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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): October 29, 1996
CRA MANAGED CARE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 02-25856 04-2658593
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) NUMBER) IDENTIFICATION NO.)
312 UNION WHARF
BOSTON, MASSACHUSETTS 02109 (617) 367-2163
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) (REGISTRANT'S TELEPHONE
OFFICES) NUMBER, INCLUDING AREA CODE)
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ITEM 5. OTHER EVENTS.
The Financial Statements of Prompt Associates, Inc., a Delaware
corporation ("Prompt") and the Consolidated Pro Forma Financial Statements of
CRA Managed Care, Inc., a Massachusetts corporation (the "Company"), filed
herewith were previously filed in accordance with General Instruction B.1. to
Form 8-K pursuant to a Registration Statement on Form S-3 (Registration No.
333-15715) filed on November 7, 1996 with the United States Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended. The
Company withdrew such Registration Statement on December 4, 1996 due to pricing
considerations.
On October 29, 1996, CRA acquired all of the outstanding capital stock of
Prompt for $30,000,000 in cash, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") by and among the Company, Prompt, PAI Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of the Company, and the
shareholders of Prompt named therein (the "Acquisition"). The Merger became
effective upon filing of the Certificate of Merger with the Secretary of State
of the State of Delaware (the "Effective Time"). Pursuant to the Merger
Agreement, at the Effective Time, all of the issued and outstanding shares of
capital stock of Prompt were converted into the right to receive cash in the
aggregate amount of $30,000,000.
Prompt, based in Salt Lake City, Utah, is a provider of hospital bill audit
services to health care payors for claims that fall outside of the payors'
networks of hospitals or outpatient facilities. Prompt utilizes its group of
experienced negotiators, as well as proprietary data base systems, to reduce its
clients' expenses by repricing inpatient hospital and outpatient facility bills
on a line-by-line basis to either a usual and customary rate, a PPO contract
rate or a combination thereof. In 1995, Prompt had annual revenues of over
$10,000,000. On the date of the execution of the Merger Agreement, there was no
material relationship between the Company and Prompt or the Company and any
affiliates of Prompt, any director or officer of the Company and Prompt, or
between any associate of any director or officer of the Company and Prompt.
The Acquisition was funded with the Company's cash reserves and amounts
borrowed under the Company's senior revolving credit facility with First Union
National Bank of North Carolina.
A copy of the Merger Agreement is attached hereto as an exhibit and is
incorporated herein by reference. The foregoing description of the Acquisition
does not purport to be complete and is qualified in its entirety by reference to
such exhibit.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
REPORT OF INDEPENDENT AUDITORS
FINANCIAL STATEMENTS OF PROMPT ASSOCIATES, INC.
Balance Sheets
Statement of Operations
Statement of Cash Flows
Statement of Shareholders' Equity
Notes to Financial Statements
2
(b) Pro Forma Financial Information
CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS OF CRA MANAGED
CARE, INC., FOCUS HEALTHCARE MANAGEMENT, INC. AND PROMPT
ASSOCIATES, INC. (UNAUDITED):
Consolidated Pro Forma Balance Sheet
Consolidated Pro Forma Statement of Operations
Notes to Pro Forma Financial Statements
(c) EXHIBITS
2.1 Agreement and Plan of Merger, dated as of October 29, 1996,
by and between Prompt Associates, Inc., CRA Managed Care,
Inc., PAI Acquisition Corp. and the shareholders of Prompt
Associates, Inc. named therein.
In accordance with Item 601(b)(2) of Regulation S-K, the Schedules and Exhibits
referenced in the Merger Agreement have not been filed as part of the exhibits
to this Current Report on Form 8-K. The registrant agrees to furnish
supplementally a copy of the omitted Schedules and Exhibits to the Commission
upon request.
3
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 duly authorized.
CRA MANAGED CARE, INC.
By: /s/ Donald J. Larson
------------------------------
Name: Donald J. Larson
Title: President and Chief
Executive Officer
Dated: January 7, 1997
4
CRA MANAGED CARE, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT AUDITORS................................... F-2
FINANCIAL STATEMENTS OF PROMPT ASSOCIATES, INC.
