<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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): August 31,
1998
-------------------
CONCENTRA MANAGED CARE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 000-22751 04-3363415
-------- --------- ----------
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of incorporation) Identification Number)
312 Union Wharf
Boston, Massachusetts 02109
- --------------------- -----
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (617)367-2163
-----------------------------------------------------------------
Not Applicable
--------------
(former address if changed since last report)
<PAGE>
Item 5. Other Events
The Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations and Consolidated Financial Statements for the Three
Years Ended December 31, 1995, 1996 and 1997 have been restated to reflect
the acquisition of all of the outstanding common stock of Preferred Payment
Systems, Inc., on February 24, 1998. The merger was accounted for as a
pooling of interests.
See CONCENTRA Managed Care, Inc.'s Management's Discussion and Analysis of
Financial Condition and Results of Operations and Consolidated Financial
Statements for the Three Years Ended December 31, 1995, 1996 and 1997
restated for the merger with Preferred Payment Systems, Inc. attached hereto
as Exhibit 99.1.
Item 7. Financial Statements and Exhibits
(c) Exhibits
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
99.1 CONCENTRA Managed Care, Inc.'s Management's Discussion and Analysis of
Financial Condition and Results of Operations and Consolidated Financial
Statements for the Three Years Ended December 31, 1995, 1996 and 1997
restated for the merger with Preferred Payment Systems, Inc.
2
<PAGE>
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 thereunto duly authorized.
CONCENTRA MANAGED CARE, INC.
(Registrant)
By: /s/ Richard A. Parr II
-----------------------------
Name: Richard A. Parr II
Title: Executive Vice President,
General Counsel and Secretary
Date: August 31, 1998
- ---------------------
3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------------------------------------------------------------------------
<S> <C>
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
99.1 CONCENTRA Managed Care, Inc.'s Management's Discussion and Analysis of
Financial Condition and Results of Operations and Consolidated Financial
Statements for the Three Years Ended December 31, 1995, 1996 and 1997
restated for the merger with Preferred Payment Systems, Inc.
</TABLE>
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<CASH> 11,375,000 58,221,000 12,576,000
<SECURITIES> 0 12,045,000 0
<RECEIVABLES> 59,976,000 78,743,000 106,963,000
<ALLOWANCES> 7,517,000 11,278,000 18,515,000
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 76,957,000 157,889,000 145,751,000
<PP&E> 42,522,000 72,554,000 104,054,000
<DEPRECIATION> 16,063,000 26,699,000 38,351,000
<TOTAL-ASSETS> 188,530,000 367,900,000 482,971,000
<CURRENT-LIABILITIES> 54,986,000 41,450,000 108,633,000
<BONDS> 15,000,000 132,464,000 150,103,000
0 0 0
0 0 0
<COMMON> 347,000 404,000 436,000
<OTHER-SE> 109,036,000 177,742,000 206,005,000
<TOTAL-LIABILITY-AND-EQUITY> 188,530,000 367,900,000 482,971,000
<SALES> 0 0 0
<TOTAL-REVENUES> 305,355,000 372,683,000 493,879,000
<CGS> 0 0 0
<TOTAL-COSTS> 242,920,000 289,928,000 376,250,000
<OTHER-EXPENSES> 32,989,000 37,561,000 84,578,000
<LOSS-PROVISION> 2,984,000 7,897,000 19,039,000
<INTEREST-EXPENSE> 5,499,000 3,741,000 12,667,000
<INCOME-PRETAX> 24,246,000 41,476,000 21,062,000
<INCOME-TAX> 7,771,000 13,437,000 11,062,000
<INCOME-CONTINUING> 16,475,000 28,039,000 10,000,000
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> (3,140,000) 0 0
<CHANGES> 0 0 0
<NET-INCOME> 13,335,000 28,039,000 10,000,000
<EPS-PRIMARY> 0.39 0.69 0.23
<EPS-DILUTED> 0.37 0.65 0.22
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 24,442,000 12,839,000 21,501,000
<SECURITIES> 31,097,000 37,828,000 0
<RECEIVABLES> 87,044,000 101,736,000 117,465,000
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 150,153,000 160,499,000 154,143,000
<PP&E> 77,670,000 90,492,000 95,394,000
<DEPRECIATION> 29,226,000 31,838,000 35,313,000
<TOTAL-ASSETS> 373,601,000 426,122,000 464,573,000
<CURRENT-LIABILITIES> 40,778,000 80,900,000 107,322,000
<BONDS> 130,808,000 130,400,000 142,261,000
0 0 0
0 0 0
<COMMON> 408,000 408,000 414,000
<OTHER-SE> 186,256,000 196,460,000 195,398,000
<TOTAL-LIABILITY-AND-EQUITY> 373,601,000 426,122,000 464,573,000
<SALES> 0 0 0
<TOTAL-REVENUES> 107,142,000 227,870,000 359,082,000
<CGS> 0 0 0
<TOTAL-COSTS> 83,162,000 174,762,000 271,885,000
<OTHER-EXPENSES> 10,268,000 21,413,000 71,925,000
<LOSS-PROVISION> 4,357,000 8,982,000 13,887,000
<INTEREST-EXPENSE> 2,427,000 5,192,000 8,894,000
<INCOME-PRETAX> 11,809,000 27,326,000 7,557,000
<INCOME-TAX> 4,106,000 9,501,000 6,159,000
<INCOME-CONTINUING> 7,703,000 17,825,000 1,398,000
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 7,703,000 17,825,000 1,398,000
<EPS-PRIMARY> 0.18 0.42 0.03
<EPS-DILUTED> 0.17 0.39 0.03
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 0 0 0
<SECURITIES> 0 0 0
<RECEIVABLES> 0 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 0 0 0
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 0 0 0
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 0 0
<SALES> 0 0 0
<TOTAL-REVENUES> 83,948,000 176,890,000 275,733,000
<CGS> 0 0 0
<TOTAL-COSTS> 67,159,000 138,650,000 214,041,000
<OTHER-EXPENSES> 7,916,000 17,183,000 27,127,000
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 754,000 1,535,000 2,147,000
<INCOME-PRETAX> 8,140,000 19,370,000 32,075,000
<INCOME-TAX> 2,377,000 5,957,000 10,311,000
<INCOME-CONTINUING> 5,763,000 13,413,000 21,764,000
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 5,763,000 13,413,000 21,764,000
<EPS-PRIMARY> 0.16 0.35 0.55
<EPS-DILUTED> 0.15 0.33 0.52
</TABLE>
<PAGE>
EXHIBIT 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This document contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Reference is hereby made
to the Company's Annual Report on Form 10-K for the year ended December 31,
1997, where certain terms have been defined, Form 8-Ks and Form 8-K/A
relating to the merger with Preferred Payment Systems, Inc. ("PPS"), and Form
S-3 relating to the issuance of 4.5% Convertible Subordinated Notes all filed
with the Securities and Exchange Commission, for certain considerations that
could cause actual results to differ materially from those contained in this
document.
Overview
On August 29, 1997, Concentra Managed Care, Inc. ("CONCENTRA" or the
"Company"), a Delaware corporation, was formed by the merger (the "Merger")
of CRA Managed Care, Inc. ("CRA") and OccuSystems, Inc. ("OccuSystems"). The
Merger was a tax-free stock for stock exchange accounted for as a pooling of
interests. On February 24, 1998, the Company merged with Preferred Payment
Systems, Inc. ("PPS") and significantly expanded its presence in the
out-of-network group health bill review market. PPS, founded in 1990, is a
leading nationwide provider of specialized cost containment and outsourcing
services for healthcare payors.
CONCENTRA Managed Care Services, Inc. ("Managed Care Services"), an operating
subsidiary of CONCENTRA which was formerly CRA Managed Care, Inc., provides
field case management and specialized cost containment services designed to
reduce costs associated with workers' compensation, disability and automobile
accident coverage. Field case management services involve working on a
one-on-one basis with injured employees and their various health care
professionals, employers and insurance company adjusters to assist in
maximizing medical improvement and, where appropriate, to expedite the return
to work. Managed Care Services' field case management revenue growth has
resulted from both local market share gains and geographic office expansion.
Managed Care Services believes that the size of its field case management
office network is sufficient to serve adequately the needs of its nationwide
customers. As a result, Managed Care Services anticipates opening only a few
new field case management offices per year to satisfy client needs in
selected regions. The Company would, however, examine the possibility of
acquiring additional field case management offices or businesses if an
appropriate strategic opportunity arose. Since 1990, Managed Care Services
has also offered specialized cost containment services. Specialized cost
containment services include utilization management, specialized preferred
provider organization ("PPO") network management, telephonic case management,
and retrospective medical bill review services that are designed to reduce
the cost of workers' compensation claims, automobile accident injury claims
and group health claims. Managed Care Services has experienced significant
growth in its specialized cost containment services by virtue of the
following acquisitions: (1) FOCUS HealthCare Management, Inc. ("FOCUS") on
April 2, 1996, (2) Prompt Associates, Inc. ("PROMPT") on October 29, 1996,
(3) First Notice Systems, Inc. ("FNS"), on June 4, 1997, (4) About Health,
Inc. ("ABOUT HEALTH") by PPS in a two-step transaction on August 1, 1997 and
October 31, 1997 and (5) other smaller acquisitions. Managed Care Services
currently derives most of its revenues on a fee-for-service basis.
CONCENTRA Health Services, Inc. ("Health Services"), an operating subsidiary
of CONCENTRA, which was formerly OccuCenters, Inc., manages occupational
healthcare centers at which it provides support personnel, marketing,
information systems, and management services to its affiliated physicians.
Health Services owns all of the operating assets of the occupational
healthcare centers, including leasehold interests and medical equipment.
Health Services generates its net patient service revenues primarily from the
diagnosis, treatment and management of work-related injuries and illnesses
and from other occupational healthcare services, such as employment-related
physical examinations, drug and alcohol testing, functional capacity testing
and other related programs. For the year ended December 31, 1997, Health
Services derived 63.5% of its net revenues from the treatment of work-related
injuries and illnesses and 36.5% of its net revenues from non-injury related
medical services.
Physician and physical therapy services are provided at the Health Services
centers under management agreements with affiliated physician associations (the
"Physician Groups"), which are organized professional corporations that
<PAGE>
hire licensed physicians and physical therapists to provide medical services to
the centers' patients. Since Health Services effectively controls the Physician
Groups, Health Services' results of operations reflect the revenues generated by
the Physician Groups and the costs associated with the delivery of their
services. The financial statements of the Physician Groups are consolidated
because Health Services has unilateral control over the assets and operations of
the Physician Groups and notwithstanding the lack of technical majority
ownership, consolidation of the Physician Groups with Health Services is
necessary to present fairly the financial position and results of operations of
Health Services due to the existence of a parent-subsidiary relationship by
means other than record ownership of the Physician Group's voting stock. The
shareholders of the Physician Groups are the physician leaders of Health
Services, and are employed by Health Services or one of its wholly-owned
subsidiaries. Through a shareholder agreement, Health Services restricts any
transfer of Physician Group ownership without its consent and can require the
holder of such shares to transfer ownership to a Health Services designee upon
the occurrence of certain events, including but not limited to the cessation of
employment. Control of the Physician Groups is perpetual due to the nature of
the relationship and the management agreements between the entities. The
employed physicians do not control fee schedules, payor contracts, or employment
decisions regarding personnel. The risk of loss for billed services provided by
the Physician Groups resides ultimately with Health Services as CONCENTRA
Managed Care, Inc. is required to provide financial support on an as needed
basis.
