<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file 000-22751
CONCENTRA MANAGED CARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3363415
(State or other jurisdiction of (I.R.S. employer identification No.)
incorporation or organization)
312 Union Wharf, Boston Massachusetts 02109
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (617) 367-2163
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes /X/ No / /
At August 5, 1998, the registrant had outstanding an aggregate of 47,063,950
shares of its Common Stock, $.01 par value.
1
<PAGE>
Concentra Managed Care, Inc.
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
Consolidated Balance Sheets (Unaudited) at December 31, 1997 (Restated) and June 30, 1998 3
Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended
June 30, 1997 (Restated) and 1998 4
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended
June 30, 1997 (Restated) and 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6
Management's Discussion and Analysis of Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION 13
Signature 14
EXHIBIT INDEX 15
</TABLE>
2
<PAGE>
Concentra Managed Care, Inc.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
December June
ASSETS 31, 1997 30, 1998
- --------------------------------------------------------------- -------------- -------------
Restated
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $12,576,000 $121,922,000
Accounts receivable, net 106,963,000 119,955,000
Prepaid expenses, tax assets and other current assets 26,212,000 28,838,000
-------------- --------------
Total current assets 145,751,000 270,715,000
PROPERTY AND EQUIPMENT, AT COST 104,054,000 124,418,000
Less: Accumulated depreciation and amortization (38,351,000) (45,011,000)
-------------- --------------
NET PROPERTY AND EQUIPMENT 65,703,000 79,407,000
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 262,592,000 269,963,000
OTHER ASSETS 8,925,000 15,676,000
-------------- --------------
$482,971,000 $635,761,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------
CURRENT LIABILITIES:
Revolving credit facilities $49,000,000 $ -
Current portion of long-term debt 7,497,000 418,000
Accounts payable, accrued income tax and expenses 52,136,000 63,967,000
-------------- --------------
Total current liabilities 108,633,000 64,385,000
LONG-TERM DEBT, NET OF CURRENT PORTION 150,103,000 327,769,000
DEFERRED INCOME TAXES AND OTHER LIABILITIES 17,794,000 16,323,000
STOCKHOLDERS' EQUITY :
Common stock 436,000 469,000
Paid-in capital 257,022,000 265,608,000
Retained deficit (51,017,000) (38,793,000)
-------------- --------------
Total stockholders' equity 206,441,000 227,284,000
-------------- --------------
$482,971,000 $635,761,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
Concentra Managed Care, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------
1997 1998 1997 1998
---------------- ----------------- ------------- -------------
Restated Restated
<S> <C> <C> <C> <C>
REVENUES:
Field case management $34,632,000 $44,358,000 $67,021,000 $86,198,000
Specialized cost containment 33,431,000 47,124,000 61,801,000 91,503,000
----------------- ----------------- -------------- --------------
Managed care services 68,063,000 91,482,000 128,822,000 177,701,000
Health services 52,665,000 67,402,000 99,048,000 126,727,000
----------------- ----------------- -------------- --------------
Total revenues 120,728,000 158,884,000 227,870,000 304,428,000
COST OF SERVICES:
Managed care services 53,189,000 67,772,000 100,546,000 132,530,000
Health services 38,411,000 49,950,000 74,216,000 96,238,000
----------------- ----------------- -------------- --------------
Total cost of services 91,600,000 117,722,000 174,762,000 228,768,000
----------------- ----------------- -------------- --------------
Total gross profit 29,128,000 41,162,000 53,108,000 75,660,000
General and administrative expenses 9,980,000 11,294,000 19,013,000 21,993,000
Amortization of intangibles 1,165,000 2,048,000 2,400,000 4,075,000
Non-recurring charge - - - 12,600,000
----------------- ----------------- -------------- --------------
Operating income 17,983,000 27,820,000 31,695,000 36,992,000
Interest expense 2,765,000 4,588,000 5,192,000 8,470,000
Interest income (781,000) (1,429,000) (1,632,000) (1,662,000)
Other,net 482,000 264,000 809,000 373,000
----------------- ----------------- -------------- --------------
Income before income taxes 15,517,000 24,397,000 27,326,000 29,811,000
Provision for income taxes 5,395,000 10,236,000 9,501,000 14,803,000
---------------- --------------- ----------- -----------
Net income $10,122,000 $14,161,000 $17,825,000 $15,008,000
---------------- --------------- ----------- -----------
---------------- --------------- ----------- -----------
Pro forma net income (see Note 2) $9,440,000 $16,520,000
---------- -----------
---------- -----------
Basic pro forma and actual earnings per share $ 0.22 $ 0.30 $ 0.39 $ 0.33
---------------- --------------- ----------- -----------
---------------- --------------- ----------- -----------
Weighted average common shares outstanding 42,494,000 46,744,000 42,439,000 45,842,000
---------------- --------------- ----------- -----------
---------------- --------------- ----------- -----------
Diluted pro forma and actual earnings per share $ 0.21 $ 0.30 $ 0.36 $ 0.32
---------------- --------------- ----------- -----------
---------------- --------------- ----------- -----------
Weighted average common shares and equivalents outstanding 46,337,000 47,816,000 46,324,000 47,793,000
---------------- --------------- ----------- -----------
---------------- --------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
Concentra Managed Care, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
1997 1998
<TABLE>
<CAPTION>
1997 1998
------------ ------------
Restated
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,825,000 $ 15,008,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property and equipment 4,833,000 6,682,000
Amortization of goodwill and other 2,400,000 4,075,000
intangibles
Amortization and write-off of start-up costs 315,000 -
Amortization of deferred finance costs 150,000 701,000
Change in assets and liabilities:
Accounts receivable, net (20,088,000) (12,739,000)
Prepaid expenses, prepaid income taxes and (226,000) 1,186,000
other assets
Accounts payable, accrued expenses and income taxes (3,180,000) 4,921,000
------------ ------------
Cash flows provided by operating activities 2,029,000 19,834,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in acquisitions, net of cash acquired (43,026,000) (9,141,000)
Purchase of property and equipment (13,038,000) (18,650,000)
Purchase of short-term investments (29,750,000) -
Proceeds from sale of property and equipment 625,000 440,000
------------ ------------
Cash flows used in investing activities (85,189,000) (27,351,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under the credit facilities 39,978,000 (49,000,000)
Proceeds from the issuance of long-term debt - 230,000,000
Payment of deferred financing costs - (6,021,000)
Payments to dissenting shareholders - (15,047,000)
Repayment of long-term debt and capital leases (2,108,000) (49,413,000)
Payment of dividends (2,507,000) (2,809,000)
Proceeds from the sale of common stock under
employee stock purchase plan and stock option plans 2,415,000 9,153,000
------------ ------------
Cash flows provided by financing activities 37,778,000 116,863,000
NET INCREASE (DECREASE) IN CASH (45,382,000) 109,346,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 58,221,000 12,576,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,839,000 $121,922,000
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 4,191,000 $ 5,591,000
Income taxes paid $ 8,682,000 $ 7,356,000
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
Concentra Managed Care, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The accompanying unaudited financial statements have been prepared by Concentra
Managed Care, Inc. (the "Company" or "Concentra") pursuant to the rules and
regulations of the Securities and Exchange Commission, and reflect all
adjustments (all of which are of a normal recurring nature) which, in the
opinion of management, are necessary for a fair statement of the results of the
interim periods presented. These financial statements do not include all
disclosures associated with the annual financial statements and, accordingly,
should be read in conjunction with the attached Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and footnotes for the year ended December 31, 1997 included in the
Company's Form 10-K, where certain terms have been defined, Form 8-Ks and Form
8-K/A relating to the merger of Preferred Payment Systems, Inc. ("PPS"), and
Form S-3 relating to the issuance of 4.5% Convertible Subordinated Notes.