Balance Sheets............................................... F-3
Statement of Operations...................................... F-4
Statement of Cash Flows...................................... F-5
Statement of Shareholders' Equity............................ F-6
Notes to Financial Statements................................ F-7
CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS OF CRA MANAGED
CARE, INC., FOCUS HEALTHCARE MANAGEMENT, INC. AND PROMPT
ASSOCIATES, INC. (UNAUDITED):
Consolidated Pro Forma Balance Sheet......................... F-12
Consolidated Pro Forma Statement of Operations............... F-13
Notes to Pro Forma Financial Statements...................... F-14
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Prompt Associates, Inc.
We have audited the accompanying balance sheets of Prompt Associates, Inc.
as of December 31, 1995 and 1994, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. The 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 Prompt Associates, Inc. at
December 31, 1995 and 1994 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Salt Lake City, Utah
April 19, 1996
F-2
PROMPT ASSOCIATES, INC.
BALANCE SHEETS
DECEMBER 31, (UNAUDITED)
---------------------- SEPTEMBER
ASSETS 1994 1995 30, 1996
- ----------------------------------------------------------------------- ---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 906,000 $1,616,000 $3,913,000
Short-term investments 246,000 449,000 --
Accounts receivable, less allowance for doubtful accounts of
$1,400,000, $1,052,000 and $1,475,000, respectively 744,000 982,000 1,568,000
Prepaid expenses 93,000 617,000 425,000
Current deferred tax assets -- 643,000 372,000
Receivable from related party 248,000 -- --
Current portion of loan to shareholders 1,040,000 685,000 685,000
---------- ---------- ----------
Total current assets 3,277,000 4,992,000 6,963,000
PROPERTY AND EQUIPMENT, AT COST 785,000 1,009,000 1,255,000
Less: Accumulated depreciation and amortization 432,000 674,000 817,000
---------- ---------- ----------
Net property and equipment 353,000 335,000 438,000
OTHER ASSETS:
Loan to shareholders 4,160,000 1,560,000 1,040,000
Non-current deferred tax assets -- 994,000 536,000
---------- ---------- ----------
Total other assets 4,160,000 2,554,000 1,576,000
---------- ---------- ----------
$7,790,000 $7,881,000 $8,977,000
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 906,000 $ 730,000 $ 962,000
Accrued payroll and related 396,000 362,000 423,000
Current portion of payable under long-term agreements to related
parties (net of discount of $377,000, $151,000 and $141,000,
respectively) 1,029,000 680,000 690,000
---------- ---------- ----------
Total current liabilities 2,331,000 1,772,000 2,075,000
Long-term portion of payable under long-term agreements to related
parties (net of discount of $754,000, $226,000 and $85,000,
respectively) 4,117,000 1,544,000 1,009,000
COMMITMENTS AND CONTINGENCIES (Note 3) -- -- --
STOCKHOLDERS' EQUITY :
Preferred Stock -- $.001 par value, 78,000 authorized and issued -- -- --
Common stock -- $.001 par value; 1,500,000 authorized; 500,000 shares
issued and outstanding 1,000 1,000 1,000
Paid-in-capital 700,000 2,457,000 2,457,000
Retained earnings 641,000 2,107,000 3,435,000
---------- ---------- ----------
Total stockholders' equity 1,342,000 4,565,000 5,893,000
---------- ---------- ----------
$7,790,000 $7,881,000 $8,977,000
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
F-3
PROMPT ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------- SEPTEMBER
1993 1994 1995 30, 1996
------------ ----------- ---------- ----------
NET REVENUES $ 3,939,000 $ 6,835,000 $10,385,000 $9,692,000
COST OF SERVICES 1,489,000 4,059,000 5,945,000 4,985,000
------------ ----------- ---------- ----------
GROSS PROFIT 2,450,000 2,776,000 4,440,000 4,707,000
MARKETING AND SALES EXPENSES 769,000 433,000 554,000 596,000
GENERAL AND ADMINISTRATIVE EXPENSES 1,799,000 2,325,000 2,361,000 2,048,000
------------ ----------- ---------- ----------
OPERATING INCOME (LOSS) (118,000) 18,000 1,525,000 2,063,000
OTHER (INCOME) EXPENSE, NET:
Interest (income) (428,000) (473,000) (76,000) (103,000)
Interest expense 1,479,000 1,547,000 -- --
Other (income) expense, net (14,000) 42,000 14,000 --
------------ ----------- ---------- ----------
Total (income) expense, net 1,037,000 1,116,000 (62,000) (103,000)