The following table provides certain information concerning the Company's
service locations:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1995 1996 1997
--------------- --------------- -------------
<S> <C> <C> <C>
Service locations at the end of the period:
Field case management 110 118 123
Cost containment services 50 70 83
Medical centers (1) 71 109 140
Physician practices acquired during the period (2) 24 32 22
Physician practices developed during the period 3 10 8
Number of affiliated physicians at the end of the period 129 196 252
Medical centers - same market revenue growth (3) 12.2% 10.7% 11.0%
</TABLE>
(1) Does not include the assets of the practices which were acquired and
subsequently divested or consolidated into existing centers within the
market.
(2) Represents the assets of practices which were acquired during each period
presented and not subsequently divested.
(3) Same market revenue growth sets forth the aggregate net change from the
prior period for all markets in which Health Services has operated for
longer than one year (excluding revenue growth due to acquisitions of
additional centers).
Result of Operations for the Years Ended December 31, 1997 and 1996
Revenues
Total revenues increased 32.5% in 1997 to $493,879,000 from $372,683,000 in
1996. Managed Care Services' revenues increased 39.0% in 1997 to $281,642,000
from $202,648,000 in 1996, as field case management revenues increased 16.7% in
1997 to $138,723,000 from $118,864,000 in 1996 and specialized cost containment
revenues increased 70.6% in 1997 to $142,919,000 from $83,784,000 in 1996.
Health Services' revenues increased 24.8% in 1997 to $212,237,000 from
$170,035,000 in 1996.
The field case management revenue growth is primarily due to growth in revenues
from existing service locations, and the opening of 13 offices subsequent to
December 31, 1995. The specialized cost containment revenue growth is largely
attributable to the acquisitions of FOCUS, PROMPT, FNS and ABOUT HEALTH, as well
as revenue increases attributable to growth in retrospective medical bill
review, telephonic case management and claims review services in existing
service locations and the expansion into additional service locations. The
Health Services revenue growth resulted from the acquisition of practices
(including the acquisition of 16 occupational medical centers and the management
of an additional four medical centers from Vencor, Inc.
<PAGE>
("VMC")), development of sites in new markets, an increase in business in
existing markets, as well as an increase in consulting and other ancillary
services.
Cost of Services
Total cost of services increased 29.8% in 1997 to $376,250,000 from $289,928,000
in 1996. Managed Care Services' cost of services increased 36.5% in 1997 to
$217,263,000 from $159,174,000 in 1996, while Health Services' cost of services
increased 21.6% in 1997 to $158,987,000 from $130,754,000 in 1996.
Total cost of services as a percentage of revenue decreased to 76.2% in 1997
compared to 77.8% in 1996. Managed Care Services' cost of services as a
percentage of revenue decreased to 77.1% in 1997 compared to 78.5% in 1996,
while Health Services' cost of services as a percentage of revenue decreased to
74.9% in 1997 compared to 76.9% in 1996.
Managed Care Services has seen improvement in gross margin primarily resulting
from a shift in its revenue mix towards specialized cost containment services,
including the services provided by FOCUS, PROMPT, FNS and ABOUT HEALTH, which
historically have had higher gross profit margins than revenues derived from
field case management. Health Services' gross profit margin improvement has
resulted from increased efficiencies and productivity. As certain functions are
consolidated and other staff-related changes occur, coupled with increased
patient volume, the margins of acquired or developed practices have tended to
improve.
General and Administrative Expenses
General and administrative expenses increased 20.7% in 1997 to $40,008,000 from
$33,155,000 in 1996, or 8.1% and 8.9% as a percentage of revenue for 1997 and
1996, respectively. The increase in general and administrative expenses in 1997
was due primarily to expenses associated with acquisitions and the continued
investment in the Information Services and Technology Group.
Amortization of Intangibles
Amortization of intangibles increased 72.7% in 1997 to $5,945,000 from
$3,442,000 in 1996, or 1.2% and 0.9% as a percentage of revenues for 1997 and
1996, respectively. This increase is the result of amortizing additional
intangible assets such as goodwill, customer lists and assembled workforces
primarily associated with the purchase of FOCUS, PROMPT, FNS, VMC, ABOUT HEALTH
and other smaller acquisitions.
Non-recurring Charge
The Company recorded a non-recurring charge of $38,625,000 associated with the
Merger. The charges incurred were approximately $12,450,000 for professional
fees and services, $14,200,000 in costs associated with personnel reductions,
$6,575,000 in facility consolidations and closings, $2,525,000 for the write-off
of start-up costs, and $2,875,000 of other merger and transitional expenses.
Interest Expense
Interest expense increased $8,926,000 in 1997 to $12,667,000 from $3,741,000 in
1996 due primarily to the issuance of $97,750,000 of 6% Convertible Subordinated
Notes in December 1996, the issuance of PPS indebtedness in August 1996 and to
increased outstanding credit facility borrowings used to finance acquisitions.
Interest Income
Interest income increased $1,438,000 in 1997 to $2,297,000 from $859,000 in 1996
due primarily to the investment of excess cash generated from the issuance of
the 6% Convertible Subordinated Notes until the funds were utilized to finance
certain acquisitions.
Other Expense, Net
Other expense, net increased $783,000 in 1997 to $1,619,000 from $836,000 in
1996 primarily due to minority interests.
Provision for Income Taxes
The Company's provision for income taxes in 1997 and 1996 was $11,062,000 and
$13,437,000, respectively. On a pro forma basis, giving effect to the PPS
transaction, the Company's provision for income taxes in 1997 and 1996 would
have been $13,873,000 and $16,167,000, respectively, resulting in pro forma
effective tax rates of 65.9%
<PAGE>
and 39.0%, respectively. Excluding the tax effects of the non-recurring charge,
the pro forma effective tax rate would have been 39.3% for 1997. The Company
expects to provide for its taxes at an effective tax rate of approximately
41%-42% for 1998.
Years Ended December 31, 1996 and 1995
Revenues
Total revenues increased 22.1% in 1996 to $372,683,000 from $305,355,000 in
1995. Managed Care Services' revenues increased 20.4% in 1996 to $202,648,000
from $168,369,000 in 1995, as field case management revenues increased 11.6% in
1996 to $118,864,000 from $106,462,000 in 1995 and specialized cost containment
revenues increased 35.3% in 1996 to $83,784,000 from $61,907,000 in 1995. Health
Services' revenues increased 24.1% in 1996 to $170,035,000 from $136,986,000 in
1995.
The field case management revenue growth is primarily due to growth in revenues
from existing service locations and the opening of eight offices subsequent to
December 31, 1995. The specialized cost containment revenue growth is largely
attributable to the acquisitions of FOCUS and PROMPT, as well as revenue
increases attributable to growth in retrospective bill review, telephonic case
management and claims review services in existing service locations and the
expansion into additional service locations. The Health Services revenue growth
resulted from the acquisition of practices, development of sites in new markets,
an increase of business in existing markets, as well as an increase in
consulting and other ancillary services.
Cost of Services
Total cost of services increased 19.4% in 1996 to $289,928,000 from $242,920,000
in 1995. Managed Care Services' cost of services increased 17.4% in 1996 to
$159,174,000 from $135,636,000 in 1995, while Health Services' cost of services
increased 21.9% in 1996 to $130,754,000 from $107,284,000 in 1995.
Total cost of services as a percentage of revenue decreased to 77.8% in 1996
compared to 79.6% in 1995. Managed Care Services' cost of services as a
percentage of revenue decreased to 78.5% in 1996 compared to 80.6% in 1995,
while Health Services' cost of services as a percentage of revenue decreased to
76.9% in 1996 compared to 78.3% in 1995.
Managed Care Services has seen improvement in gross margin primarily resulting
from a shift in its services revenue mix towards specialized cost containment
services, including the services provided by FOCUS and PROMPT, which
historically have had higher gross profit margins than revenues derived from
field case management. Health Services' gross profit margin improvement has
resulted from increased efficiencies and productivity. As certain functions are
consolidated and other staff-related changes occur, coupled with increased
patient volume, the margins of acquired or developed practices have tended to
improve over time.
General and Administrative Expenses
General and administrative expenses increased 9.7% in 1996 to $33,155,000 from
$30,220,000 in 1995, or 8.9% and 9.9% as a percentage of revenue for 1996 and
1995, respectively. The increase in general and administrative expenses in 1996
was due primarily to expenses associated with acquisitions and the continued
investment in the Information Services and Technology Group.
Amortization of Intangibles
Amortization of intangibles increased 84.0% in 1996 to $3,442,000 from
$1,871,000 in 1995, or 0.9% and 0.6% as a percentage of revenue for 1996 and
1995, respectively. This increase is the result of amortizing additional
intangible assets such as goodwill, customer lists and assembled workforces,
primarily associated with the purchase of FOCUS, PROMPT and various smaller
acquisitions.
Non-recurring Charge
The Company recorded a non-recurring charge of $964,000 and $898,000 in 1996 and
1995, respectively, associated with pooling costs of the pooled entities.
Interest Expense
<PAGE>
Interest expense decreased $1,758,000 in 1996 to $3,741,000 from $5,499,000 in
1995 due primarily to decreased outstanding borrowings under the credit
facilities.
Interest Income
Interest income decreased $1,000 in 1996 to $859,000 from $860,000 in 1995.
Other Expense, Net
Other expense, net increased $275,000 in 1996 to $836,000 from $561,000 in 1995
primarily due to minority interests.
Provision for Income Taxes
The Company's provision for income taxes in 1996 and 1995 was $13,437,000 and
$7,771,000, respectively. On a pro forma basis, giving effect to the PPS
transaction, the Company's provision for income taxes in 1996 and 1995 would
have been $16,167,000 and $10,401,000, respectively, resulting in pro forma
effective tax rates of 39.0% and 42.9%, respectively.
Loss on Retirement of Debt
The Company used the net proceeds from the sale of Common Stock, supplemented by
borrowings under its credit facility to fully repay certain long-term debt. The
early repayment of this debt resulted in the Company recording a net loss on the
retirement of debt of $3,140,000 comprised of the write-off of associated
deferred finance costs, debt discounts and fees associated with the termination
of the interest rate swaps previously required by the loan agreement offset by a
tax benefit.
Seasonality
The Company's business is seasonal in nature. Health Services' patient visits at
its medical centers are lower in the first and fourth quarters, primarily
because of fewer occupational injuries and illnesses during those time periods
due to plant closings, vacations and holidays. In addition, employers generally
hire fewer employees in the fourth quarter, thereby reducing the number of
pre-placement physical examinations and drug and alcohol tests conducted at the
medical centers during that quarter. Managed Care Services' field case
management revenues have historically been flat in the fourth quarter compared
to the third quarter due to the impact of vacations and holidays. Although the
Company's rapid growth may obscure the effect of seasonality in the Company's
financial results, the first and fourth quarters generally reflect lower
revenues when compared to the Company's second and third quarters.