(1) BASIS OF PRESENTATION AND RECENT ACQUISITIONS
On February 24, 1998, the Company acquired all of the outstanding common stock
of Preferred Payment Systems, Inc. ("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 $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 acquisition (see Note 3). This transaction was accounted for as a pooling of
interests. PPS, founded in 1990, is a provider of specialized cost containment
and outsourcing services for healthcare payors.
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.
The financial statements as of December 31, 1997 and for the three and six
months ended June 30, 1997 have been restated to reflect the acquisition of PPS
in accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"). The Company also completed several immaterial
acquisitions during the first and second quarters of 1998.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130")
effective in the second quarter of 1998. SFAS 130 establishes standards for
reporting comprehensive income and its components in the consolidated financial
statements. The Company's reported net income for the three and six months ended
June 30, 1997 and 1998 does not differ from comprehensive income as defined in
SFAS 130.
(2) PRO FORMA NET INCOME AND EARNINGS PER SHARE
Pro forma net income and pro forma basic and pro forma diluted earnings per
share for the three and six months ended June 30, 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.
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. 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 is computed
assuming the exercise of common stock equivalents, including the conversion of
the 5% Convertible Subordinated Notes (see Note 3) and the elimination of the
related interest expense, net of their related income tax effects. The Company's
$97,750,000 6% Convertible Subordinated Notes and $230,000,0000 4.5% Convertible
Subordinated Notes are not assumed to be converted in the Diluted Earnings Per
Share calculation as the effect is antidilutive for the three and six months
ended June 30, 1997 and 1998.
6
<PAGE>
Concentra Managed Care, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(3) REVOLVING CREDIT FACILITIES AND LONG-TERM DEBT
Debt consists of the following as of:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ------------
Restated
<S> <C> <C>
Senior Credit Facility $ 49,000,000 $ -
4.5% Convertible Subordinated Notes
due March 2003 - 230,000,000
6% Convertible Subordinated Notes
due December 2001 97,750,000 97,750,000
Other 850,000 437,000
5% Convertible Subordinated Notes
due 2006 (a) 10,000,000 -
10% Subordinated Notes (a) 7,000,000 -
PPS Credit Facility (a) 42,000,000 -
------------ ------------
Total debt 206,600,000 328,187,000
Less - Senior Credit Facility and current
portion of long-term debt 56,497,000 418,000
------------ ------------
Long-term debt $150,103,000 $327,769,000
------------ ------------
------------ ------------
</TABLE>
(a) PPS indebtedness.
On September 17, 1997, the Company entered into a $100,000,000 Senior Credit
Facility with a syndicate of five banks. Interest on borrowings under the Senior
Credit Facility is payable, at the Company's option, at the bank's prime rate or
LIBOR plus an additional percentage of up to 1.25%, depending on certain
financial criteria. 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 debt associated with its acquisition of PPS. On March 11, 1998, the
Senior Credit Facility borrowing capacity was reduced to the original
$100,000,000 amount.
On March 11, 1998, the Company issued $200,000,000 4.5% Convertible Subordinated
Notes due March 15, 2003. 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 March 10, 1998 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 and have similar terms and conditions as the 6%
Convertible Subordinated Notes.
On August 31, 1996, PPS issued $10,000,000 of 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"). In July 1997,
PPS entered into an amended and restated credit facility (the "PPS Credit
Facility") which provided for $51,500,000 of senior debt. On February 24, 1998,
the Company acquired PPS and retired $49,000,000 of PPS' outstanding
indebtedness (the PPS Credit Facility and 10% Subordinated Notes). The 5%
Convertible Subordinated Notes converted into 2,721,904 shares of Concentra
common stock.
The Senior Credit Facility contains customary covenants, including 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 as of June 30,
1998.
7
<PAGE>
Concentra Managed Care, Inc.
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 of 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
Managed Care Services provides field case management and specialized cost
containment services designed to reduce costs associated with workers'
compensation, disability and automobile accident injury 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 and automobile accident injury claims. On
February 24, 1998, the Company acquired Preferred Payment Systems, Inc. in a
pooling-of-interests transaction and significantly expanded its presence in the
out-of-network group health bill review market. The results of PPS are included
in the Managed Care Services results as part of its cost containment services.
The financial statements as of December 31, 1997 and for the three and six
months ended June 30, 1997 have been restated for the PPS merger. Managed Care
Services currently derives most of its revenues on a fee-for-service basis.
Health Services 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 six months ended June 30,
1998, Health Services derived 62.8% of its net revenues from the treatment of
work-related injuries and illnesses and 37.2% of its net revenues from
non-injury related medical services.
8
<PAGE>
Concentra Managed Care, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table provides certain information concerning the Company's
service locations:
<TABLE>
<CAPTION>
Six months
Years ended December 31, ended
----------------------------- June 30,
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Service locations at the end of the period:
Field case management 118 123 123
Cost containment services 70 83 85
Medical centers (1) 109 140 148
Physician practices acquired during the period (2) 32 22 7
Physician practices developed during the period 10 8 2
Number of affiliated physicians at the end of the period 196 252 259
Medical centers - same market growth (3) 10.7% 11.0% 11.0%
</TABLE>
(1) Does not include the assets of practices which were acquired and
subsequently divested or consolidated into existing centers within a
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).
Revenues
Total revenues increased 31.6% in the second quarter of 1998 to $158,884,000
from $120,728,000 in the second quarter of 1997. Managed Care Services' revenues
increased 34.4% in the second quarter of 1998 to $91,482,000 as field case
management revenues increased 28.1% for the second quarter of 1998 to
$44,358,000 from $34,632,000 in the second quarter of 1997 and specialized cost
containment revenues increased 41.0% in the second quarter of 1998 to
$47,124,000 from $33,431,000 in the second quarter of 1997. Health Services'
revenues increased 28.0% in the second quarter of 1998 to $67,402,000 from
$52,665,000 in the second quarter of 1997.
Total revenues increased 33.6% for the six months of 1998 to $304,428,000 from
$227,870,000 for the six months of 1997. Managed Care Services' revenues
increased 37.9% for the six months of 1998 to $177,701,000 as field case
management revenues increased 28.6% for the six months of 1998 to $86,198,000
from $67,021,000 for the six months of 1997 and specialized cost containment
revenues increased 48.1% for the six months of 1998 to $91,503,000 from
$61,801,000 for the six months of 1997. Health Services' revenues increased
27.9% for the six months of 1998 to $126,727,000 from $99,048,000 for the six
months of 1997.
The field case management revenue growth is primarily attributable to the
business generated from two field case management acquisitions, continued growth
in revenues from existing service locations and the expansion of offices in
selected areas. The specialized cost containment revenue growth is largely
attributable to the growth of PPS (including the impact of its purchase of About
Health, Inc. in August of 1997), the acquisition of FNS and other immaterial
acquisitions as well as continued growth in retrospective bill review,
telephonic case management and claims review services. 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 during the fourth quarter of 1997,
development of sites in new markets, an increase of business in existing
markets, as well as an increase in consulting and other ancillary services.