INCOME (LOSS) BEFORE INCOME TAXES (1,155,000) (1,098,000) 1,587,000 2,166,000
PROVISION FOR INCOME TAXES -- -- 121,000 838,000
------------ ----------- ---------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (1,155,000) (1,098,000) 1,466,000 1,328,000
GAIN ON RETIREMENT OF DEBT -- 3,254,000 -- --
------------ ----------- ---------- ----------
NET INCOME (LOSS) ($1,155,000) $ 2,156,000 $1,466,000 $1,328,000
------------ ----------- ---------- ----------
------------ ----------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
F-4
PROMPT ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------- SEPTEMBER
1993 1994 1995 30, 1996
------------ ---------- ---------- ----------
CASH FLOWS FROM OPERATIONS:
Net income (loss) ($1,155,000) $2,156,000 $1,466,000 $1,328,000
Items not requiring cash:
Depreciation of property and equipment 180,000 196,000 243,000 143,000
Amortization of debt discount 276,000 -- -- --
Gain on retirement of debt -- (1,974,000) -- --
Loss on forgiveness of shareholder debt -- -- 51,000 --
Loss on disposal of fixed assets -- -- 1,000 --
Provision for deferred tax income taxes -- -- 121,000 729,000
Change in assets and liabilities:
Accounts receivable (201,000) 174,000 (473,000) (586,000)
Prepaid expenses and other assets (224,000) 298,000 (523,000) 192,000
Accounts payable, accrued expenses and income taxes 1,426,000 26,000 124,000 288,000
------------ ---------- ---------- ----------
Cash flows from operations 302,000 876,000 1,010,000 2,094,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (62,000) (182,000) (203,000) (246,000)
Sale (purchase) of short-term investments 2,000 (246,000) (226,000) 449,000
------------ ---------- ---------- ----------
Cash flows used for investing activities (60,000) (428,000) (429,000) 203,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under long-term agreements with related
parties -- -- (703,000) --
Receipts on note from shareholders -- -- 708,000 --
Receipts on receivable from related party -- -- 124,000 --
------------ ---------- ---------- ----------
Cash flows used for financing activities -- -- 129,000 --
------------ ---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 242,000 448,000 710,000 2,297,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 216,000 458,000 906,000 1,616,000
------------ ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 458,000 $ 906,000 $1,616,000 $3,913,000
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ -- $ -- $ -- $ --
Income taxes paid $ -- $ -- $ 417,000 $ 263,000
The accompanying notes are an integral part of these financial statements.
F-5
PROMPT ASSOCIATES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996
PREFERRED COMMON PAID-IN- RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
---------- ------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1992 $ -- $1,000 $ 700,000 $ (360,000) $ 341,000
Net loss -- -- -- (1,155,000) (1,155,000)
---------- ------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1993 -- 1,000 700,000 (1,515,000) (814,000)
---------- ------- ---------- ---------- ----------
---------- ------- ---------- ---------- ----------
Net income -- -- -- 2,156,000 2,156,000
---------- ------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1994 -- 1,000 700,000 641,000 1,342,000
---------- ------- ---------- ---------- ----------
---------- ------- ---------- ---------- ----------
Tax benefits allocated to contributed capital -- -- 1,757,000 -- 1,757,000
Net income -- -- -- 1,466,000 1,466,000
---------- ------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1995 -- 1,000 2,457,000 2,107,000 4,565,000
---------- ------- ---------- ---------- ----------
---------- ------- ---------- ---------- ----------
Net income (unaudited) -- -- -- 1,328,000 1,328,000
---------- ------- ---------- ---------- ----------
BALANCE SEPTEMBER 30, 1996 $ -- $1,000 $2,457,000 $3,435,000 $5,893,000
---------- ------- ---------- ---------- ----------
---------- ------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
F-6
PROMPT ASSOCIATES, INC.
Notes to Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF THE COMPANY
Prompt Associates, Inc. ("Prompt") was established in 1989 to help identify
savings to insurance companies, self-insured companies, third party
administrators ("TPA") and health maintenance organizations ("HMO") nationwide
by providing statistical data regarding usual, reasonable and customary
outpatient facility charges.
