-2.00
--------- ----------
Outstanding, May 31, 1994.................................... 1,145,250 1.94-9.50
Granted.................................................... 176,000 1.87-3.00
Canceled................................................... (163,250) 2.00-9.50
--------- ----------
Outstanding, December 31, 1994............................... 1,158,000 $1.87-3.75
======== =========
</TABLE>
The directors who were not employees of the Company were granted
nonqualified stock options to purchase shares of the Company's common stock
prior to May 31, 1991. These options, which expire ten years from the date of
grant, were granted at prices between $2.00 and $5.17 per share, the fair market
value on the date of grant, and are all exercisable. During the seven months
ended December 31, 1994, no options were exercised and options to purchase 7,500
shares are still outstanding.
1990 EMPLOYEE STOCK PURCHASE PLAN
Effective January 1, 1991, the Company began offering employees the right
to purchase shares of the Company's common stock at a 15% discount from market
value pursuant to the 1990 Employee Stock Purchase Plan (the "Purchase Plan").
Under the Purchase Plan, full-time employees who have been employed for more
than six months, except 5% owners of the Company's common stock, are eligible to
participate. A maximum of 225,000 shares of common stock are issuable under the
Purchase Plan. As of December 31, 1994, 30,608 shares have been issued under the
Purchase Plan.
In January 1995, the Shareholders approved an amendment to the 1990
Employee Stock Purchase Plan, which eliminated the six-month employment
requirement for participation and to provide that earnings for purposes of
determining maximum participation will include all earnings for federal income
tax purposes.
15. RETIREMENT SAVINGS PLAN
The Company has established a Retirement Savings Plan ("Savings Plan") for
its eligible employees. Under the Savings Plan, employees who have completed 12
months of service and at least 1,000 hours of service during that period are
eligible to participate in the Savings Plan. Contributions are invested by the
trustee in various funds based upon the instructions of individual participants.
Each participant is immediately fully vested. The Savings Plan is
"tax-qualified" under the Internal Revenue Code as a defined contribution profit
sharing plan which includes a section 401(k) qualified cash or deferred
arrangement. The Company had approximately $6,000 in expense related to this
plan during the last three years.
30
<PAGE> 32
TRICARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUBSEQUENT EVENTS
On January 10, 1995, TriCare acquired Transcend by the merger of Transcend
into First Western Health Corporation. Inasmuch as the merger is being treated
for financial accounting purposes as the acquisition of TriCare by Transcend,
following the merger, the historical financial statements of Transcend shall
become the financial statements of TriCare and shall include the business of
both companies, and the fiscal year will end on December 31 instead of May 31.
The following unaudited ProForma Combined Statements of Operations and the
unaudited ProForma Combined Balance Sheet gives effect to the merger of TriCare
and Transcend as if it had occurred for all periods presented.
For the ProForma Combined Statements of Operations for the year ended May
31, 1994, the historical statements of Transcend and Script-Ease, Inc. have been
adjusted to reflect statements of operations for the twelve months ended June
30, 1994 and the historical statements of Sullivan have been adjusted to reflect
statements of operations for the twelve months ended June 30, 1994.
The historical statements of Transcend and Script-Ease, Inc. and of
Sullivan have been adjusted to reflect Statements of Operations for the twelve
months ended December 31, 1994. For the twelve months ended December 31, 1994,
the revenue and related costs have been adjusted to reflect the loss of one of
Sullivan's key customers.
The Pro Forma Combined Statements of Operations and the ProForma Combined
Balance Sheet are not necessarily indicative of future operating results or
financial position that would have occurred or will occur had the acquisition
been consummated during the periods presented.
PROFORMA STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS
FISCAL YEAR ENDED ENDED
MAY 31, 1994 DECEMBER 31, 1994
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Net revenues........................................ $16,280,000 $17,173,000
============= =============
Net loss from continuing operations................. $(1,271,000) $(2,406,000)
============= =============
Net loss per common share and common share
equivalent from continuing operations............. $ (.07) $ (.13)
============= =============
</TABLE>
31
<PAGE> 33
TRICARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PROFORMA BALANCE SHEET:
<TABLE>
<CAPTION>
AT
DECEMBER 31,
1994
------------
(UNAUDITED)
<S> <C>
ASSETS
Cash.................................................................. $ 5,321,000
All Other Current Assets.............................................. 1,442,000
Net Assets Related to Discontinued Operations......................... 3,923,000
Securities Related to Sale of Occu-Care............................... 2,050,000
Fixed Assets, net..................................................... 850,000
Intangible Assets, net................................................ 5,287,000
------------
Total Assets.................................................. $ 18,873,000
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities................................................... $ 3,556,000
Deferred Taxes Related to Discontinued Operations..................... 873,000
Equity................................................................ 14,444,000
------------
$ 18,873,000
==========
</TABLE>
32
<PAGE> 34
SIGNATURES
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.
TRICARE, INC.
By: /s/ Richard L. Klein
------------------------------------
Richard L. Klein
Chief Financial Officer
DATE: April 7, 1995
33