9
<PAGE>
Concentra Managed Care, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Cost of Services
Total cost of services increased 28.5% in the second quarter of 1998 to
$117,722,000 from $91,600,000 in the second quarter of 1997. Managed Care
Services' cost of services increased 27.4% in the second quarter of 1998 to
$67,772,000 from $53,189,000 in the second quarter of 1997 while Health
Services' cost of sales increased 30.0% in the second quarter of 1998 to
$49,950,000 from $38,411,000 in the second quarter of 1997.
Total cost of services increased 30.9% for the six months of 1998 to
$228,768,000 from $174,762,000 for the six months of 1997. Managed Care
Services' cost of services increased 31.8% for the six months of 1998 to
$132,530,000 from $100,546,000 for the six months of 1997 while Health Services'
cost of sales increased 29.7% for the six months of 1998 to $96,238,000 from
$74,216,000 for the six months of 1997.
Total cost of services as a percentage of revenue decreased to 74.1% in the
second quarter of 1998 compared to 75.9% in the second quarter of 1997. Managed
Care Services' cost of services as a percentage of revenue decreased to 74.1% in
the second quarter of 1998 compared to 78.1% in the second quarter of 1997,
while Health Services cost of services as a percentage of revenue increased to
74.1% in the second quarter of 1998 compared to 72.9% in the second quarter of
1997.
Total cost of services as a percentage of revenue decreased to 75.1% for the six
months of 1998 compared to 76.7% for the six months of 1997. Managed Care
Services' cost of services as a percentage of revenue decreased to 74.6% for the
six months of 1998 compared to 78.1% for the six months of 1997, while Health
Services cost of services as a percentage of revenue increased to 75.9% for the
six months of 1998 compared to 74.9% for the six months of 1997.
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 FNS and PPS, which historically
have had higher gross profit margins than revenues derived from field case
management. Health Services' gross profit margin decreased primarily as a result
of an acceleration in the roll-out of patient tracking and billing systems into
the medical centers, increased spending on marketing and facility improvements
and the impact of lower margins from practices recently acquired and developed.
Historically, 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 13.2% in the second quarter of
1998 to $11,294,000 from $9,980,000 in the second quarter of 1997, or 7.1% and
8.3% as a percentage of revenue for the second quarter of 1998 and 1997,
respectively. The increase in general and administrative expenses in 1998 was
due primarily to expenses associated with acquisitions and the continued
investment in the Information Services and Technology Group and in accounting
and administrative personnel.
General and administrative expenses increased 15.7% for the six months of 1998
to $21,993,000 from $19,013,000 for the six months of 1997, or 7.2% and 8.3% as
a percentage of revenue for the six months of 1998 and 1997, respectively. The
increase in general and administrative expenses in 1998 was due primarily to
expenses associated with acquisitions and the continued investment in the
Information Services and Technology Group and in accounting and administrative
personnel.
Amortization of Intangibles
Amortization of intangibles increased 75.8% in the second quarter of 1998 to
$2,048,000 from $1,165,000 in the second quarter of 1997, or 1.3% and 1.0% as a
percentage of revenue for the second quarter of 1998 and 1997, respectively.
Amortization of intangibles increased 69.8% for the six months of 1998 to
$4,075,000 from $2,400,000 for the six months of 1997, or 1.3% and 1.1% as a
percentage of revenue for the second quarter of 1998 and 1997, respectively.
This increase is the result of amortizing additional intangible assets such as
goodwill, customer lists and assembled workforces primarily associated with the
purchases of About Health, Inc. by PPS and FNS and various smaller acquisitions
by Health Services.
10
<PAGE>
Concentra Managed Care, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Non-Recurring Charge
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.
Interest Expense
Interest expense increased $1,823,000 in the second quarter of 1998 to
$4,588,000 from $2,765,000 in the second quarter of 1997 while interest expense
increased $3,278,000 for the six months of 1998 to $8,470,000 from $5,192,000
for the six months of 1997 due primarily to increased outstanding borrowings
under the credit facilities to finance acquisitions and the issuance of
$230,000,000 in 4.5% Convertible Subordinated Notes in March and April 1998.
Interest Income
Interest income increased $648,000 in the second quarter of 1998 to $1,429,000
from $781,000 in the second quarter of 1997 while interest income increased
$30,000 for the six months of 1998 to $1,662,000 from $1,632,000 for the six
months of 1997 due primarily to an increase in investable cash balances as a
result of the issuance of $230,000,000 in 4.5% Convertible Subordinated Notes in
March and April 1998.
Other Expense
Other expense decreased $218,000 in the second quarter of 1998 to $264,000 from
$482,000 in the second quarter of 1997 while other expense decreased $436,000
for the six months of 1998 to $373,000 from $809,000 for the six months of 1997.
Provision for Income Taxes
The Company's provision for income taxes in the second quarter and six months of
1998 was $10,236,000 and $14,803,000, respectively. The effective tax rate was
42.0% and 39.2% in the second quarters of 1998 and 1997, respectively and 49.7%
and 39.5% for the six months of 1998 and 1997, respectively. Excluding the tax
effects of the non-recurring charge, the effective tax rate would have been
42.0% for the six months of 1998. The higher tax rate for the six months of 1998
results from the non-recurring charge and the impact of the non-deductibility of
certain fees and expenses associated with the mergers. The Company expects to
continue to provide for its taxes at an effective tax rate of approximately 42%
for the remainder of the year.
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 operations was $19,834,000 for the six months of 1998
and $2,029,000 for the six months of 1997. During the six months of 1998,
working capital used $6,632,000 of cash due primarily to an increase in accounts
receivable partially offset by an increase in accounts payable and accrued
expenses and a decrease in prepaid expenses. Accounts payable and accrued
expenses increased due primarily to the $12,600,000 non-recurring charge in the
first quarter of 1998 partially offset by the payment of obligations related to
that non-recurring charge and year-end obligations, including certain
obligations associated with the non-recurring charge of $38,625,000 recorded in
the third quarter of 1997. As of June 30, 1998, the Company has a remaining
obligation of approximately $7,800,000 related to these non-recurring charges.
11
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Concentra Managed Care, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company utilized net cash of $9,141,000 in connection with acquisitions and
$18,650,000 to purchase property and equipment during the six months of 1998,
the majority of which was spent on new computer and software technology.
Cash flows provided by financing activities of $116,863,000 was due primarily to
the issuance of $230,000,000 in 4.5% Convertible Subordinated Notes,
$223,979,000 net of deferred finance fees. A portion of the proceeds from the
issuance of the 4.5% Convertible Subordinated Notes were used to repay
borrowings under the Senior Credit Facility, repay debt assumed in the merger
with PPS, and the payment of $15,047,000 to PPS dissenting shareholders.
The Company believes that its current cash balances, the cash flow generated
from operations and its borrowing capacity under the $100,000,000 Senior Credit
Facility, will be sufficient to fund the Company's working capital, medical
center acquisitions and capital expenditure requirements for at least the next
twelve months.
12
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Concentra Managed Care, Inc.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Employment Agreement dated January 12, 1998, between
Concentra Managed Care, Inc. and Richard D. Rehm, M.D.
Exhibit 10.2 Employment Agreement dated February 10, 1998, between
Concentra Managed Care, Inc. and Stephen Read.
Exhibit 10.2 - Indemnification Agreement dated May 13, 1998, between
Concentra Managed Care, Inc. and Hon. Willis D.