In 1994, Prompt established an inpatient charge review service utilizing
databases and employee registered nurses who review claims on a line-by-line
basis for possible savings. Prompt earns revenue by charging insurance company
clients a fee based on the savings.
MultiPlan, an unrelated company, has preferred provider organizations
("PPO") contracts with various health care providers across the country. In
1994, Prompt entered into an agreement with MultiPlan whereby Prompt applies the
MultiPlan PPO contract rates to selected health insurance claims to identify
possible contractual savings. Prompt shares in the savings that are identified
and realized.
Four principal customers comprised approximately 40% of gross revenue in
1994 while three principal customers comprised approximately 37% of gross
revenue in 1995.
(B) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(C) CASH AND EQUIVALENTS
Cash and equivalents consist of cash and short-term investments in highly
liquid investments with maturities of less than three months from the date of
purchase.
(D) CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk include cash, short-term investments and trade
receivables. The Company places its temporary cash investments with
creditworthy, high quality financial institutions. The Company at times holds
notes and bonds issued by the United States government, its agencies and
financially strong corporations. The Company has not experienced significant
losses related to receivables from individual customers, groups of customers
within the health care industry or customers within certain geographic areas.
(E) SHORT-TERM INVESTMENTS
Short-term investments consist of commercial paper with maturities greater
than 90 days from the date of purchase. These securities are considered to be
held-to-maturity and are carried at amortized cost, which approximates fair
market value.
(F) ALLOWANCE
The allowance 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
F-7
collectibility and bad debts for each service line are evaluated and additional
allowance amounts may be provided.
Insurance claims are modeled prior to the insurance company's review
procedures, which indicate if the claims are payable. During the insurance
company's review process, some claims have PPO or HMO arrangements, pre-existing
conditions, or other 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 the allowance as an offset to sales and
accounts receivable based on the historical tracking of discounts and/or
chargebacks. Prompt recorded net provisions to the allowance for the years ended
December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1996 of
$4,941,000, $5,360,000, $5,089,000 and $4,121,000, respectively. It is
reasonably possible that management's analysis of the allowance will change in
the near term. Such a change could be material to the financial statements.
(G) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over estimated useful lives of 3 to 5 years.
Maintenance and repairs that do not improve or extend the life of the
equipment are charged to expenses as incurred. Major renewals and improvements
are treated as capital expenditures and depreciated over the extended remaining
lives of the assets.
(H) INCOME TAXES
Effective December 29, 1994, Prompt terminated its subchapter S corporation
status and became a C corporation. The liability method is used in accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when differences are expected to reverse.
(I) ADVERTISING COSTS
In accordance with SOP 93-7, the Company expenses the production costs of
non direct-response advertising as the costs are incurred during the period the
advertising first takes place.
(J) RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements to
conform with the 1995 presentation.
(2) INCOME TAXES
As of December 31, 1995, the Company had federal and state net operating
loss carryforwards of approximately $1,604,000. The net operating loss
carryforwards will expire at various dates beginning in 2009 through 2010, if
not utilized.
F-8
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
1994 1995
-------- ----------
Deferred Tax Assets:
Fixed assets $ 14,000 $ 14,000
Allowance for doubtful accounts -- 83,000
Accounting method differences 143,000 90,000
Accrued expenses -- 92,000
Net operating loss carryforwards 384,000 598,000
Restructuring differences -- 759,000
-------- ----------
541,000 1,636,000
Valuation allowance (541,000) --
-------- ----------
$ -- $1,636,000
-------- ----------
-------- ----------
The net valuations allowance decreased by $541,000 during the year ended
December 31, 1995.
Significant components of the provision for income taxes are as follows:
1993 1994 1995
-------- -------- ----------
Current:
Federal $ -- $ -- $ --
State -- -- --
-------- -------- ----------
Total current -- -- --
Deferred:
Federal -- -- (1,417,000)
State -- -- (219,000)
-------- -------- ----------
-- -- (1,636,000)
Tax benefits allocated to contributed capital -- -- 1,757,000
-------- -------- ----------
Total net deferred -- -- 121,000
-------- -------- ----------
Total $ -- $ -- $ 121,000
-------- -------- ----------
-------- -------- ----------
Differences between the reported amount of income tax expense for the year
and the amount of income tax expense that would result from applying domestic
federal statutory tax rates to pretax income, relate primarily to permanent
differences and changes in the valuation allowance for deferred tax assets.