Information Systems - Year 2000
The Company expects to incur significant costs over the next two to three years
to address the "Year 2000" information systems issue. The Year 2000 concern,
which is common to most companies, concerns the inability of information
systems, primarily computer software programs, to properly recognize and process
date sensitive information as the year 2000 approaches. The Company is in the
process of completing an assessment of the majority of its systems and is in the
process of developing specific workplans to remedy this issue. The Company
currently believes that it will be able to modify or replace its affected
systems in time to minimize the effect on its business. As a part of the ongoing
investment in information technology, some of the Company's Year 2000 issues
will be addressed. While the Company is unable to give an accurate estimate of
the incremental costs to make these Year 2000 system modifications, it is
expected these costs will not be significantly different from the Company's
currently planned investment for information technology, and therefore, should
not have a material adverse effect on the Company's long-term results of
operations, liquidity or consolidated financial position.
Liquidity and Capital Resources
Cash flows generated from (used for) operations were ($262,000), $15,595,000 and
$17,967,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
During 1997, working capital used $30,911,000 of cash primarily due to an
increase in accounts receivable of $27,381,000 and an increase in prepaid
expenses of $15,827,000, offset by a increase in accounts payable and accrued
expenses of $12,297,000. Accounts receivable increased primarily due to
continued revenue growth while accounts payable increased due to the timing of
payments and the remaining obligations relating to the non-recurring charge.
<PAGE>
The Company utilized net cash of $102,093,000 in connection with the
acquisitions of FNS, ABOUT HEALTH, VMC and other smaller acquisitions. The
Company also utilized $26,346,000 of cash to purchase property and equipment
during 1997, the majority of which was spent on new computer hardware and
software technology. The Company received cash of $12,045,000 in connection with
the sale of short-term investments.
The Company has a $100,000,000 Senior Credit Facility ("Senior Credit
Facility") which is secured by a pledge of stock in the Company's
subsidiaries. At December 31, 1997, the Company had borrowings under the
Senior Credit Facility of $49,000,000 at an average interest rate of 6.94%.
On February 24, 1998, the Company acquired all of the outstanding common stock
of PPS in exchange for approximately 7,100,000 shares of CONCENTRA common stock,
the assumption of PPS options totaling approximately 580,000 shares of CONCENTRA
common stock, the payment of approximately $15,047,000 in cash to dissenting PPS
shareholders and the assumption of approximately $49,000,000 of debt which was
repaid at the time of the merger. The Company expanded its borrowing capacity
under the Senior Credit Facility to $200,000,000 to finance this merger. This
merger was accounted for as a pooling of interests. In the first quarter of
1998, the Company recorded a non-recurring charge of $12,600,000 primarily
associated with the merger of PPS. The charges incurred were approximately
$5,100,000 for professional fees and services, $2,200,000 in costs associated
with personnel reductions, $2,400,000 in facility consolidations and closings,
$1,600,000 associated with the write-off of deferred financing fees on PPS
indebtedness retired and $1,300,000 of other merger and transitional costs.
On March 11, 1998, the Company issued $200,000,000 aggregate principal amount of
4.5% Convertible Subordinated Notes due March 15, 2003 (the "4.5% Convertible
Subordinated Notes"). On April 6, 1998, the underwriters exercised the
$30,000,000 overallotment provision. The 4.5% Convertible Subordinated Notes are
convertible into the Company's common stock, at the option of the holder, at a
conversion price of $41.25 per share, representing a conversion premium of 25%
over the closing price. The 4.5% Convertible Subordinated Notes are general
unsecured obligations of the Company ranking equal in right of payment with the
6% Convertible Subordinated Notes and all other unsecured indebtedness of the
Company. In addition, the Company is a holding company that conducts all of its
operations through subsidiaries, and the 4.5% Convertible Subordinated Notes and
the 6% Convertible Subordinated Notes are structurally subordinate to all
obligations of the Company's subsidiaries. The 4.5% Convertible Subordinated
Notes were sold through a private placement under Rule 144A of the Securities
Act of 1933, as amended. The Company intends to use the proceeds from the sale
of the 4.5% Convertible Subordinated Notes to repay existing debt under the
Senior Credit Facility and for general corporate purposes. The Senior Credit
Facility borrowing capacity was subsequently reduced to the original
$100,000,000 amount.
The Company's long-term liquidity needs consist of working capital and capital
expenditure requirements, repayment of borrowings under the Senior Credit
Facility, the funding of any future acquisitions, as well as the repayment of
the 6% Convertible Subordinated Notes in 2001 and 4.5% Convertible Subordinated
Notes in 2003. The Company intends to fund these long-term liquidity needs from
the cash generated from operations, available borrowings under the Senior Credit
Facility and, if necessary, future debt or equity financing. There can be no
assurance that any future debt or equity financing will be available on terms
favorable to the Company.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
CONCENTRA Managed Care, Inc.:
We have audited the accompanying consolidated balance sheets of CONCENTRA
Managed Care, Inc. (a Delaware corporation) as of December 31, 1996 and 1997,
and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1997. 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 CONCENTRA Managed Care, Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
August 28, 1998
<PAGE>
CONCENTRA Managed Care, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
ASSETS 1996 1997
- ------------------------------------------------------ ---------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 58,221,000 $ 12,576,000
Short-term investments 12,045,000 -
Accounts receivable, net of allowances of
$11,278,000 and $18,515,000 respectively 78,743,000 106,963,000
Prepaid expenses and other current assets 4,092,000 14,116,000
Prepaid and deferred income taxes 4,788,000 12,096,000
-------------- -------------
Total current assets 157,889,000 145,751,000
Land 1,815,000 2,525,000
Buildings and improvements 4,038,000 5,747,000
Leasehold improvements 14,736,000 22,302,000
Computer hardware and software 24,361,000 39,529,000
Furniture and equipment 27,604,000 33,951,000
-------------- -------------
Property and equipment, at cost 72,554,000 104,054,000
Accumulated depreciation and amortization (26,699,000) (38,351,000)
-------------- -------------
Property and equipment, net 45,855,000 65,703,000
Other assets:
Goodwill, net 152,712,000 259,068,000
Assembled workforce and customer lists, net 2,501,000 3,524,000
Other assets 8,943,000 8,925,000
-------------- -------------
$367,900,000 $482,971,000
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------
CURRENT LIABILITIES:
Revolving credit facilities $ 5,700,000 $ 49,000,000
Current portion of long-term debt 4,065,000 7,497,000
Accounts payable and accrued expenses 12,223,000 35,221,000
Accrued payroll and related expenses 11,968,000 16,915,000
Accrued income taxes 7,494,000 -
-------------- --------------
Total current liabilities 41,450,000 108,633,000
Long-term debt, net of current portion 132,464,000 150,103,000
Deferred income taxes 6,303,000 7,713,000
Other liabilities 9,537,000 10,081,000
COMMITMENTS AND CONTINGENCIES (Note 10)
<PAGE>
STOCKHOLDERS' EQUITY :
Preferred stock - $.01 par value;
1,000,000 and 20,000,000
authorized; none issued and outstanding - -
Common stock - $.01 par value; 90,000,000
and 100,000,000 authorized; 40,425,590 and
43,567,686 shares issued and outstanding,
respectively 404,000 436,000
Paid-in capital 234,316,000 257,022,000
Retained deficit (56,574,000) (51,017,000)
-------------- --------------
Total stockholders' equity 178,146,000 206,441,000
-------------- --------------
$367,900,000 $482,971,000
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
CONCENTRA Managed Care, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
REVENUE:
Field case management $106,462,000 $118,864,000 $138,723,000
Specialized cost containment 61,907,000 83,784,000 142,919,000
------------ ------------ ------------
Managed Care Services 168,369,000 202,648,000 281,642,000
Health Services 136,986,000 170,035,000 212,237,000
------------ ------------ ------------
Total revenue 305,355,000 372,683,000 493,879,000
COST OF SERVICES:
Managed Care Services 135,636,000 159,174,000 217,263,000
Health Services 107,284,000 130,754,000 158,987,000
------------ ------------ ------------
Total cost of services 242,920,000 289,928,000 376,250,000
------------ ------------ ------------
Total gross profit 62,435,000 82,755,000 117,629,000
General and administrative expenses 30,220,000 33,155,000 40,008,000
Amortization of intangibles 1,871,000 3,442,000 5,945,000
Non-recurring charge 898,000 964,000 38,625,000
------------ ------------ ------------
Operating income 29,446,000 45,194,000 33,051,000
Interest expense 5,499,000 3,741,000 12,667,000
Interest income (860,000) (859,000) (2,297,000)
Other, net 561,000 836,000 1,619,000
------------ ------------ ------------
Income before income taxes 24,246,000 41,476,000 21,062,000
Provision for income taxes 7,771,000 13,437,000 11,062,000
------------ ------------ ------------
Net income before extraordinary items 16,475,000 28,039,000 10,000,000
Loss on retirement of debt, net of taxes (3,140,000) - -
------------ ------------ ------------
Net income $ 13,335,000 $ 28,039,000 $ 10,000,000
------------ ------------ ------------
------------ ------------ ------------
Pro forma net income (see Note 4) $ 10,705,000 $ 25,309,000 $ 7,189,000
------------ ------------ ------------
------------ ------------ ------------
Basic Earnings Per Share:
Net income before extraordinary items $0.48 $0.69 $0.23
Loss on retirement of debt, net of taxes (0.09) - -
------------ ------------ ------------
Net income $0.39 $0.69 $0.23
------------ ------------ ------------
------------ ------------ ------------
Basic Pro Forma Earnings Per Share
(see Note 4):
Pro forma net income before
extraordinary item $0.41 $0.63 $0.17
Loss on retirement of debt, net
of taxes (0. 09) - -
------------ ------------ ------------
Pro forma net income $0.32 $0.63 $0.17
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Weighted average common shares outstanding 33,810,000 40,411,000 42,774,000
------------ ------------ ------------
------------ ------------ ------------
Diluted Earnings Per Share:
Net income before extraordinary items $0.46 $0.65 $0.22
Loss on retirement of debt, net of taxes (0.09) - -
------------ ------------ ------------
Net income $0.37 $0.65 $0.22
------------ ------------ ------------
------------ ------------ ------------
Diluted Pro Forma Earnings Per
Share (see Note 4):
Pro forma net income before
extraordinary items $0.39 $0.59 $0.16
Loss on retirement of debt, net of taxes (0.09) - -
------------ ------------ ------------
Pro forma net income $0.30 $0.59 $0.16
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares and
common share equivalents outstanding 35,939,000 43,344,000 46,895,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONCENTRA Managed Care, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1995 1996 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 13,335,000 $ 28,039,000 $ 10,000,000
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Depreciation of property and equipment 5,596,000 6,706,000 10,520,000
Amortization and write-off of intangibles 2,210,000 3,442,000 5,945,000
Amortization of deferred compensation - - 562,000
Amortization and write-off of start-up costs 929,000 322,000 2,845,000