Gradison, Jr. (identical agreements executed between
Concentra Managed Care, Inc. and: Stephen Read
(dated December 16, 1997), Richard D. Rehm, M.D. (dated
May 13, 1998), Eliseo Ruiz III (dated May 11, 1998),
Scott Henault (dated September 17, 1997), Darla Walls
(dated December 16, 1997) Jeffrey R. Luber (dated
December 16, 1997) and Martha Kuppens (dated December
16, 1997)).
Exhibit 11 - Statement Re: Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K/A dated April 22, 1998, regarding the February 24, 1998
acquisition of the outstanding shares of Preferred Payment Systems, Inc.
Form 8-K dated April 30, 1998 regarding the Company's press release
announcing the Company's earnings for the quarter ended March 31, 1998.
13
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Concentra Managed Care, Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCENTRA MANAGED CARE, INC.
Date: August 13, 1998 By: /s/ Joseph F. Pesce
---------------------------------------
Joseph F. Pesce
Executive Vice President -
Finance and Administration,
Chief Financial Officer and Treasurer
14
<PAGE>
Concentra Managed Care, Inc.
Exhibit Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
10.1 Employment Agreement dated January 12, 1998, between Concentra Managed Care, Inc. and Richard
D. Rehm, M.D. 16
10.2 Employment Agreement dated February 10, 1998, between Concentra Managed Care, Inc. and Stephen
Read. 19
10.3 Indemnification Agreement dated May 13, 1998, between Concentra Managed Care, Inc. and Hon.
Willis D. Gradison, Jr. (identical agreements executed between Concentra Managed Care, Inc. and:
Stephen Read (dated December 16, 1997), Richard D. Rehm, M.D. (dated May 13, 1998),
Eliseo Ruiz III (dated May 11, 1998), Scott Henault (dated September 17, 1997),
Darla Walls (dated December 16, 1997) Jeffrey R. Luber (dated December 16, 1997)
and Martha Kuppens (dated December 16, 1997)). 28
11 Concentra Managed Care, Inc. - Statement Re: Computation of Per Share Earnings 35
27 Financial Data Schedule 36
</TABLE>
15
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into as
of the 12th day of January, 1998, between Concentra Managed Care, Inc., a
Delaware corporation (the "Company"), and Richard D. Rehm, M.D.
("Employee").
WITNESSETH:
WHEREAS, the Company desires to employ Employee on a part-time basis as
set forth in this Agreement and Employee desires to be employed by the Company
on such basis.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements set forth below, the parties hereto agree as follows:
1. Employment and Term; Termination.
(a) The Company hereby agrees to employ Employee as a part
time employee, and Employee hereby agrees to accept such employment, on the
terms and conditions set forth herein, for the period commencing on the date
hereof (the "Effective Date") and expiring as on the second anniversary of the
Effective Date (unless sooner terminated as hereinafter set forth) (the "Term");
provided, however, that commencing on such second anniversary date, and each
anniversary of the date hereof thereafter, the Term of this Agreement shall
automatically be extended for one additional year unless at least ninety (90)
days prior to each such anniversary date, the Company or Employee shall have
given notice that it or he, as applicable, does not wish to extend this
Agreement.
(b) Anything herein to the contrary notwithstanding, either
party may terminate this Agreement: (i) without cause, upon ninety (90) days
prior written notice to the other party, or (ii) immediately upon written notice
to the other party in the event of such other party's breach of a material
provision of this Agreement, which breach remains uncured for a period of thirty
(30) days following receipt of written notice specifyng the breach complained
of.
2. Duties and Restrictions.
(a) Duties as Employee of the Company. Employee shall perform
services hereunder in connection with product development as may be directed by
the Company's Chief Executive Officer and as shall be reasonably acceptable to
Employee. Employee's services hereunder shall be on a part-time basis and,
unless otherwise agreed by the Company and Employee shall not exceed an average
of one (1) week per month.
(b) Confidentiality. Employee shall not, directly or
indirectly, at any time during or following the termination of his employment
with the Company, reveal, divulge, or make known to any person or entity, or use
for Employee's personal benefit (including, without limitation, for the purpose
of soliciting business, whether or not competitive with any business of the
Company or any of its subsidiaries or affiliates), any information acquired
during the course of employment hereunder with regard to the financial,
business, or other affairs of the Company or any of its subsidiaries or
affiliates, other than (1) material already in the public domain, (2)
information of a type not considered confidential by persons engaged in the same
business or a similar business to that conducted by the Company, or (3) material
that Employee is required to disclose under the following circumstances: (A) in
the performance by Employee of his duties and responsibilities hereunder,
reasonably necessary or appropriate disclosure to another employee of the
Company or to representatives or agents of the Company (such as independent
public accountants and legal counsel); (B) at the express direction of any
authorized governmental entity; (C) pursuant to a subpoena or other court
process; or (D) as otherwise required by law or the rules, regulations, or
orders of any applicable regulatory body.
16
<PAGE>
3. Compensation and Related Matters.
(a) Base Salary. Employee shall receive a base salary paid by
the Company ("Base Salary") at the annual rate of Fifty Thousand Dollars
($50,000) during each calendar year of the Term, payable in substantially equal
monthly installments (or such other more frequent times as executives of the
Company normally are paid). In addition, the Company shall, in good faith,
consider granting increases in the Base Salary based on Employee's performance
hereunder, changes to Employee's duties hereunder, and/or changes to Employee's
time commitment to the Company hereunder.
(b) Bonus Payments; Stock Options. Employee shall be entitled
to receive, in addition to the Base Salary, such bonus payments, if any, as the
Company may specify. The Company shall in good faith recommend for approval by
the Option and Compensation Committee of the Company's Board of Directors (the
"Committee") an award of options to purchase 25,000 shares of the Company's
common stock and shall in addition recommend such other awards as shall be
reasonably commensurate with Employee's contribution to the successful
development of a workers' compensation risk product; any such awards are subject
to the Committee's approval in its sole discretion.
(c) Expenses. During the term of his employment hereunder,
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in accordance with the policies and procedures
established by the Board of Directors for its senior executive officers) in
performing services hereunder, including, without limitation pursuant to Section
3(e), provided that Employee properly accounts therefor in accordance with
Company policy.
(d) Other Benefits. Employee shall be entitled to participate
in or receive benefits under any employee benefit plan or other arrangement made
available by the Company now or in the future to its senior executive officers
and key management employees, subject to and on a basis consistent with the
terms, conditions, and overall administration of such plan or arrangement.
(e) Use of Condominium; Professional Expenses. Employee shall
during the Term have the use of the Company's condominium located in, Dallas,
Texas, or a reasonable substitute therefore in the event of the sale of such
property by the Company. The Company will reimburse Employee for the following
expenses related to Employee's professional licensure and certifications: (i)
annual state professional license fees for the states in which Employee is
licensed to practice medicine; (ii) annual dues for the American College of
Occupational and Environmental Medicine, and the annual dues for membership in
other specialty societies related to Employee's professional specialty; and (iv)
annual continuing medical education expenses in an amount not to exceed $3,000.
4. Successors; Binding Agreement.
(a) Successors. This Agreement shall be binding upon, and
inure to the benefit of, the Company, Employee, and their respective successors,
assigns, personal and legal representatives, executors, administrators, heirs,
distributees, devisees, and legatees, as applicable.