Tax benefits allocated to contributed capital of $1 ,757,000, for the year
ended December 31, 1995 relates to differences in accounting for income tax
purposes for the stock purchased from original shareholders as described in Note
5.
(3) COMMITMENTS AND CONTINGENCIES
Prompt leases office space and has certain other operating leases. The
office lease contains an annual escalation clause of approximately 8%. Rental
expense was approximately $55,000, $76,000 and $118,000 for
F-9
1993, 1994 and 1995, respectively. The future payments at December 31, 1995
required under these obligations for each of the five succeeding years are
approximately as follows:
1996 $ 124,000
1997 122,000
1998 26,000
1999 6,000
2000 --
Prompt has entered into 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 were $763,000, $438,000 and $581,000 in 1993, 1994 and 1995,
respectively. Recurring minimum payments associated with this agreement at
December 31, 1995 are approximately as follows:
1996 $ 706,000
1997 831,000
1998 956,000
1999 525,000
2000 --
(4) LOANS TO SHAREHOLDERS
Loans to shareholders and the related interest totaled $5,448,000 and
$2,245,000 for the years ended December 31, 1994 and 1995, respectively. These
shareholder loans are secured by promissory notes at a rate of 7.25% with
interest payable each June 30th and maturing on June 30, 1999. These notes are
further secured by a stock pledge agreement for 100% of the shareholders'
outstanding shares of Prompt. Prompt also paid consulting fees totaling $700,000
and $425,000 to certain shareholders during the years ended December 31, 1994
and 1995, respectively, which are included in general and administrative
expense. (See Note 5).
(5) DEBT AND SHAREHOLDERS' EQUITY
On June 30, 1992, Prompt entered into a debt agreement with Summit Partners
("Summit"), a venture capital group, in which Prompt signed an $8,000,000 note
due in three equal installments payable on June 30, 1996, 1997 and 1998, with an
interest rate of 15%, payable quarterly in arrears beginning September 30, 1992
in exchange for $6,000,000 in cash. As such, Prompt recorded a debt discount of
$2,000,000. The debt discount was to be amortized using the effective interest
rate method of approximately 24% over the life of the note. Prompt also issued
warrants to Summit to purchase 409,091 shares of common stock. As of December
29, 1994, no principal had been paid on the note to Summit and interest payable,
net of the unamortized discount, had accrued to approximately $1,188,000.
The net proceeds of the note payable of $6,000,000 from Summit was loaned by
Prompt to the original shareholders for promissory notes bearing interest at
approximately 7.25%. As of December 29, 1994, the principal balance of the loan
was $5,900,000 with accrued interest of approximately $250,000.
At December 29, 1994, Prompt entered into the Security Exchange Agreement
("Agreement") with Summit and the original shareholders, whereby, 90% of
Prompt's common stock was purchased by Prompt from the original shareholders.
Prompt then transferred 80% of the common stock to Summit and issued 78,000
shares of preferred stock to Summit in full settlement of the note, outstanding
interest and warrants. Additionally, 10% of Prompt's common stock was purchased
by Prompt's chief executive officer. The original shareholders held a combined
10% interest in Prompt at December 31, 1994 and 1995. The transaction was
reflected as a troubled debt restructuring in the 1994 financial statements and
resulted in an extraordinary gain of $3,254,000.
F-10
The preferred stock carries no voting rights. In the event of any
liquidation, dissolution or winding-up of Prompt, whether voluntary or
involuntarily, each share of preferred stock is entitled to be paid up to $100
per share.
The transaction also resulted in the terms of the loan to the original
shareholders being modified, and corresponding payables under long-term
agreements to these shareholders being recorded, in exchange for consulting
services and covenants not to compete for which no value was accrued. Therefore,
the receipt of payment on the loan to the original shareholders and payment of
the payables under long-term agreements to the original shareholders will
approximately offset over a five year period.
During 1995, one of the original shareholders declared bankruptcy and
effectively defaulted on his obligations to Prompt. No payments were made by
Prompt to this shareholder under the long-term consulting and non-compete
agreements. As of December 31, 1995, the Company had accepted a bankruptcy
settlement agreement, which forgave all existing loans and payable under the
above long-term agreement and reestablished a new promissory notes with an
offsetting payable valued at $165,000 each. This forgiveness resulted in a net
loss to the Company of approximately $50,000. The receipt of the $165,000 loan
and $165,000 payment of the payable to the shareholder will offset over the next
year.