Amortization of deferred finance
costs and debt discount 228,000 58,000 777,000
Loss on retirement of debt 4,592,000 - -
Change in assets and liabilities:
Accounts receivable (6,671,000) (14,967,000) (27,381,000)
Prepaid expenses and other assets (754,000) (5,330,000) (15,827,000)
Accounts payable, accrued
expenses and income taxes (1,498,000) (2,675,000) 12,297,000
------------ ------------ ------------
------------ ------------ ------------
Net cash provided by (used in)
operating activities 17,967,000 15,595,000 (262,000)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisitions, net of cash acquired (49,245,000) (68,805,000) (102,093,000)
Purchase of property and equipment (9,726,000) (24,024,000) (26,346,000)
Sale (purchase) of investments, net - (12,045,000) 12,045,000
Proceeds from sale of property and
equipment and other 542,000 21,000 626,000
------------ ------------ ------------
Net cash used in investing (58,429,000) (104,853,000) (115,768,000)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings (payments) under revolving
credit facilities, net (416,000) 1,400,000 43,300,000
Proceeds from the issuance of
long-term debt 29,046,000 158,739,000 26,489,000
Repayments of long-term debt (82,919,000) (37,220,000) (5,071,000)
Net proceeds from the issuance of
common stock and preferred stock 105,814,000 57,082,000 10,023,000
Payment of deferred financing costs - (1,226,000) (596,000)
Dividends and distributions to shareholders (7,986,000) (42,671,000) (3,760,000)
------------ ------------ ------------
Net cash provided by
financing activities 43,539,000 136,104,000 70,385,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,077,000 46,846,000 (45,645,000)
<PAGE>
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,298,000 11,375,000 58,221,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $11,375,000 $58,221,000 $12,576,000
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $5,970,000 $3,316,000 $11,941,000
Income taxes paid $7,379,000 $8,557,000 $12,305,000
Liabilities and debt assumed in acquisitions $13,500,000 $9,030,000 $13,242,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONCENTRA Managed Care, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE CLASS A $0.01 PAR VALUE
PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------------ -------------------- ----------------------
NUMBER NUMBER NUMBER
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE
---------- ------------ ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994 5,868,455 $12,084,000 8,394,200 $38,000 12,947,120 $128,000
Conversion of Convertible
Preferred Stock into
Common Stock (5,868,455) (12,084,000) -- -- 2,835,000 28,000
Conversion of Class A
Common Stock into $0.01
par value Common Stock -- -- (8,394,200) (38,000) 8,394,200 84,000
Sale of Common Stock -- -- -- -- 9,859,573 99,000
Common Stock issued in
connection with
acquisitions -- -- -- -- 373,488 4,000
Issuance of Common Stock
warrants -- -- -- -- -- --
Exercise of Common Stock
warrants -- -- -- -- 82,222 1,000
Common Stock issued under
employee stock purchase
and option plans -- -- -- -- 262,989 3,000
Conversion of notes
payable into Common
Stock -- -- -- -- 18,241 --
Dividends and shareholder
distributions -- -- -- -- -- --
Net income -- -- -- -- -- --
---------- ------------ ---------- -------- ----------- ---------
BALANCE, DECEMBER 31,
1995 -- -- -- -- 34,772,833 347,000
---------- ------------ ---------- -------- ----------- ---------
---------- ------------ ---------- -------- ----------- ---------
Sale of Common Stock -- -- -- -- 2,143,200 21,000
Common Stock issued in
connection with
acquisitions -- -- -- -- 715,246 7,000
Common Stock issued under
employee stock purchase
and option plans -- -- -- -- 683,076 7,000
Exercise of Common Stock
warrants -- -- -- -- 151,111 2,000
Conversion of notes
payable into Common
Stock -- -- -- -- 105,983 1,000
Conversion of debenture
payable into Common
Stock -- -- -- -- 1,854,141 19,000
Dividends and shareholder
distributions -- -- -- -- -- --
Net income -- -- -- -- -- --
---------- ------------ ---------- -------- ----------- ---------
BALANCE, DECEMBER 31,
1996 -- -- -- -- 40,425,590 404,000
---------- ------------ ---------- -------- ----------- ---------
---------- ------------ ---------- -------- ----------- ---------
Common Stock issued in
connection with
acquisitions -- -- -- -- 2,162,995 22,000
Common Stock issued under
employee stock purchase
and option plans -- -- -- -- 897,530 9,000
Amortization of deferred
compensation -- -- -- -- -- --
Conversion of notes
payable into Common
Stock -- -- -- -- 81,571 1,000
Dividends and shareholder
distributions -- -- -- -- -- --
Net income -- -- -- -- -- --
---------- ------------ ---------- -------- ----------- ---------
BALANCE, DECEMBER 31,
1997 0 $0 0 $0 43,567,686 $436,000
---------- ------------ ---------- -------- ----------- ---------
---------- ------------ ---------- -------- ----------- ---------
<CAPTION>
STOCK-
PAID-IN RETAINED HOLDERS'
CAPITAL DEFICIT TREASURY STOCK EQUITY (DEFICIT)
------------ ------------ ------------------------- ----------------
NUMBER
OF SHARES VALUE
----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994 $39,795,000 ($15,991,000) (3,033,455) ($40,866,000) ($4,812,000)
Conversion of Convertible
Preferred Stock into
Common Stock 2,807,000 (31,617,000) 3,033,455 40,866,000 --
Conversion of Class A
Common Stock into $0.01
par value Common Stock -- (46,000) -- -- --
Sale of Common Stock 104,648,000 -- -- -- 104,747,000
Common Stock issued in
connection with
acquisitions 1,503,000 (194,000) -- -- 1,313,000
Issuance of Common Stock
warrants 450,000 -- -- -- 450,000
Exercise of Common Stock
warrants 246,000 -- -- -- 247,000
Common Stock issued under
employee stock purchase
and option plans 1,808,000 -- -- -- 1,811,000
Conversion of notes
payable into Common
Stock 128,000 -- -- -- 128,000
Dividends and shareholder
distributions -- (7,836,000) -- -- (7,836,000)
Net income -- 13,335,000 -- -- 13,335,000
------------ ------------ ----------- ------------ ----------------
BALANCE, DECEMBER 31,
1995 151,385,000 (42,349,000) -- -- 109,383,000
------------ ------------ ----------- ------------ ----------------
------------ ------------ ----------- ------------ ----------------
Sale of Common Stock 51,819,000 -- -- -- 51,840,000
Common Stock issued in
connection with
acquisitions 6,725,000 407,000 -- -- 7,139,000
Common Stock issued under
employee stock purchase
and option plans 7,735,000 -- -- -- 7,742,000
Exercise of Common Stock
warrants 1,062,000 -- -- -- 1,064,000
Conversion of notes
payable into Common
Stock 824,000 -- -- -- 825,000
Conversion of debenture
payable into Common
Stock 14,766,000 -- -- -- 14,785,000
Dividends and shareholder
distributions -- (42,671,000) -- -- (42,671,000)
Net Income -- 28,039,000 -- -- 28,039,000
------------ ------------ ----------- ------------ ----------------
BALANCE, DECEMBER 31,
1996 234,316,000 (56,574,000) -- -- 178,146,000
------------ ------------ ----------- ------------ ----------------
------------ ------------ ----------- ------------ ----------------
Common Stock issued in
connection with
acquisitions 11,441,000 (969,000) -- -- 3,846,000
Common Stock issued under
employee stock purchase
and option plans 10,013,000 -- -- -- 16,670,000
Amortization of deferred
compensation 562,000 -- -- -- 562,000
Conversion of notes
payable into Common
Stock 690,000 -- -- -- 691,000
Dividends and shareholder
distributions -- (3,474,000) -- -- (3,474,000)
Net income -- 10,000,000 -- -- 10,000,000
------------ ------------ ----------- ------------ ----------------
BALANCE, DECEMBER 31,
1997 $257,022,000 ($51,017,000) -- $ -- $206,441,000
------------ ------------ ----------- ------------ ----------------
------------ ------------ ----------- ------------ ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONCENTRA Managed Care, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
On August 29, 1997, CONCENTRA Managed Care, Inc. ("CONCENTRA" or the
"Company"), a Delaware corporation, was formed by the merger (the "Merger")
of CRA Managed Care, Inc. ("CRA") and OccuSystems, Inc. ("OccuSystems"). As a
result of the Merger, CRA changed its name to CONCENTRA Managed Care
Services, Inc. ("Managed Care Services") and OccuCenters, Inc., the operating
subsidiary of OccuSystems, changed its name to CONCENTRA Health Services,
Inc. ("Health Services"). The Merger was a tax-free stock for stock exchange
accounted for as a pooling of interests. The outstanding shares of CRA and
OccuSystems were exchanged for new shares in CONCENTRA. The 22,022,378
outstanding shares of OccuSystems were exchanged one for one for shares of
CONCENTRA common stock while the 9,013,906 outstanding shares of CRA were
exchanged for 16,098,836 shares of CONCENTRA common stock, representing a
conversion ratio of 1.786 to 1.0.
The Company recorded a non-recurring charge of $38,625,000 associated with
the Merger. The charges incurred were approximately $12,450,000 for
professional fees and services, $14,200,000 in costs associated with
personnel reductions, $6,575,000 in facility consolidations and closings,
$2,525,000 for the write-off of start-up costs and $2,875,000 of other merger
and transitional expenses.
On February 24, 1998, the Company acquired all of the outstanding common
stock of Preferred Payment Systems ("PPS") of Naperville, Illinois, in
exchange for approximately 7,100,000 shares of CONCENTRA common stock, the
assumption of PPS options totaling approximately 580,000 shares of CONCENTRA
common stock, the payment of approximately $15,047,000 in cash to dissenting
PPS shareholders and the assumption of approximately $49,000,000 of debt
which was repaid at the time of the merger. This merger was accounted for as
a pooling of interests. In the first quarter of 1998, the Company recorded a
non-recurring charge of $12,600,000 primarily associated with the merger of
PPS. The charges incurred were approximately $5,100,000 for professional fees
and services, $2,200,000 in costs associated with personnel reductions,
$2,400,000 in facility consolidations and closings, $1,600,000 associated
with the write-off of deferred financing fees on PPS indebtedness retired and
$1,300,000 of other merger and transitional costs. PPS, founded in 1990, is a
provider of specialized cost containment and outsourcing services for
healthcare payors.
The financial statements as of and for the years ended December 31, 1995,
1996 and 1997 have been restated to reflect the merger of PPS in accordance
with Accounting Principles Board Opinion No. 16, "Business Combinations"
("APB 16").
(2) Significant Acquisitions
Managed Care Services has experienced a significant amount of its growth by
virtue of the acquisitions of FOCUS HealthCare Management, Inc. ("FOCUS"),
Prompt Associates, Inc. ("PROMPT"), First Notice Systems, Inc. ("FNS") and
several other smaller acquisitions. Health Services has also experienced a
significant amount of its growth from the acquisition of practices, including
the acquisition of 16 occupational medical centers and contracts to manage
four additional medical centers from Vencor, Inc. ("VMC").
On April 2, 1996, the Company purchased FOCUS for $21,000,000 in cash. FOCUS,
based in Brentwood, Tennessee, has built and maintains one of the nation's
largest workers' compensation preferred provider organization ("PPO")
networks and had annual revenues of approximately $9,900,000 for the year
ended December 31, 1995.
On October 29, 1996, the Company purchased PROMPT for $30,000,000 in cash.
PROMPT, which is based in Salt Lake City, Utah, is one of the leading
providers of hospital bill audit services to the group health payor community
for claims that fall outside of an indemnity carrier's, third-party
administrator's ("TPA") or health maintenance organization's ("HMO") network
of hospital or outpatient facilities and had annual revenues of approximately
$10,000,000 for the year ended December 31, 1995.
On June 4, 1997, the Company purchased FNS for $40,000,000 in cash. FNS,
based in Boston, Massachusetts, is a leading provider of outsourced call
reporting for first notice of loss/injury to the automobile insurance and
workers'
<PAGE>
compensation industries and had annual revenues of approximately $9,000,000
for the year ended December 31, 1996.