(b) Assumption. The Company will require any successor
(whether direct or indirect, by purchase of securities, merger, consolidation,
sale of assets, or otherwise) to all or substantially all of the business or
assets of the Company, by an agreement in form and substance reasonably
satisfactory to Employee, to expressly assume this Agreement and to agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
(c) Certain Payments. If Employee should die while any amounts
would still be payable to him hereunder if he had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in
17
<PAGE>
accordance with the terms of this Agreement to Employee's devisee, legatee, or
other designee or, if there be no such designee, to Employee's estate.
5. Notice. For purposes of this Agreement, all notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when (a) delivered personally, (b) sent by
facsimile or similar electronic device and confirmed, (c) delivered by overnight
express, or (d) if sent by any other means, upon receipt. Notices and all other
communications provided for in this Agreement shall be addressed as follows:
If to Employee: Richard D. Rehm, M.D.
RR 1, Box 257
Richville, Minnesota 56576
If to the Company: Concentra Managed Care, Inc.
312 Union Wharf
Boston, Massachusetts 02109
Fax No.: (617) 367-8519
Attention: Chief Executive Officer
With a copy to: Concentra Managed Care, Inc.
3010 LBJ Freeway, Suite 400
Dallas, Texas 75234
Fax No.: (972) 243-7540
Attention: General Counsel
or to such other address as either party may have furnished to the other in
writing in accordance herewith.
6. Miscellaneous. No provision of this Agreement may be modified,
waived, or discharged unless such waiver, modification, or discharge is agreed
to in a written instrument signed by Employee and the Company. No waiver by
either party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement. The validity,
interpretation, construction, and performance of this Agreement shall be
governed by the laws of the State of Delaware, excluding any choice-of-law
provisions thereof.
7. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
8. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same agreement.
9. Entire Agreement; Effectiveness. This Agreement constitutes the
entire agreement between the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date and year first above written.
THE COMPANY: EMPLOYEE:
CONCENTRA MANAGED CARE, INC.
a Delaware corporation
/s/ Richard D. Rehm, M.D.
------------------------------
Richard D. Rehm, M.D.
By: /s/ Donald J. Larson
------------------------------
Donald J. Larson
Chairman and Chief Executive Officer
18
<PAGE>
Exhibit 10.2
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered
into as of the 10th day of February, 1998, between Concentra Managed Care,
Inc., a Delaware corporation (the "Company"), and Stephen Read ("Executive").
WITNESSETH:
WHEREAS, Executive serves as the Vice President and Controller of
the Corporation; and
WHEREAS, it is the desire of the Board of Directors of the Company
(the "Board of Directors") to assure itself of the management services of
Executive by directly engaging Executive hereunder as an officer of the
Company and its subsidiaries and affiliates; and
WHEREAS, Executive is desirous of committing himself to continue to
serve the Company on the terms herein provided.
NOW, THEREFORE, in consideration of the foregoing and of the
respective covenants and agreements set forth below, the parties hereto agree
as follows:
Employment and Term. The Company hereby agrees to employ
Executive as its Vice President and Controller, and Executive hereby agrees
to accept such employment, on the terms and conditions set forth herein, for
the period commencing on the date hereof (the "Effective Date") and expiring
as of 11:59 p.m. on the second anniversary of the Effective Date (unless
sooner terminated as hereinafter set forth) (the "Term"); provided, however,
that commencing on such second anniversary date, and each anniversary of the
date hereof thereafter, the Term of this Agreement shall automatically be
extended for one additional year unless at least thirty (30) days prior to
each such anniversary date, the Company or Executive shall have given notice
that it or he, as applicable, does not wish to extend this Agreement.
Duties and Restrictions.
(a) Duties as Employee of the Company. Executive shall,
subject to the supervision of the Company's Executive Vice President and
Chief Financial Officer, serve as the Company's Vice President and Controller
with all such powers as may be set forth in the Company's Bylaws with respect
to, and/or are reasonably incident to, such officerships.
(b) Other Duties. Executive agrees to serve as requested by
the Company as a director of the Company's subsidiaries and affiliates and in
one or more executive offices of any of the Company's subsidiaries and
affiliates; provided, that the Company indemnifies Executive for serving in
any and all such capacities in a manner acceptable to the Company and
Executive. Executive agrees that he shall not be entitled to receive any
compensation for serving in any capacities of the Company's subsidiaries and
affiliates other than the compensation to be paid to Executive by the Company
pursuant to this Agreement.
(c) Noncompetition. Executive agrees that he will not, for
a period of one year following the termination of his employment with the
Company, (1) solicit the employment of, endeavor to entice away from the
Company or its subsidiaries or affiliates or otherwise interfere with any
person who was an employee of or consultant to the Company or any of its
subsidiaries or affiliates during the one year period preceding such
termination, or (2) be employed by, associated with, or have any interest in,
directly or indirectly (whether as principal, director, officer, employee,
consultant, partner, stockholder, trustee, manager, or otherwise), any
occupational healthcare company or managed care company which has a principal
line of business that is directly competitive with the Company or its
subsidiaries or affiliates in any geographical area in which the Company or
its subsidiaries or affiliates engage in business at the time of such
termination or in which any of them, prior to
19
<PAGE>
termination of Executive's employment, evidenced in writing its intention to
engage in business. Notwithstanding the foregoing, Executive shall not be
prohibited from owning five percent or less of the outstanding equity
securities of any entity whose equity securities are listed on a national
securities exchange or publicly traded in any over-the-counter market.
(d) Confidentiality. Executive shall not, directly or
indirectly, at any time during or following the termination of his employment
with the Company, reveal, divulge, or make known to any person or entity, or
use for Executive's personal benefit (including, without limitation, for the
purpose of soliciting business, whether or not competitive with any business
of the Company or any of its subsidiaries or affiliates), any information
acquired during the course of employment hereunder with regard to the
financial, business, or other affairs of the Company or any of its
subsidiaries or affiliates (including, without limitation, any list or record
of persons or entities with which the Company or any of its subsidiaries or
affiliates has any dealings), other than (1) material already in the public
domain, (2) information of a type not considered confidential by persons
engaged in the same business or a similar business to that conducted by the
Company, or (3) material that Executive is required to disclose under the
following circumstances: (A) in the performance by Executive of his duties
and responsibilities hereunder, reasonably necessary or appropriate
disclosure to another employee of the Company or to representatives or agents
of the Company (such as independent public accountants and legal counsel);
(B) at the express direction of any authorized governmental entity; (C)
pursuant to a subpoena or other court process; (D) as otherwise required by
law or the rules, regulations, or orders of any applicable regulatory body;
or (E) as otherwise necessary, in the opinion of counsel for Executive, to be
disclosed by Executive in connection with the prosecution of any legal action
or proceeding initiated by Executive against the Company or any subsidiary or
affiliate of the Company or the defense of any legal action or proceeding
initiated against Executive in his capacity as an employee or director of the
Company or any subsidiary or affiliate of the Company. Executive shall, at
any time requested by the Company (either during or after his employment with
the Company), promptly deliver to the Company all memoranda, notes, reports,
lists, and other documents (and all copies thereof) relating to the business
of the Company or any of its subsidiaries or affiliates which he may then
possess or have under his control.
3. Compensation and Related Matters.
(a) Base Salary. Executive shall receive a base salary paid
by the Company ("Base Salary") at the annual rate of One Hundred Fifty
Thousand Dollars ($150,000) during each calendar year of the Term, payable in
substantially equal monthly installments (or such other more frequent times
as executives of the Company normally are paid). In addition, the Company's
Board of Directors or Option and Compensation Committee of the Board of
Directors shall, in good faith, consider granting increases in the Base
Salary based on such factors as Executive's performance and the growth and/or
profitability of the Company, but the Company shall have no obligation to
grant such increases in compensation.