Prompt also agreed to pay the original shareholders' tax liability
(approximately $100,000) related to Prompt's net income for the period ending
December 28, 1994.
Pursuant to the Agreement, the board of directors authorized options
totaling 55,556 shares. On February 7, 1995 options to purchase an additional
4,222 shares were authorized. Options to purchase 27,778 shares were granted to
the chief executive officer on December 29, 1994. These shares are exerciseable
at $.25 per share and vest in full on April 1, 2004. In July 1995, Prompt
granted 20,250 options to certain employees. These options have a four year
vesting period and an exercise price of $.25. Approximately 12.5 percent of
these options were vested on December 31, 1995.
F-11
CRA MANAGED CARE, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
The following sets forth the Company's Consolidated Pro Forma Balance Sheet
as of September 30, 1996 giving effect to the acquisition of Prompt Associates,
Inc. ("Prompt"). The Company's Consolidated Pro Forma Balance Sheet presents the
acquisition of Prompt as if it had been consummated on September 30, 1996. The
Consolidated Pro Forma Financial Statements of the Company do not purport to
present the financial position or results of operations of the Company had the
transaction assumed therein occurred on the dates indicated, nor are they
necessarily indicative of the results of operations which may be expected to
occur in the future.
The acquisition of Prompt has been accounted for by the Company as a
purchase whereby the basis for accounting for Prompt's assets and liabilities is
based upon their fair values at the date of acquisition. Pro forma adjustments
represent the Company's preliminary determination of these adjustments and are
based upon available information and certain assumptions the Company considers
reasonable under the circumstances. Final amounts could differ from those set
forth below.
SEPTEMBER 30, 1996
-------------------------------------------------------
PRO FORMA PRO FORMA
CRA PROMPT ADJUSTMENTS COMBINED
----------- ---------- --------------- ------------
ASSETS
Current assets:
Cash and cash equivalents.................... $33,585,000 $3,913,000 $(25,000,000)(1) $ 12,498,000
Accounts receivable, net..................... 32,395,000 1,568,000 33,963,000
Current portion of loan to shareholders -- 685,000 (685,000)(2) --
Prepaid expenses and tax assets.............. 1,685,000 797,000 2,482,000
----------- ---------- --------------- ------------
Total current assets..................... 67,665,000 6,963,000 (25,685,000) 48,943,000
Property and equipment, net.................. 7,075,000 438,000 7,513,000
Other assets................................. 386,000 536,000 922,000
Long-term portion of loan to shareholders.... -- 1,040,000 (1,040,000)(2) --
Excess of cost over fair value of assets
acquired................................... 19,568,000 -- 29,000,000(3) 48,568,000
----------- ---------- --------------- ------------
$94,694,000 $8,977,000 $ 2,275,000 $105,946,000
----------- ---------- --------------- ------------
----------- ---------- --------------- ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities.................. $ -- $ -- $ 5,000,000(1) $ 5,000,000
Current portion of long-term debt............ 71,000 -- 71,000
Accounts payable and accrued expenses 18,985,000 1,385,000 4,867,000(4) 25,237,000
Current portion of long-term payable to
related parties............................ -- 690,000 (690,000)(2) --
----------- ---------- --------------- ------------
Total current liabilities................ 19,056,000 2,075,000 9,177,000 30,308,000
Long-term debt................................. 6,000 -- 6,000
Long-term payable to related parties........... -- 1,009,000 (1,009,000)(2) --
Long-term deferred tax liabilities............. 2,422,000 -- 2,422,000
Stockholders' equity........................... 73,210,000 5,893,000 (5,893,000)(5) 73,210,000
----------- ---------- --------------- ------------
$94,694,000 $8,977,000 $ 2,275,000 $105,946,000
----------- ---------- --------------- ------------
----------- ---------- --------------- ------------
See accompanying Notes to Consolidated Pro Forma Financial Statements.
F-12
CRA MANAGED CARE, INC.