PPS acquired ABOUT HEALTH in a two-step transaction on August 1, 1997 and
October 31, 1997 for $25,800,000 in cash and $9,733,000 in equity. ABOUT
HEALTH, based in Rockville, Maryland, is a provider of specialized cost
containment and outsourcing services for healthcare payors and had annual
revenues of approximately $10,000,000 for the year ended December 31, 996.
On September 30, 1997, the Company purchased 16 occupational medical centers
and the management of four additional medical centers from Vencor, Inc.
("VMC") for approximately $27,000,000 in cash. These medical centers had
annual revenues of approximately $23,000,000 for the year ended December 31,
1996.
The acquisitions of FOCUS, PROMPT, FNS, ABOUT HEALTH and VMC have been
accounted for by the Company as purchases whereby the basis for accounting
for their assets and liabilities are based upon their fair values at the
dates of acquisition. The excess of the purchase price over fair value of net
assets acquired (goodwill) for the FOCUS, PROMPT, FNS, ABOUT HEALTH and VMC
acquisitions was $19,217,000, $28,791,000, $35,852,000, $33,923,000 and
$28,983,000, respectively, and is being amortized over thirty to forty year
periods.
During 1995, the Company used the net proceeds from the sale of CONCENTRA
common stock, supplemented by borrowings under its credit facility to fully
repay certain long-term debt. The early repayment of this debt resulted in
the Company recording a net loss on the retirement of debt of $3,140,000
comprised of the write-off of associated deferred finance costs, debt
discounts and fees associated with the termination of the interest rate swaps
previously required by the loan agreement, offset by a tax benefit.
(3) Summary of Significant Accounting Policies
(a) Consolidation
The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
Physician and physical therapy services are provided at the Health Services
centers under management agreements with affiliated physician associations
(the "Physician Groups"), which are organized professional corporations that
hire licensed physicians and physical therapists to provide medical services
to the centers' patients. Since Health Services effectively controls the
Physician Groups, Health Services results of operations reflect the revenues
generated by the Physician Groups and the costs associated with the delivery
of their services. The financial statements of the Physician Groups are
consolidated because Health Services has unilateral control over the assets
and operations of the Physician Groups and notwithstanding the lack of
technical majority ownership, consolidation of the Physician Groups with
Health Services is necessary to present fairly the financial position and
results of operations of Health Services due to the existence of a
parent-subsidiary relationship by means other than record ownership of the
Physician Group's voting stock. The shareholders of the Physician Groups are
the physician leaders of Health Services, and are employed by Health Services
or one of its wholly-owned subsidiaries. Through a shareholder agreement,
Health Services restricts any transfer of Physician Group ownership without
its consent and can require the holder of such shares to transfer ownership
to a Health Services designee upon the occurrence of certain events,
including but not limited to the cessation of employment. Control of the
Physician Groups is perpetual due to the nature of the relationship and the
management agreements between the entities. The employed physicians do not
control fee schedules, payor contracts, or employment decisions regarding
personnel. The risk of loss for billed services provided by the Physician
Groups resides ultimately with Health Services as CONCENTRA Managed Care,
Inc. is required to provide financial support on an as needed basis.
(b) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the short maturity of those instruments.
(c) Revenue Recognition
<PAGE>
The Company recognizes revenue primarily as services have been rendered based
upon time and expenses incurred. A certain portion of the Company's revenues
are derived from fee schedule auditing which is based on the number of
charges reviewed, and to a limited extent, based on a percentage of savings
achieved for the Company's customers. In these circumstances, the customer is
obligated to pay the Company when the services have been rendered and the
savings identified. During the fee schedule audit process (i.e. medical bill
review), each bill reviewed and audited is returned to the customer
accompanied by an Explanation of Benefit ("EOB"). The EOB details the total
savings with respect to the bill being reviewed as well as the amount owed to
the Company as a percentage of savings identified and the line charge
associated with the bill being reviewed.
Insurance claims are modeled by PROMPT prior to the insurance company's
internal review procedures to determine if the claims should be modeled or
are payable by the insurance company. During the insurance company's review
process, some claims have pre-existing PPO or HMO arrangements, or other
pre-existing conditions and disqualifying situations. When these situations
occur, a refund (chargeback) is requested for the amounts paid (invoiced) on
these claims. PROMPT's policy is to record a sales allowance as an offset to
revenues and accounts receivable based upon the historical tracking of
discounts and chargebacks at the time the claims are modeled. A portion of
the allowance for doubtful accounts attributable to PROMPT is based on
historical experience of ineligible claims which are either charged back or
given a negotiated discount. PROMPT utilizes several methods to project
unpresented discounts and chargebacks including a tracking of the actual
experience of contractual discounts. Other factors that affect collectibility
and bad debts for each service line are also evaluated and additional
allowance amounts are provided as necessary.
Accounts receivable at December 31, 1996 and 1997 include $4,500,000 of
unbilled accounts receivable relating to services rendered during the period
but not invoiced until after the period-end. These unbilled accounts
receivable relate primarily to field case management services, which are
billed on an hourly basis, whereby the Company has not yet provided a
sufficient amount of services to warrant the generation of an invoice. The
customers are obligated to pay for the services once performed. The Company
estimates unbilled accounts receivable by tracking and monitoring its
historical experience.
(d) Depreciation
The Company provides for depreciation on property and equipment using
straight-line and accelerated methods by charges to operations in amounts that
allocate the cost of depreciable assets over their estimated lives as follows:
<TABLE>
<CAPTION>
Asset Classification Estimated Useful Life
- -------------------- ---------------------
<S> <C>
Furniture and fixtures 7 Years
Office and computer equipment 3 - 7 Years
Automobiles 5 Years
Buildings and improvements 30 Years
Leasehold improvements The shorter of the
life of lease or asset life
</TABLE>
(e) Intangible Assets
The value of goodwill, assembled workforces and customer lists are recorded
at cost at the date of acquisition. Goodwill, including any excess arising
from earn-out payments, is being amortized on a straight-line basis over 30
to 40-year periods in accordance with Accounting Principles Board Opinion No.
17 ("APB No. 17"), "Intangible Assets". The Company believes that the life of
the core businesses acquired and the delivery of occupational healthcare
services is indeterminate and likely to exceed 40 years. The assembled
workforces and customer lists are being amortized over five-year and
seven-year periods, respectively. As of December 31, 1996 and 1997, the
Company recorded accumulated amortization on intangible assets of $24,158,000
and $29,847,000, respectively.
Subsequent to an acquisition, the Company continually evaluates whether later
events and circumstances have occurred that indicate that the remaining
balance of goodwill may not be recoverable or that the remaining useful life
may warrant revision. When factors indicate that goodwill should be evaluated
for possible impairment, the Company uses an estimate of the related business
segments' undiscounted cash flows over the remaining life of the goodwill and
compares it to the business segment's goodwill balance to determine whether
the goodwill is recoverable or if impairment exists, in which case an
adjustment is made to the carrying value of the asset. When an adjustment is
required the Company evaluates the remaining goodwill amortization using the
factors outlined in APB No. 17.
(f) Deferred Finance Costs
<PAGE>
The Company has capitalized costs associated primarily with the 6% Convertible
Subordinated Notes and the PPS indebtedness and is amortizing this as interest
expense over the life of the notes. Included in other assets at December 31,
1996 and 1997 were deferred finance costs, net of accumulated amortization, of
$3,904,000 and $4,515,000, respectively.
(g) Deferred Start-Up Costs
Prior to the Merger, Health Services capitalized the start-up costs
associated with the internal development of its medical centers until
operational and would amortize these costs over a three year period. The
American Institute of Certified Public Accountants proposed a change to the
accounting and reporting treatment of start-up costs effective with fiscal
year ends beginning after December 15, 1998 which requires start-up costs to
be expensed as incurred. As a result of this pending change in accounting
principle, the Company wrote-off deferred start-up costs of approximately
$2,525,000 at the effective time of the Merger and included this in the
non-recurring charge. As of December 31, 1996, the amount recorded as
deferred start-up costs was $1,973,000.
(h) Foreign Currency Translation
All assets and liabilities of the Company's Canadian offices are translated
at the year-end exchange rate while revenues and expenses are translated at
the average exchange rate for the year.
(i) Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(j) Reclassifications
Certain amounts in 1995 and 1996 previously reported in CRA's, OccuSystems'
and PPS' financial statements have been reclassified to conform to the
presentation in the 1997 financial statements.
(4) Pro Forma Net Income and Earnings Per Share
Pro forma net income and basic and diluted pro forma earnings per share for
the three years ended December 31, 1995, 1996 and 1997 have been calculated
as if the merger of PPS had been subject to federal and state income taxes
for the entire period, based upon an effective tax rate indicative of the
statutory rates in effect. Prior to its merger, PPS elected to be taxed as an
S corporation, and accordingly, was not subject to federal and state income
taxes in certain jurisdictions.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
supersedes Accounting Principles Board Opinion No. 15. SFAS 128, establishes
new accounting standards for the presentation of earnings per share whereby
primary earnings per share is replaced with "Basic Earnings Per Share" and
fully diluted earnings per share is now called "Diluted Earnings Per Share".
Under SFAS 128, Basic Earnings Per Share is computed by dividing reported net
income by weighted average common shares outstanding and Diluted Earnings Per
Share has been computed assuming the conversion of the Company's convertible
notes and the elimination of the related interest expense, and the exercise
of stock options, net of their related income tax effect.
<TABLE>
<CAPTION>
1995 1996 1997
--------------- ---------------- ----------------
Basic Earnings Per Share:
<S> <C> <C> <C>
Net income available to shareholders
before extraordinary items $16,475,000 $28,039,000 $10,000,000
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Pro forma net income available to shareholders
before extraordinary items (1) $13,845,000 $25,309,000 $7,189,000
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Weighted average common shares outstanding 33,810,000 40,411,000 42,774,000
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Basic earnings per share $0.48 $0.69 $0.23
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Basic pro forma earnings per share (1) $0.41 $0.63 $0.17
--------------- ---------------- ---------------
--------------- ---------------- ---------------
<PAGE>
Diluted Earnings Per Share:
Net income available to shareholders
before extraordinary items $16,475,000 $28,039,000 $10,000,000
Interest on common stock equivalents, net of tax - 290,000 308,000
--------------- --------------- --------------
Diluted net income before extraordinary items $16,475,000 $28,329,000 $10,308,000
--------------- --------------- --------------
--------------- --------------- --------------
Pro forma net income available to shareholders
before extraordinary items (1) $13,845,000 $25,309,000 $ 7,189,000
Interest on common stock equivalents, net of tax - 290,000 308,000
--------------- --------------- --------------
Diluted pro forma net income before
extraordinary items (1) $13,845,000 $25,599,000 $ 7,497,000
--------------- --------------- --------------
--------------- --------------- --------------
Weighted average common shares outstanding 33,810,000 40,411,000 42,774,000
Dilutive options, warrants and notes payable 2,129,000 2,026,000 1,399,000
Dilutive convertible notes - 907,000 2,722,000
--------------- --------------- --------------
Weighted average common shares
and equivalents outstanding 35,939,000 43,344,000 46,895,000
--------------- --------------- --------------
--------------- --------------- --------------
Diluted earnings per share $0.46 $0.65 $0.22
--------------- --------------- --------------
--------------- --------------- --------------
Diluted pro forma earnings per share (1) $0.39 $0.59 $0.16
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
(1) Net income and earnings per share for the years ended December 31, 1995,
1996 and 1997 has been calculated as if Preferred Payment Systems, Inc.