(b) Bonus Payments. Executive shall be entitled to receive,
in addition to the Base Salary, such bonus payments, if any, as the Board of
Directors or the Option and Compensation Committee of the Board of Directors
may specify.
(c) Expenses. During the term of his employment hereunder,
Executive shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by him (in accordance with the policies and
procedures established by the Board of Directors for its senior executive
officers) in performing services hereunder, provided that Executive properly
accounts therefor in accordance with Company policy.
(d) Other Benefits. The Company shall not make any changes
in any employee benefit plans or other arrangements in effect on the date
hereof or subsequently in effect in which Executive currently or in the
future participates (including, without limitation, each pension and
retirement plan, supplemental pension and retirement plan, savings and profit
sharing plan, stock or unit ownership plan, stock or unit purchase plan,
stock or unit option plan, life insurance plan, medical insurance plan,
disability plan, dental plan, health-and-accident plan, or any other similar
plan or arrangement) that would adversely affect Executive's rights or
benefits thereunder, unless such change occurs pursuant to a program
applicable to all officers of the Company and does not result in a
proportionately greater reduction in the rights of or benefits to Executive
as compared with any other officer of the
20
<PAGE>
Company. Executive shall be entitled to participate in or receive benefits
under any employee benefit plan or other arrangement made available by the
Company now or in the future to its officers and key management employees,
subject to and on a basis consistent with the terms, conditions, and overall
administration of such plan or arrangement. Nothing paid to Executive under
any plan or arrangement presently in effect or made available in the future
shall be deemed to be in lieu of the Base Salary payable to Executive
pursuant to paragraph (a) of this Section 3.
(e) Vacations. Executive shall be entitled to twenty (20)
paid vacation days in each calendar year commencing on or after January 1,
1998, or such additional number as may be determined by the Board of
Directors from time to time. For purposes of this Section 3(e), weekends
shall not count as vacation days and Executive shall also be entitled to all
paid holidays given by the Company to its officers.
(f) Perquisites. Executive shall be entitled to receive the
perquisites and fringe benefits appertaining to officers of the Company in
accordance with any practice established by the Board of Directors. In the
event Executive's employment hereunder is terminated (whether by Executive or
the Company) for any reason whatsoever (other than Executive's death), then
the Company shall, at Executive's written request and to the extent permitted
by the terms of such policies and applicable law, assign and convey to
Executive any life insurance policies maintained by the Company on the life
of Executive, who shall thereafter be solely responsible, at his election, to
pay all premiums payable after such assignment and conveyance to maintain the
coverage under such policies with respect to Executive. Executive shall not
be required to pay any money or other consideration to the Company upon such
assignment and conveyance, it being acknowledged and agreed by the parties
hereto that Executive's execution and delivery hereof constitute adequate and
satisfactory consideration for such assignment and conveyance.
(g) Proration. Any payments or benefits payable to
Executive hereunder in respect of any calendar year during which Executive is
employed by the Company for less than the entire year, unless otherwise
provided in the applicable plan or arrangement, shall be prorated in
accordance with the number of days in such calendar year during which he is
so employed.
4. Executive's Office and Relocation. Executive shall primarily
perform his duties and responsibilities hereunder at the Company's offices
located at 130 Second Avenue, Waltham, Massachusetts (or at such other
location within the Boston, Massachusetts, metropolitan area, to which the
Company may in the future relocate such principal executive offices), except
for reasonable required travel on the Company's business. If the Company
requests Executive to report for the performance of his services hereunder on
a regular or permanent basis at any location or office more than thirty-five
(35) miles from 130 Second Avenue, Waltham, Massachusetts, and Executive
agrees to such change, the Company shall pay Executive's reasonable
relocation and moving expenses, including, but not limited to, the cost of
moving his immediate family, expenses incurred while seeking new housing
(including travel by Executive's spouse) and temporary living expenses
incurred by Executive or his family for up to one hundred eighty (180) days.
5. Termination. Executive's employment hereunder may be terminated
by the Company or Executive, as applicable, without any breach of this
Agreement, only under the following circumstances.
(a) Death. Executive's employment hereunder shall terminate
upon his death.
(b) Disability. If, as a result of Executive's incapacity
due to physical or mental illness, Executive shall have been unable, with
reasonable accommodation, to perform the essential functions of his duties
and responsibilities hereunder on a full time basis for one hundred eighty
(180) consecutive calendar days, and within thirty (30) days after written
notice of termination is given (which may occur before or after the end of
such one hundred eighty (180) day period) Executive shall not have returned
to the performance of his material managerial duties and responsibilities
hereunder on a full time basis, the Company may terminate Executive's
employment hereunder.
21
<PAGE>
(c) Cause. Subject to the provisions of Section 7(d), the
Company may terminate Executive's employment hereunder for Cause. For
purposes of this Agreement, the Company shall have "Cause" to terminate
Executive's employment hereunder upon:
(1) Executive's willful or intentional failure to
perform Executive's material duties and
responsibilities hereunder (other than any such
failure resulting from Executive's incapacity due
to physical or mental illness or any such actual
or anticipated failure after the issuance of a
Notice of Termination for Good Reason (as
hereinafter defined) by Executive);
(2) The commission by Executive of dishonesty or fraud
of a material nature in connection with the
performance of his duties hereunder, intentional
violation of law or governmental regulation of a
material nature in connection with the performance
of his duties hereunder, or willful or intentional
misconduct of a material nature in connection with
the performance of his duties hereunder;
(3) Unprofessional or unethical conduct of a material
nature by Executive in connection with the
performance of his duties hereunder as determined
in a final adjudication of any board, institution,
organization or governmental agency having any
privilege or right to pass upon the conduct of
Executive;
(4) Intentional or willful conduct by Executive which
is materially detrimental to the reputation,
character, business, or standing of the Company; or
(5) The continued breach by Executive of any of
Executive's material obligations under this
Agreement.
(d) Termination by Executive. Subject to the provisions of
Section 7(c), and at his option, Executive may terminate his employment
hereunder (1) for Good Reason, or (2) if his health should become impaired to
an extent that makes the continued performance of his duties hereunder
hazardous to his physical or mental health or his life.
For purposes of this Agreement, the termination of Executive's
employment hereunder by Executive because of the occurrence of any one or
more of the following events within six (6) months following a Change in
Control (as hereinafter defined) shall be deemed to have occurred for "Good
Reason":
(A) a material change in the nature or scope of
Executive's authorities, status, powers,
functions, duties, responsibilities, or reporting
relationships that is determined by Executive in
good faith to be adverse to those existing before
such change;
(B) any removal by the Company of Executive from, or
any failure to reelect Executive to, the positions
indicated in Section 1 hereof except in connection
with termination of Executive's employment for
Cause or disability;
(C) a reduction in Executive's Base Salary or any
other failure by the Company to comply with
Section 3 hereof that is not consented to or
approved by Executive;
(D) the relocation of Executive's office at which he
is to perform his duties and responsibilities
hereunder to a location outside of the Boston,
Massachusetts, metropolitan area, or a materially
adverse alteration in the office space within
which Executive is to perform his duties and
responsibilities hereunder or in the secretarial
and administrative support provided to Executive;
or
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(E) a failure by the Company or any subsidiary or
affiliate of the Company to comply with any other
material term or provision hereof or of any other
written agreement between Executive and the
Company or any such subsidiary or affiliate.