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
The following sets forth the Company's Consolidated Pro Forma Statement of
Operations for the fiscal year ended December 31, 1995 and the nine months ended
September 30, 1996 giving effect the purchases of Prompt and Focus Healthcare
Management, Inc. ("Focus") and the Company's sales of 2,515,625 and 1,200,000
shares of Common Stock in May of 1995 and June of 1996, respectively, and the
application of the net proceeds to repay the Company's existing indebtness and
additional borrowings to finance the Focus and Prompt acquisitions effective
January 1, 1995. Focus was acquired on April 2, 1996 and, as such, all pro forma
adjustments related to Focus are for the period prior to its acquisition. The
Consolidated Pro Forma Financial Statements of the Company do not purport to
present the financial position or results of operations of the Company had the
transaction assumed therein occurred on the dates indicated, nor are they
necessarily indicative of the results of operations which may be expected to
occur in the future. The Statement of Operations for Prompt for the year ended
December 31, 1995 and nine months ended September 30, 1996 have been
reclassified to conform with the Company's basis of presentation.
The acquisitions of Prompt and Focus have been accounted for by the Company
as purchases whereby the basis for accounting for Prompt's and Focus' assets and
liabilities are based upon their fair values at the date of acquisition. Pro
forma adjustments represent the Company's preliminary determination of these
adjustments and are based upon available information and certain assumptions the
Company considers reasonable under the circumstances. Final amounts could differ
from those set forth below.
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------
PRO FORMA PRO FORMA
CRA FOCUS PROMPT ADJUSTMENTS COMBINED
------------ ---------- ----------- ------------- -------------
Revenues $146,055,000 $9,089,000 $10,385,000 $ (407,000)(6) $165,122,000
Cost of services 122,615,000 7,347,000 6,499,000 474,000(7) 136,935,000
------------ ---------- ----------- ------------- -------------
Gross profit 23,440,000 1,742,000 3,886,000 (881,000) 28,187,000
General and administrative
expenses 11,021,000 2,269,000 2,361,000 (646,000)(8) 15,005,000
------------ ---------- ----------- ------------- -------------
Operating income 12,419,000 (527,000) 1,525,000 (235,000) 13,182,000
Interest (income) expense, net 2,484,000 2,000 (62,000) (1,988,000)(9) 436,000
Provision for income taxes 3,974,000 395,000 121,000 995,000(10) 5,485,000
------------ ---------- ----------- ------------- -------------
Net income (loss) $ 5,961,000 $ (924,000) $ 1,466,000 $ 758,000 $7,261,000
------------ ---------- ----------- ------------- -------------
------------ ---------- ----------- ------------- -------------
Earnings per share $ 0.91 $ 0.85
------------ -------------
------------ -------------
Weighted average shares
outstanding 6,540,000 8,579,000(11)
------------ -------------
------------ -------------
NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------------------------------
PRO FORMA PRO FORMA
CRA FOCUS PROMPT ADJUSTMENTS COMBINED
------------ ---------- ----------- ------------- -------------
Revenues $131,032,000 $2,327,000 $ 9,692,000 $ (269,000)(6) $142,782,000
Cost of services 107,981,000 1,926,000 5,581,000 435,000(7) 115,923,000
------------ ---------- ----------- ------------- -------------
Gross profit 23,051,000 401,000 4,111,000 (704,000) 26,859,000
General and administrative
expenses 10,491,000 605,000 2,048,000 (110,000)(8) 13,034,000
------------ ---------- ----------- ------------- -------------
Operating income 12,560,000 (204,000) 2,063,000 (594,000) 13,825,000
Interest (income) expense, net 212,000 0 (103,000) (99,000)(9) 10,000
Provision for income taxes 5,124,000 0 838,000 72,000(10) 6,034,000
------------ ---------- ----------- ------------- -------------
Net income (loss) $ 7,224,000 $ (204,000) $ 1,328,000 $ (567,000) $7,781,000
------------ ---------- ----------- ------------- -------------
------------ ---------- ----------- ------------- -------------
Earnings per share $ 0.87 $ 0.87
------------ -------------
------------ -------------
Weighted average shares
outstanding 8,261,000 8,928,000(11)
------------ -------------
------------ -------------
See accompanying Notes to Consolidated Pro Forma Financial Statements.
F-13
CRA MANAGED CARE, INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS--UNAUDITED)
(1) To record the use of $25,000,000 of existing cash and borrowings of
$5,000,000 under the Company's $40,000,000 Credit Facility to finance the
Prompt acquisition.