("PPS") had been subject to federal and state income taxes for the entire
period, based upon an effective tax rate indicative of the statutory rates in
effect. Prior to its merger with the Company, PPS elected to be taxed as an S
corporation, and accordingly, was not subject to federal and state income
taxes in certain jurisdictions.
(5) Revolving Credit Facilities
On September 17, 1997, the Company entered into the $100,000,000 Senior
Credit Facility, ("Senior Credit Facility"), replacing the $60,000,000
Managed Care Services Credit Facility, ("MCS Credit Facility") and the
$60,000,000 Health Services Credit Facility, ("HS Credit Facility"). Interest
on borrowings under the Senior Credit Facility is payable, at the Company's
option, at the higher of the bank's prime rate of interest or the federal
funds rate plus an additional percentage of 0.5%, or LIBOR plus an additional
percentage of up to 1.25%, depending on certain financial criteria. At
December 31, 1996 and 1997, the Company had borrowings under the MCS Credit
Facility of $5,700,000 and borrowings under the Senior Credit Facility of
$49,000,000, respectively, at an average rate of interest of 7.61% and 6.94%,
respectively.
The Senior Credit Facility contains customary covenants, including, without
limitation, restrictions on the incurrence of indebtedness, the sale of
assets, certain mergers and acquisitions, the payment of dividends on the
Company's capital stock, the repurchase or redemption of capital stock,
transactions with affiliates, investments, capital expenditures and changes
in control of the Company. Under the Senior Credit Facility, the Company is
also required to satisfy certain financial covenants, such as cash flow,
capital expenditures and other financial ratio tests including current ratios
and interest expense coverage ratios. The Company was in compliance with all
such covenants during 1997. The Company's obligations under the Senior Credit
Facility are secured by a pledge of stock in the Company's subsidiaries.
The Company is required to pay a commitment fee of 0.125% to 0.25% per annum,
depending on certain financial criteria, on the unused portion of the Senior
Credit Facility.
On February 23, 1998, the Company signed an amendment to expand the Company's
borrowing capacity under the Senior Credit Facility to $200,000,000 under
similar terms and conditions in order to finance the repayment of $49,000,000
of PPS outstanding indebtedness (the PPS Credit Facility and 10% Subordinated
Notes).
<PAGE>
On March 11, 1998, the Senior Credit Facility borrowing capacity was reduced
back to the original $100,000,000 amount (see Footnote 14 - Subsequent Event).
For the years ended December 31, 1995, 1996 and 1997, the weighted average
borrowings under these revolving credit facilities were $4,903,000,
$8,184,000 and $9,615,000, respectively, and the weighted average interest
rates were 8.55%, 6.94% and 7.31%, respectively.
(6) Long-term Debt
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------------------- --------------------
<S> <C> <C>
6% Convertible Subordinated Notes, interest at 6%, due December 2001 $ 97,750,000 $ 97,750,000
Convertible notes payable, interest at 6%, payable through September 1999 785,000 -
Notes payable to various holders, interest ranging from 5.5% to 10%,
payable in installments through 2005 304,000 308,000
Obligations under capital leases 1,190,000 542,000
PPS indebtedness:
5% Convertible Subordinated Notes due August 2006 10,000,000 10,000,000
10% Subordinated Notes due August 2003 7,000,000 7,000,000
PPS Credit Facility 19,500,000 42,000,000
------------------- --------------------
136,529,000 157,600,000
Less: Current maturities (4,065,000) (7,497,000)
------------------- --------------------
Long-term debt, net of current maturities $ 132,464,000 $ 150,103,000
------------------- --------------------
------------------- --------------------
</TABLE>
In December 1996, Health Services issued an aggregate of up to $97,750,000 in
principal amount of 6% Convertible Subordinated Notes ("6% Convertible
Subordinated Notes"). The 6% Convertible Subordinated Notes will be
convertible into 3,291,243 shares of Common Stock at the initial conversion
price of $29.70 per share (equivalent to a conversion rate of 33.67 shares
per $1,000 principal amount of 6% Convertible Subordinated Notes), subject to
adjustment in certain events. The notes are convertible into Common Stock at
the option of the holder on or after February through December 2001. The 6%
Convertible Subordinated Notes will mature on December 15, 2001 with interest
being payable semi-annually on June 15 and December 15 of each year,
commencing on June 15, 1997.
On August 31, 1996, PPS completed a series of transactions involving funds
managed by a private equity firm and senior officers of PPS (the "1996
Transaction"). In connection with the 1996 Transaction, the private equity firm
invested $17,000,000 to acquire $10,000,000 in 5% Convertible Subordinated Notes
due August 2006 (the "5% Convertible Subordinated Notes") and $7,000,000 of 10%
Subordinated Notes due August 2003 (the "10% Subordinated Notes"). PPS also
entered into a credit facility with a syndicate of two banks, which provided for
$25,000,000 of senior debt, $20,000,000 of which was in the form of a term loan
and $5,000,000 of which was available pursuant to a line of credit. PPS, in
turn, used the net proceeds from these financing transactions to make
distributions to its stockholders in an aggregate amount of approximately
$36,000,000.
On July 31, 1997, in connection with the acquisition of ABOUT HEALTH (see Note
2), PPS entered into an amended and restated credit facility (as so amended and
restated, the PPS Credit Facility) to increase the term loan portion by $26.5
million. The Company is obligated to make quarterly principal and interest
payments on the term loan (bearing interest of 8.0% and 7.8% at December 31,
1996 and 1997, respectively) and quarterly interest payments on the line of
credit (bearing interest at 9.25% and 9.0% at December 31, 1996 and 1997,
respectively). The PPS Credit Facility expires in September 2001.
The 10% Subordinated Notes bear interest at 10% per annum, payable quarterly.
Beginning February, 2002, the Company is required to make semiannual principal
payments on the 10% Subordinated Notes of $1.7 million. Under the 10%
Subordinated Loan Agreement, the Company is required to prepay the 10%
Subordinated Notes in whole upon a qualifying public offering, sale of the
Company, or other change in control, as defined.
The 5% Convertible Subordinated Notes are convertible at any time by the holder
into 10,000 shares of PPS Redeemable Preferred Stock and 10,000 shares of PPS
Convertible Preferred Stock. The 5% Convertible Subordinated Notes mature in
August, 2006, subject to the right of the holders to accelerate the maturity of
the 5% Convertible Subordinated Notes upon a public equity offering, a
qualifying sale of the Company, or a merger
<PAGE>
resulting in a change in majority ownership of the Company. The 5% Convertible
Subordinated Notes bear interest at 5%, 2% being payable quarterly and 3% being
deferred and payable upon redemption or maturity.
On February 24, 1998, in connection with the merger of PPS, CONCENTRA repaid
$49,000,000 of PPS indebtedness (the PPS Credit Facility and 10% Subordinated
Notes) and the 5% Convertible Subordinated Notes were converted into 2,721,904
shares of CONCENTRA common stock.
(7) Disclosure About Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments". This statement requires entities to disclose the fair value of
their financial instruments, both assets and liabilities, on and off balance
sheet, for which it is practicable to estimate fair value. The following methods
and assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value. The Company's
short-term investments are held as available for sale per Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities".
The carrying amounts of cash and cash equivalents, short term investments,
accounts receivable, other current assets, accounts payable, and accrued
expenses approximate fair value because of the short maturity of those
instruments. The credit facilities approximate fair value primarily due to the
floating interest rates associated with those debt instruments.
The fair value of the Company's 6% Convertible Subordinated Notes was
estimated based on the closing price of the notes and was approximately
$97,750,000 and $125,120,000 as of December 31, 1996 and 1997, respectively.
The 5% Convertible Subordinated Notes were issued in August 1996 and, due to
the short time period from issuance, the carrying value at December 31, 1996
approximated fair value. As of December 31, 1997, the approximate fair value
of the 5% Convertible Subordinated Notes is $15,700,000. Although the
interest rate on the 10% Subordinated Notes is fixed, the carrying value
reasonably approximates the fair value at both December 31, 1996 and 1997.
(8) Income Taxes
The provision for income taxes consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Current:
Federal $ 6,529,000 $ 11,429,000 $ 15,112,000
State 1,320,000 2,473,000 3,968,000
--------------- --------------- ---------------
7,849,000 13,902,000 19,080,000
Deferred:
Federal (120,000) (214,000) (6,873,000)
State 42,000 (251,000) (1,145,000)
--------------- --------------- ---------------
(78,000) (465,000) (8,018,000)
--------------- --------------- ---------------
Total $ 7,771,000 $13,437,000 $11,062,000
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
<PAGE>
Significant items making up deferred tax liabilities and deferred tax assets
were as follows at December 31:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 2,957,000 $ 4,624,000
Accrued vacation - 1,760,000
Accrued self insurance 783,000 580,000
Acquired goodwill 771,000 1,678,000
Restructuring accruals and
reserves 225,000 5,107,000
Net operating losses - 506,000
Other 52,000 109,000
--------------- ---------------
Deferred tax assets $ 4,788,000 $ 14,364,000
--------------- ---------------
--------------- ---------------
Deferred tax liabilities:
Book to tax depreciation $ 930,000 $ 1,716,000
SEC. 481 (a) adjustments 1,278,000 34,000
Goodwill, principally due to differences in amortization periods 2,274,000 4,400,000
Pre-opening costs 499,000 -
Research and development
expense 1,178,000 1,520,000
Other 144,000 43,000
--------------- ---------------
Deferred tax liabilities $ 6,303,000 $ 7,713,000
--------------- ---------------
--------------- ---------------
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective tax
rate were as follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 % 1996 % 1997 %
----------- -------- ------------ ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Tax provision at federal statutory rate $8,244,000 34.0% $14,309,000 34.5% $7,372,000 35.0%
State taxes, net of federal income tax benefit 1,022,000 4.2 1,488,000 3.6 925,000 4.4
PPS S corporation status (2,296,000) (9.5) (2,441,000) (5.9) (2,582,000) (12.3)
Pooled entities tax benefit attributed
to individual stockholders of the
respective companies 984,000 4.1 101,000 0.2 - -
Non-deductible goodwill 129,000 0.5 367,000 0.9 1,003,000 4.8
Non-deductible restructuring
and acquisition costs - - - - 4,064,000 19.3
Change in valuation allowance (638,000) (2.6) - - - -
Other items, net 326,000 1.3 (387,000) (0.9) 280,000 1.3
----------- -------- ------------ ------- ------------- --------
$7,771,000 32.0% $13,437,000 32.4% $11,062,000 52.5%
----------- -------- ------------ ------- ------------- --------
----------- -------- ------------ ------- ------------- --------
</TABLE>
PPS' shareholders had elected S Corporation taxing status. Thus, PPS' taxable
income was taxed directly to its shareholders. PPS did pay state taxes in
Illinois, Pennsylvania, California and Utah based on its taxable income.
Effective with the merger with CONCENTRA, PPS' taxable income will be included
in CONCENTRA's consolidated income tax returns.