As used herein "Change in Control" shall have the meaning
set forth in the Concentra Managed Care, Inc., 1997 Long-Term Incentive Plan.
6. Compensation Upon Termination. Executive shall be entitled to the
following compensation from the Company upon the termination of his
employment.
(a) Death. If Executive's employment shall be terminated by
reason of his death, the Company shall pay to such person as shall have been
designated in a notice filed with the Company prior to Executive's death, or,
if no such person shall be designated, to his estate as a death benefit, his
Base Salary to the date of his death in addition to any payments Executive's
spouse, beneficiaries, or estate may be entitled to receive pursuant to any
pension or employee benefit plan or other arrangement or life insurance
policy maintained by the Company. In addition, the Company shall make
payments of premiums to continue the medical and dental insurance coverage of
Executive's spouse and children under age twenty-five (25) as in effect at
and as of the date of Executive's death (or to provide as similar coverage as
possible for the same premiums if the continuation of existing coverage is
not permitted) for one (1) year after the date of Executive's death, in each
case to the extent such coverage is available.
(b) Disability. During any period that Executive fails to
perform his material managerial duties and responsibilities hereunder as a
result of incapacity due to physical or mental illness, Executive shall
continue to receive his Base Salary and any bonus payments until Executive's
employment is terminated pursuant to Section 5(b) hereof or until Executive
terminates his employment pursuant to Section 5(d)(2) hereof, whichever first
occurs. After such termination, the Company shall pay to Executive, on or
before the fifth day following the Date of Termination (as hereinafter
defined) his Base Salary to the Date of Termination. In addition, the Company
shall make payments of premiums as necessary to cause Executive and
Executive's spouse and children under age twenty-five (25) to continue to be
covered by the medical and dental insurance as in effect at and as of the
Date of Termination (or to provide as similar coverage as possible for the
same premiums if the continuation of existing coverage is not permitted) for
one (1) year after the Date of Termination, in each case to the extent such
coverage is available.
(c) Cause. If Executive's employment shall be terminated
for Cause, the Company shall pay Executive his Base Salary through the Date
of Termination at the rate in effect at the time Notice of Termination is
given. Such payments shall fully discharge the Company's obligations
hereunder.
(d) Breach by the Company or for Good Reason, or Upon
Failure to Renew Following Change in Control. If (1) in breach of this
Agreement, the Company shall terminate Executive's employment (it being
understood that a purported termination of Executive's employment by the
Company pursuant to any provision of this Agreement that is disputed and
finally determined not to have been proper shall be a termination by the
Company in breach of this Agreement), or (2) Executive shall terminate his
employment for Good Reason, or (3) following a Change in Control, the Company
shall give Executive notice pursuant to Section 1 prior to any anniversary of
the date hereof that the Term of this Agreement shall not be automatically
extended for an additional year on any such anniversary date, then the
Company shall pay Executive:
(A) his Base Salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given;
(B) in lieu of any further salary payments to Executive for
periods subsequent to the Date of Termination, the Company
shall pay as severance pay to Executive, commencing on or
before the fifth day following the Date of Termination and
on the fifth day of each of the next eleven (11) months
thereafter (amounting to a total of twelve (12) months), an
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amount equal to one-twelfth (1/12) of Executive's annual
Base Salary at the rate in effect at the time the Notice of
Termination is given; and
(C) all benefits payable under the terms of any employee
benefit plan or other arrangement as of the Date of
Termination.
In addition, the Company shall make payments of premiums as
necessary to cause Executive and Executive's spouse and children under age
twenty-five (25) to continue to be covered by the medical and dental
insurance as in effect at and as of the Date of Termination (or to provide as
similar coverage as possible for the same premiums if the continuation of
existing coverage is not permitted) for one (1) year after the Date of
Termination, in each case to the extent such coverage is available.
(e) Mitigation. Executive shall not be required to mitigate
the amount of any payment provided for in this Section 6 by seeking other
employment or otherwise, nor shall the amount of any payment provided for in
this Section 6 be reduced by any compensation earned by Executive as the
result of employment by another employer after the Date of Termination, or
otherwise.
7. Other Provisions Relating to Termination.
(a) Notice of Termination. Any termination of Executive's
employment by the Company or by Executive (other than termination because of
the death of Executive) shall be communicated by written Notice of
Termination to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated.
(b) Date of Termination. For purposes of this Agreement,
"Date of Termination" shall mean: (1) if Executive's employment is terminated
by his death, the date of his death; (2) if Executive's employment is
terminated because of a disability pursuant to Section 5(b), then thirty (30)
days after Notice of Termination is given (provided that Executive shall not
have returned to the performance of his duties on a full-time basis during
such thirty (30) day period); (3) if Executive's employment is terminated by
the Company for Cause or by Executive for Good Reason, then, subject to
Sections 7(c) and 7(d), the date specified in the Notice of Termination; (4)
if the Company gives Executive notice pursuant to Section 1 prior to any
anniversary of the date hereof that the Term of this Agreement shall not be
automatically extended for an additional year on any such anniversary date,
the date upon which the Term expires; and (5) if Executive's employment is
terminated for any other reason, the date on which a Notice of Termination is
given.
(c) Good Reason. Upon the occurrence of an event described
in clauses (A) through (E) of Section 5(d), Executive may terminate his
employment hereunder for Good Reason within one hundred eighty (180) days
thereafter by giving a Notice of Termination to the Company to that effect.
If the effect of the occurrence of the event described in clauses (A) through
(E) of Section 5(d) may be cured, the Company shall have the opportunity to
cure any such effect for a period of thirty (30) days following receipt of
Executive's Notice of Termination. If the Company fails to cure any such
effect, the termination for Good Reason shall become effective on the date
specified in Executive's Notice of Termination. If Executive does not give
such Notice of Termination to the Company, then this Agreement will remain in
effect; provided, however, that the failure of Executive to terminate this
Agreement for Good Reason shall not be deemed a waiver of Executive's right
to terminate his employment for Good Reason upon the occurrence of a
subsequent event described in clauses (A) through (E) of Section 5(d) in
accordance with the terms of this Agreement.
(d) Cause. In the case of any termination of Executive for
Cause, the Company will give Executive a Notice of Termination describing in
reasonable detail, the facts or circumstances giving rise to Executive's
termination (and, if applicable, the action required to cure same) and will
permit Executive thirty (30) days to cure such failure to comply or perform.
Cause for Executive's termination will not be deemed to exist until the
expiration of the foregoing cure period, so long as Executive continues to
use his best efforts during the cure
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<PAGE>
period to cure such failure. If within thirty (30) days following Executive's
receipt of a Notice of Termination for Cause (1) Executive delivers written
notice to the Company denying that Cause exists, the question of the
existence or nonexistence of Cause will be submitted for arbitration in
accordance with Section 10; or (2) if Executive has not cured the facts or
circumstances giving rise to Executive's termination for Cause and shall not
have delivered a notice pursuant to clause (1) of this Section 7(d), then
Executive's termination for Cause shall be effective as of the date specified
in the Notice of Termination.
(e) Interest. Until paid, all past due amounts required to
be paid by the Company under any provision of this Agreement shall bear
interest at the highest non-usurious rate permitted by applicable federal,
state, or local law.