(2) To eliminate the loan to shareholder and long-term payable to related
parties which will be terminated immediately prior to the closing of the
transaction.
(3) To record the excess of cost over fair value of net assets acquired
resulting from the preliminary purchase price allocation as follows:
Pro forma purchase price including fees and expenses: $34,867,000
Purchase price allocated to:
Current assets 6,278,000
Property and equipment 438,000
Other long term assets 536,000
Current liabilities (1,385,000)
-----------
Net assets acquired 5,867,000
-----------
Excess of cost over fair value of net assets acquired $29,000,000
-----------
-----------
The foregoing purchase price allocation is based upon preliminary
information. The final purchase price allocation is contingent upon the
final determination of the fair value of the net assets acquired on October
28, 1996, the date of acquisition. Based upon presently available
information, the Company does not believe that the final purchase price
allocation will materially differ from the preliminary allocation.
(4) Record fees and expenses associated with the purchase of Prompt.
(5) To eliminate the historical stockholders' equity of Prompt.
(6) To eliminate sales between CRA and Focus of $407,000 and $269,000 for the
year ended December 31, 1995 and the nine months ended September 30, 1996,
respectively.
(7) The pro forma adjustment includes:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- --------------------
Elimination of sales between CRA and Focus $ (407,000) $ (269,000)
Elimination of historical Focus goodwill amortization (749,000) (187,000)
Record new Focus goodwill amortization under a thirty year life 663,000 166,000
Record Prompt goodwill amortization under a thirty year life 967,000 725,000
---------- ----------
$ 474,000 $ 435,000
---------- ----------
---------- ----------
(8) To eliminate general overhead expenses allocated to Focus by United
HealthCare Corporation of $646,000 and $110,000 for the year ended December
31, 1995 and the nine months ended September 30, 1996, respectively.
(9) To reduce interest expense by $1,988,000 and $99,000 for the year ended
December 31, 1995 and nine months ended September 30, 1996, respectively to
reflect the interest expense associated with the estimated outstanding
borrowings under the Company's existing Credit Facility after the
application of
F-14
CRA MANAGED CARE, INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS--UNAUDITED)
the net proceeds from the Company's two sales of Common Stock to repay all
existing indebtedness at January 1, 1995 and the additional borrowings of
$21,000,000 and $30,000,000 for the Focus and Prompt acquisitions,
respectively. The calculation of the January 1, 1995 estimated outstanding
borrowings under the Credit Facility is as follows:
Net proceeds from the sale of 2,515,625 shares of Common
Stock $36,507,000
Net proceeds from the sale of 1,200,000 shares of Common
Stock 51,840,000
-----------
Total proceeds 88,347,000
Total outstanding debt at January 1, 1995 44,716,000
Borrowings required for the Focus acquisition 21,000,000
Borrowings required for the Prompt acquisition 30,000,000
-----------
Total uses of funds 95,716,000
-----------
Estimated outstanding borrowings at January 1, 1995 $ 7,369,000
-----------
-----------
The Company further assumed that it would be able to repay all of the
outstanding January 1, 1995 borrowings in seven equal quarterly installments
beginning March 31, 1995. Interest expense was calculated assuming an
interest rate of 8.55% and 7.12% (weighted average interest rate on
borrowings during the period) for the year ended December 31, 1995 and nine
months ended September 30, 1996, respectively.
(10) To record a tax provision of $995,000 and $72,000 associated with the pro
forma adjustments and to adjust Focus's and Prompt's results of operation to
an effective tax rate of 40% and 41.5%, after adding back the Prompt
goodwill amortization which is non-deductible for tax purposes, for the year
ended December 31, 1995 and nine months ended September 30, 1996,
respectively.
(11) The weighted average shares outstanding has been increased to reflect the
issuance of additional shares from the Company's sale of 2,515,625 shares of
Common Stock in May 1995 and 1,200,000 shares of Common Stock in June 1996.
F-15
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT
- ----------- --------
2.1 Agreement and Plan of Merger, dated as of October 29, 1996, by
and between Prompt Associates, Inc., CRA Managed Care, Inc., PAI
Acquisition Corp. and the shareholders of Prompt Associates, Inc.
named therein.