(9) Stockholders' Equity
(a) Preferred Stock
The Board of Directors is authorized to issue shares of Preferred Stock, in one
or more series, and to fix for each such series the number of shares thereof and
voting powers and such preferences and relative, participating, optional or
other
<PAGE>
special rights and such qualifications, limitations or restrictions as are
permitted by the Delaware General Corporation Law. The Board of Directors could
authorize the issuance of shares of Preferred Stock with terms and conditions
that could discourage a takeover or other transaction that holders of some or a
majority of shares of Common Stock might believe to be in their best interests
or in which such holders might receive a premium for their shares of stock over
the then market price of such shares. As of the date hereof, no shares of
Preferred Stock are outstanding and the Board of Directors has no present
intention to issue any shares of Preferred Stock.
(b) Stockholder Rights Plan
Shortly after the Merger, on September 17, 1997, the Board of Directors
declared, pursuant to a rights agreement (the "Rights Agreement"), a dividend
distribution of one common share purchase right ("Right") for each outstanding
share of Common Stock. Each Right will entitle the registered holder to purchase
from CONCENTRA one thousandth of a share of Series A Junior Participating
Preferred Stock, par value $.01 per share (the "Junior Preferred Shares"), of
CONCENTRA at a price per share to be determined by the Board of Directors with
the advice of its financial advisor about the long-term prospects for the
Company's value (the "Purchase Price"), subject to adjustment. Each thousandth
of a Junior Preferred Share will be economically equivalent to one share of
CONCENTRA Common Stock. The Purchase Price is expected to be significantly
higher than the trading price of the Common Stock. Therefore, the dividend will
have no initial value and no impact on the financial statements of Company.
(c) Common Stock
At December 31, 1997, the Company has reserved approximately 11,043,000 unissued
shares of its Common Stock for possible issuance under the Company's stock
option plan, stock purchase plans and for the issuance upon possible conversion
of the Company's 6% Convertible Subordinated Notes.
(10) Commitments and Contingencies
The Company leases certain corporate office space, operating and medical
facilities, and office and medical equipment under various non-cancelable
operating and capital lease agreements. Certain facility leases require the
Company to pay increases in operating costs and real estate taxes. In addition,
the Company leases certain office facilities from related parties under
operating lease agreements that expire on various dates to July 31, 2002. The
Company made rental payments of $726,000 to Colonial Realty Trust, a real estate
company owned by two stockholders and board members of the Company, for each of
the years ended December 31, 1995, 1996 and 1997.
The following is a schedule of rent expense by major category for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
--------------- --------------- -------------
<S> <C> <C> <C>
Facilities $11,203,000 $13,009,000 $17,406,000
Office equipment 1,053,000 1,166,000 2,029,000
Automobiles 2,638,000 2,729,000 2,976,000
--------------- --------------- -------------
Total rent expense $14,894,000 $16,904,000 $22,411,000
--------------- --------------- -------------
--------------- --------------- --------------
</TABLE>
<PAGE>
The following is a schedule of future minimum lease payments under
non-cancelable operating leases for the years ending December 31:
<TABLE>
<CAPTION>
Operating Leases
------------------------------------------------
Capital Related Unrelated
Year Ending December 31, Leases Parties Parties Total
------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
1998 $573,000 $726,000 $19,949,000 $20,675,000
1999 163,000 726,000 16,711,000 17,437,000
2000 22,000 726,000 12,745,000 13,471,000
2001 - 726,000 9,683,000 10,409,000
2002 - 726,000 7,941,000 8,667,000
Thereafter - 727,000 11,213,000 11,940,000
------------- ---------------- ------------- ---------------
758,000 $4,357,000 $78,242,000 $82,599,000
---------------- ------------- ---------------
---------------- ------------- ---------------
Amount representing interest (216,000)
-------------
$542,000
-------------
-------------
</TABLE>
A wholly-owned subsidiary of Health Services has committed to guarantee
$10,400,000 in senior discount notes, plus interest, issued by CONCENTRA
Development Corporation ("CDC"), a corporation organized and capitalized to
develop occupational healthcare centers in selected markets in the United
States. The stated principal amount of the notes total $28,400,000, which
will be their accreted value at their stated maturity (five years after the
date of issuance of each note). Health Services also has the right to acquire
the developed centers at fair market value in the future. Health Services has
entered into a management agreement with CDC to manage the healthcare
centers' daily operations.
The Company is party to certain claims and litigation initiated in the
ordinary course of business. The Company is not involved in any legal
proceeding that it believes will result, individually or in the aggregate, in
a material adverse effect upon its financial condition or results of
operations.
<PAGE>
(11) Employee Benefit Plans
(a) CONCENTRA 401(k) Plan
The Company has a defined contribution plan (the "CONCENTRA 401(k) Plan")
pursuant to which employees who are at least 21 years of age and who have
completed at least six months of service are eligible to participate.
Participants in the 401(k) Plan may not contribute more than the lesser of a
specified statutory amount or 15% of his or her pre-tax total compensation.
The CONCENTRA 401(k) Plan permits, but does not require, additional matching
contributions of up to 50% of participants' pretax contributions up to a
maximum of 6% of compensation by the Company. Employees are 100% vested in
their own contributions while Company contributions vest 20% after three
years and vest an additional 20% each year thereafter. The Company did not
make a matching contribution for 1997.
(b) Managed Care Services 401(k) Plan
Managed Care Services has a defined contribution plan (the "MCS 401(k) Plan")
under similar terms to those of the CONCENTRA 401(k) Plan. For the years
ended December 31, 1995, 1996 and 1997, the Company has elected to match 50%
of up to 4% of compensation. The Company made net contributions to this plan
of $581,000, $855,000 and $925,000 for the years ended December 31, 1995,
1996 and 1997, respectively. It is anticipated that this plan will merge with
the CONCENTRA 401(k) Plan.
(c) Health Services 401(k) Plan
Health Services has a defined benefit plan (the "HS 401(k) Plan") under
similar terms to those of the CONCENTRA 401(k) Plan except that their were no
matching contributions under the plan. It is anticipated that this plan will
merge with the CONCENTRA 401(k) Plan.
(d) PPS 401(k) Plan
PPS has a defined contribution plan (the "PPS 401(k) Plan") under similar
terms to those of the Concentra 401(k) Plan. For the years ended December 31,
1995, 1996 and 1997, PPS elected to match 25% of employee contributions up to
7% of gross earnings. PPS made contributions to this plan of approximately
$43,000, $55,000 and $128,000 for the years ended December 31, 1995, 1996 and
1997, respectively. It is anticipated that this plan will merge with the
CONCENTRA 401(k) Plan.
(12) Stock Purchase Plan and Stock Option Plans
(a) CONCENTRA 1997 Employee Stock Purchase Plan
The CONCENTRA 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
for employees of the Company authorizes the issuance of up to 500,000 shares
of Common Stock pursuant to the exercise of nontransferable options granted
to participating employees. The 1997 Purchase Plan is administered by the
Compensation Committee of the Board of Directors.
Under the terms of the 1997 Purchase Plan, an employee must authorize the
Company in writing to deduct an amount (not less than 1% nor more than 15% of
a participant's base compensation and in any event not more than $25,000)
from his or her pay during six month periods commencing on January 1 and July
1 of each year (each a "Purchase Period"). The exercise price for shares
purchased under the 1997 Purchase Plan for each Purchase Period is the lesser
of 85% of the fair market value of the Common Stock on the first or last
business day of the Purchase Period. The fair market value will be the
closing selling price of the Common Stock as quoted.
(b) Managed Care Services and Health Services Employee Stock Purchase Plans
Managed Care Services and Health Services each had employee stock purchase
plans under similar terms and conditions as those under the 1997 Purchase
Plan.
The Company issued the following shares of Common Stock under the employee
stock purchase plans for each of the following purchase periods:
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average
Number Price
Purchase Periods Ended of Shares Per Share
---------------------- ---------------- ----------------
<S> <C> <C>
December 31, 1995 32,682 $10.49
June 30, 1996 29,089 $10.59
December 31, 1996 44,606 $22.18
June 30, 1997 50,056 $21.38
December 31, 1997 47,245 $24.86
</TABLE>
(c) CONCENTRA 1997 Long-term Incentive Plan
CONCENTRA may grant awards with respect to shares under the Company's
Long-term Incentive Plan (the "CONCENTRA Incentive Plan"). The awards under
the CONCENTRA Incentive Plan include (i) incentive stock options qualified as
such under U.S. Federal income tax laws, (ii) stock options that do not
qualify as incentive stock options, (iii) stock appreciation rights ("SARs"),
(iv) restricted stock awards and (v) performance units.
The number of shares of Common Stock that may be subject to outstanding
awards under the CONCENTRA Incentive Plan at any one time is equal to ten
percent of the total number of outstanding shares of CONCENTRA Common Stock
(treating as outstanding all shares of Common Stock issuable within 60 days
upon exercise of stock options or conversion or exchange of outstanding,
publicly-traded convertible or exchangeable securities of CONCENTRA) minus
the total number of shares of Common Stock subject to outstanding awards
under the CONCENTRA Incentive Plan and any future stock-based plan for
employees or directors of Company. At December 31, 1997, the Company was
authorized to award grants of approximately 4,050,000 shares under the
CONCENTRA Incentive Plan. The number of shares authorized under the CONCENTRA
Incentive Plan and the number of shares subject to an award under the
CONCENTRA Incentive Plan will be adjusted for stock splits, stock dividends,
recapitalizations, mergers and other changes affecting the capital stock of
CONCENTRA.
During 1997, the Company granted restricted stock for 359,754 shares of
common stock under the 1997 Incentive Plan which were valued at $9,903,000,
based upon the market value of the shares at the time of issuance. The
Company granted 2,754 shares to outside directors which will vest over one
year. The remaining 357,000 shares will vest 20% per year beginning January
1, 2002. If the Company's financial performance exceeds certain established
performance goals, however, the vesting of these shares could accelerate
whereby 33 1/3% of the shares could become vested on January 1, 2000 and each
year thereafter. For the year ended December 31, 1997, the Company recorded
compensation expense of $562,000 in connection with the amortization of
deferred compensation associated with the restricted stock grants.
After the Merger, no additional awards will be made under the former CRA and
OccuSystems stock option plans and only that number of shares of Common Stock
issuable upon exercise of awards granted under the former CRA and OccuSystems
stock option plans as of the Merger were reserved for issuance by the Company.
In connection with the 1996 Transaction, PPS canceled all outstanding stock
options and terminated all existing stock option plans. In return for the
cancellation of outstanding options, PPS made a cash payment to the holders
of these options, which resulted in a compensation charge of approximately
$484,000. Upon the cancellation of the options, PPS adopted the 1996 PPS
Replacement Stock Option Plan and the 1996 PPS Incentive Stock Option Plan
for its key employees. The plan provided for the issuance of up to 325,000
shares of PPS common stock. The exercise price for the incentive stock
options could not be less than the fair market value of the underlying PPS
common stock on the date of grant. After the merger, no additional awards
were made under the former PPS stock option plans and outstanding PPS options
were assumed by the CONCENTRA Incentive Plan totaling approximately 580,000
shares of CONCENTRA common stock.
A summary of the status for all outstanding options at December 31, 1995, 1996
and 1997 and changes during the years then ended is presented in the table
below:
<PAGE>
<TABLE>
<CAPTION>
Weighted
Number Average Price
of Shares Per Share
------------- ---------------
<S> <C> <C>
Balance December 31, 1994 2,004,479 $4.68
Granted 939,538 14.53
Exercised (168,748) 2.69
Canceled (77,676) 6.63
------------- ---------------
Balance December 31, 1995 2,697,593 8.18
Granted 1,959,777 18.07
Exercised (633,143) 4.41
Canceled (158,485) 13.79
------------- ---------------
Balance December 31, 1996 3,865,742 13.59
Granted 2,925,655 22.51
Exercised (801,593) 9.02
Canceled (268,017) 20.71
------------- ---------------
Balance December 31, 1997 5,721,787 $18.46
------------- ---------------
------------- ---------------
</TABLE>
<PAGE>
The weighted average fair market value of options granted in 1996 and 1997 were
$18.07 and $25.89, respectively. A further breakdown of the outstanding options
at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average Excercisable Weighted
Range of Number of Average Contractual Number of Average
Exercise prices Options Price Life Options Price
- ----------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.01 - $12.39 2,069,184 $3.85 8.02 758,412 $5.60
$12.74 - $23.13 1,283,935 20.38 8.54 263,254 19.08
$23.17 - $27.88 990,668 26.42 9.19 96,504 25.60
$32.63 - $32.63 1,059,000 32.63 9.83 - -
$32.75 - $33.88 319,000 33.77 9.87 - -
---------- ---------- ---------- ---------- ----------
5,721,787 $18.46 8.78 1,118,170 $10.50
</TABLE>
<PAGE>
(d) SFAS 123 Disclosures
The Company accounts for these plans under APB No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's net
income, pro forma net income, earnings per share and pro forma earnings per
share would have been reduced to the following supplemental pro forma amounts:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Income Before Extraordinary
Items:
As reported $16,475,000 $28,039,000 $10,000,000
Supplemental pro forma $15,434,000 $22,555,000 $3,612,000
Pro forma as reported (1) $13,845,000 $25,309,000 $7,189,000
Supplemental pro forma (1) $12,804,000 $19,825,000 $801,000
Basic Earnings Per Share
As reported $0.48 $0.69 $0.23
Supplemental pro forma $0.46 $0.56 $0.08
Pro forma as reported (1) $0.41 $0.63 $0.17
Supplemental pro forma (1) $0.38 $0.49 $0.02
Diluted Earnings Per Share:
As reported $0.46 $0.65 $0.22
Supplemental pro forma $0.43 $0.53 $0.08
Pro forma as reported (1) $0.39 $0.59 $0.16
Supplemental pro forma (1) $0.36 $0.46 $0.02
</TABLE>
(1) Pro forma net income and basic and diluted earnings per share for the three
years ended December 31, 1995, 1996 and 1997 have been calculated as if
PPS had been subject to federal and state income taxes for the entire
period, based upon an effective tax rate indicative of the statutory rates
in effect. Prior to its merger with the Company, PPS elected to be taxed
as an S corporation, and accordingly, was not subject to federal and state
income taxes in certain jurisdictions.
Because the method of accounting under SFAS 123 has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. Additionally, the
1995, 1996 and 1997 pro forma amounts include $60,000, $229,000 and $396,000,
respectively, related to purchase discounts offered on employee stock purchase
plans.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants in 1995, 1996 and 1997, respectively:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rates 6.17% 6.00% 6.00%
Expected volatility 47.39% 47.39% 45.29%
Expected dividend yield - - -
Expected weighted average life of options in years 3.4 3.4 4.8
</TABLE>
<PAGE>
(13) Selected Financial Data
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $176,271,000 $223,499,000 $305,355,000 $372,683,000 $493,879,000
Gross profit 28,539,000 37,093,000 62,435,000 82,755,000 117,628,000
Non-recurring charges 20,573,000 - 898,000 964,000 38,625,000
Operating income (loss) (10,923,000) 15,928,000 29,446,000 45,194,000 33,051,000
Income before taxes 6,994,000 10,088,000 24,246,000 41,476,000 21,062,000
Provision for income taxes (1) 1,339,000 8,751,000 7,771,000 13,437,000 11,062,000
Net income (loss) before
extraordinary items (1) (13,883,000) 1,337,000 16,475,000 28,039,000 10,000,000
Pro forma net income before
extraordinary items (2) $13,845,000 $25,309,000 $7,189,000
Basic earnings per share before extraordinary items $0.48 $0.69 $0.23
Basic pro forma earnings per share
before extraordinary items (2) $0.41 $0.63 $0.17
Basic weighted average shares
outstanding 33,810,000 40,411,000 42,774,000
Diluted earnings per share before
extraordinary items $0.46 $0.65 $0.22
Diluted pro forma earnings per share
before extraordinary items (2) $0.39 $0.59 $0.16
Diluted weighted average shares
outstanding 35,939,000 43,344,000 46,895,000
Balance Sheet:
Working capital $21,423,000 $19,117,000 $21,971,000 $116,439,000 $37,118,000
Total assets 76,033,000 113,672,000 188,530,000 367,900,000 482,971,000
Total debt 18,149,000 83,785,000 34,639,000 142,229,000 206,600,000
Total stockholders'
equity (deficit) 37,027,000 (5,820,000) 109,383,000 178,146,000 206,441,000
</TABLE>
1) Prior to its recapitalization in March of 1994, CRA had elected to be taxed
as an "S" corporation. In connection with its recapitalization, CRA was
required to change from an "S" to a "C" corporation. This change resulted
in CRA recording an incremental tax provision of $3,772,000 in the first
quarter of 1994. The Company's pro forma net income for 1994 would have
been $3,466,000 higher had CRA had been subject to federal and state income
taxes during the entire period based upon an effective tax rate indicative
of the statutory rate in effect during the period.
2) Pro forma net income and basic and diluted earnings per share for the three
years ended December 31, 1995, 1996 and 1997 have been calculated as if
PPS had been subject to federal and state income taxes for
the entire period, based upon an effective tax rate indicative of the
statutory rates in effect. Prior to its merger with the Company, PPS
elected to be taxed as an S corporation, and accordingly, was not subject
to federal and state income taxes in certain jurisdictions.
(14) Subsequent Event:
<PAGE>
On March 11, 1998, the Company issued a new issue of $200 million aggregate
principal amount of 4.5% Convertible Subordinated Notes due March 15, 2003 (the
"4.5% Convertible Subordinated Notes"). On April 6, 1998, the underwriters
exercised the $30,000,000 overallotment provision. The 4.5% Convertible
Subordinated Notes will be convertible into the Company's common stock, at the
option of the holder, at a conversion price of $41.25 per share, representing a
conversion premium of 25% over the previous day's closing price. The 4.5%
Convertible Subordinated Notes are general unsecured obligations of the Company
ranking equal in right of payment with the 6% Convertible Subordinated Notes and
all other unsecured indebtedness of the Company. In addition, the Company is a
holding company that conducts all of its operations through subsidiaries, and
the 4.5% Convertible Subordinated Notes and the 6% Convertible Subordinated
Notes are structurally subordinate to all obligations of the Company's
subsidiaries. The 4.5% Convertible Subordinated Notes were sold through a
private placement under Rule 144A of the Securities Act of 1933, as amended and
have similar terms and conditions as the 6% Convertible Subordinated Notes. The
Company intends to use the proceeds from the sale of the 4.5% Convertible
Subordinated Notes to repay existing debt under the Senior Credit Facility and
for general corporate purposes. On March 11, 1998, the Senior Credit Facility
borrowing capacity was reduced back to the original $100,000,000 amount.
(15) Selected Quarterly Operating Results (Unaudited)
The following table sets forth certain unaudited quarterly results of operations
for each of the eight quarters ended December 31, 1997. In management's opinion,
this unaudited information has been prepared on the same basis as the annual
financial statements and includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the information for
the quarters presented, when read in conjunction with the financial statements
and notes thereto included elsewhere in this document. The operating results for
any quarter are not necessarily indicative of results for any subsequent
quarter.
<TABLE>
<CAPTION>
Quarter ended
-------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
----------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenue $107,142,000 $120,728,000 $131,212,000 $134,797,000
Cost of services 83,162,000 91,600,000 97,123,000 104,365,000
----------------- --------------- ---------------- ---------------
Gross profit 23,980,000 29,128,000 34,089,000 30,432,000
General and administrative expenses 9,033,000 9,980,000 10,311,000 10,684,000
Amortization 1,235,000 1,165,000 1,576,000 1,969,000
Non-recurring charge - - 38,625,000 -
----------------- --------------- ---------------- ---------------
Operating income (loss) 13,712,000 17,983,000 (16,423,000) 17,779,000
Other expense, net 1,903,000 2,466,000 3,346,000 4,274,000
Provision (benefit) for income taxes 4,106,000 5,395,000 (3,342,000) 4,903,000
----------------- --------------- ---------------- ---------------
Net income (loss) $7,703,000 $10,122,000 ($16,427,000) $8,602,000
----------------- --------------- ---------------- ---------------
----------------- --------------- ---------------- ---------------
Pro forma net income (loss) (1) $7,080,000 $9,440,000 ($17,548,000) $8,217,000
----------------- --------------- ---------------- ---------------
----------------- --------------- ---------------- ---------------
Basic earnings (loss) per share $0.18 $0.24 ($0.38) $0.20
Basic pro forma earnings (loss) per share (1) $0.17 $0.22 ($0.41) $0.19
Diluted earnings (loss) per share $0.17 $0.22 ($0.38) $0.18
Diluted pro forma earnings (loss) per share (1) $0.15 $0.21 ($0.41) $0.17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
----------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenue $83,948,000 $92,942,000 $98,843,000 $96,950,000
Cost of services 67,159,000 71,491,000 75,391,000 75,887,000
----------------- --------------- ---------------- ---------------
Gross profit 16,789,000 21,451,000 23,452,000 21,063,000
General and administrative expenses 7,262,000 8,417,000 9,067,000 8,409,000
Amortization 654,000 850,000 877,000 1,061,000
Non-recurring charge
- - - 964,000
----------------- --------------- ---------------- ---------------
Operating income 8,873,000 12,184,000 13,508,000 10,629,000
Other expense, net 733,000 954,000 803,000 1,228,000
Provision for income taxes 2,377,000 3,580,000 4,354,000 3,126,000
----------------- --------------- ---------------- ---------------
Net income $5,763,000 $7,650,000 $8,351,000 $6,275,000
----------------- --------------- ---------------- ---------------
----------------- --------------- ---------------- ---------------
Pro forma net income (1) $4,788,000 $6,848,000 $7,878,000 $5,795,000
----------------- --------------- ---------------- ---------------
----------------- --------------- ---------------- ---------------
Basic earnings per share $0.16 $0.19 $0.20 $0.15
Basic pro forma earnings per share (1) $0.13 $0.17 $0.19 $0.14
Diluted earnings per share $0.15 $0.18 $0.19 $0.14
Diluted pro forma earnings per share (1) $0.13 $0.16 $0.18 $0.13
</TABLE>
(1) Pro forma net income and basic and diluted earnings per share for the three
years ended December 31, 1995, 1996 and 1997 have been calculated as if
PPS had been subject to federal and state income taxes for the entire
period, based upon an effective tax rate indicative of the statutory rates
in effect. Prior to its merger with the Company, PPS elected to be taxed as
an S corporation, and accordingly, was not subject to federal and state
income taxes in certain jurisdictions.