8. Successors; Binding Agreement.
(a) Successors. This Agreement shall be binding upon, and
inure to the benefit of, the Company, Executive, and their respective
successors, assigns, personal and legal representatives, executors,
administrators, heirs, distributees, devisees, and legatees, as applicable.
(b) Assumption. The Company will require any successor
(whether direct or indirect, by purchase of securities, merger,
consolidation, sale of assets, or otherwise) to all or substantially all of
the business or assets of the Company, by an agreement in form and substance
reasonably satisfactory to Executive, to expressly assume this Agreement and
to agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had
taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle Executive to compensation from the Company in the same amount
and on the same terms as he would be entitled to hereunder if he terminated
his employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
(c) Certain Payments. If Executive should die while any
amounts would still be payable to him hereunder if he had continued to live,
all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to Executive's devisee, legatee,
or other designee or, if there be no such designee, to Executive's estate.
9. Notice. For purposes of this Agreement, all notices and all other
communications provided for in this Agreement shall be in writing and shall
be deemed to have been duly given when (a) delivered personally, (b) sent by
facsimile or similar electronic device and confirmed, (c) delivered by
overnight express, or (d) if sent by any other means, upon receipt. Notices
and all other communications provided for in this Agreement shall be
addressed as follows:
If to Executive:
One Penobscot Street
Medfield, Massachusetts 02052
If to the Company:
Concentra Managed Care, Inc.
312 Union Wharf
Boston, Massachusetts 02109
Fax No.: (617) 367-8519
Attention: Chief Executive Officer
With a copy to:
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Concentra Managed Care, Inc.
5080 Spectrum Drive, Suite 400 - West Tower
Dallas, Texas 75248
Fax No.: (972) 387-1938
Attention: General Counsel
or to such other address as either party may have furnished to the other in
writing in accordance herewith.
10. Disputes. In the event any dispute or controversy arises under
this Agreement and is not resolved by mutual written agreement between
Executive and the Company within thirty (30) days after notice of the dispute
is first given, then, upon the written request of Executive or the Company,
such dispute or controversy shall be submitted to arbitration, which
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association. Judgment may be entered thereon and the results of
arbitration will be binding and conclusive on the parties hereto. Any
arbitrator's award or finding or any judgment or verdict thereon will be
final and unappealable. All parties agree that venue for arbitration will be
in the city specified in Section 4, and that any arbitration commenced in any
other venue will be transferred to such venue, upon the written request of
any party to this Agreement. The prevailing party will be entitled to
reimbursement for reasonable attorneys fees, costs, or other expenses
pertaining to the arbitration and the enforcement thereof and such attorneys
fees, costs, or other expenses shall become a part of any award, judgment, or
verdict. All arbitrations will have three individuals acting as arbitrators:
one arbitrator will be selected by Executive, one arbitrator will be selected
by the Company, and the two arbitrators so selected will select a third
arbitrator. Any arbitrator selected by a party will not be affiliated with,
associated with, or related to the party selecting that arbitrator in any
matter whatsoever. The decision of the majority of the arbitrators will be
binding on all parties.
11. Miscellaneous. No provision of this Agreement may be modified,
waived, or discharged unless such waiver, modification, or discharge is
agreed to in a written instrument signed by Executive and the Company. No
waiver by either party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this
Agreement. The validity, interpretation, construction, and performance of
this Agreement shall be governed by the laws of the State of Delaware,
excluding any choice-of-law provisions thereof.
12. Attorney Fees. Except as otherwise provided in Section 10, all
legal fees and costs incurred by Executive in connection with the resolution
of any dispute or controversy under or in connection with this Agreement
shall be reimbursed by the Company to Executive as bills for such services
are presented by Executive to the Company, unless such dispute or controversy
is found to have been brought not in good faith or without merit by a court
of competent jurisdiction.
13. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
14. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, but all of
which together will constitute one and the same agreement.
15. Entire Agreement; Effectiveness. This Agreement constitutes the
entire agreement between the parties with respect to the subject matter
hereof and supersedes any and all prior employment agreements and/or
severance protection letters, agreements, or arrangements between Executive,
on the one hand, and the Company, CRA Managed Care, Inc., or any other
predecessor in interest thereto or any of their respective subsidiaries, on
the other hand.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date and year first above written.
COMPANY:
CONCENTRA MANAGED CARE, INC.
a Delaware corporation
By: /s/ Donald J. Larson
--------------------------------------
Donald J. Larson
President and Chief Executive Officer
EXECUTIVE:
/s/ Stephen Read
---------------------------------
Stephen Read
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Exhibit 10.3
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the "Agreement") is made and entered
into as of this 13th day of May, 1998, by and between Concentra Managed Care,
Inc., a Delaware corporation (the "Corporation"), and Hon. Willis D.
Gradison, Jr., a Virginia resident ("Indemnitee").
RECITALS:
A. Competent and experienced persons are reluctant to serve or to
continue to serve corporations as directors or in other capacities unless
they are provided with adequate protection through insurance or
indemnification (or both) against claims and actions against them arising out
of their service to and activities on behalf of those corporations.
B. The current uncertainties relating to the availability of
adequate insurance for directors and officers have increased the difficulty
for corporations to attract and retain competent and experienced persons.
C. The Board of Directors of the Corporation has determined that the
continuation of present trends in litigation will make it more difficult to
attract and retain competent and experienced persons, that this situation is
detrimental to the best interests of the Corporation's stockholders, and that
the Corporation should act to assure its directors and officers that there
will be increased certainty of adequate protection in the future.
D. The Certificate of Incorporation of the Corporation requires the
Corporation to indemnify its directors and officers to the fullest extent
permitted by law.
E. It is reasonable, prudent, and necessary for the Corporation to
obligate itself contractually to indemnify its directors and officers to the
fullest extent permitted by applicable law in order to induce them to serve
or continue to serve the Corporation.
F. Indemnitee is willing to serve, continue to serve, and to take on
additional service for or on behalf of the Corporation on the condition that
he be indemnified to the fullest extent permitted by law.
G. Concurrently with the execution of this Agreement, Indemnitee is
agreeing to serve or to continue to serve as a director or officer of the
Corporation.
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AGREEMENTS:
NOW, THEREFORE, in consideration of the foregoing premises,
Indemnitee's agreement to serve or continue to serve as a director or officer
of the Corporation, and the covenants contained in this Agreement, the
Corporation and Indemnitee hereby covenant and agree as follows:
1. Certain Definitions:
(a) "Acquiring Person" means any Person other than (i) the
Corporation, (ii) any of the Corporation's Subsidiaries, (iii) any employee
benefit plan of the Corporation or of a Subsidiary of the Corporation or of a
corporation owned directly or indirectly by the stockholders of the
Corporation in substantially the same proportions as their ownership of stock
of the Corporation, (iv) any trustee or other fiduciary holding securities
under an employee benefit plan of the Corporation or of a Subsidiary of the
Corporation or of a corporation owned directly or indirectly by the
stockholders of the Corporation in substantially the same proportions as
their ownership of stock of the Corporation, or (v) any Person who, as of
January 1, 1997, was the "beneficial owner" (as hereinafter defined),
directly or indirectly, of securities of the Corporation representing twenty
percent or more of the combined voting power of the Voting Securities of the
Corporation outstanding as of such date.
(b) "Change in Control" means the occurrence of any of the
following events:
(i) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either (x) the then
outstanding shares of Common Stock of the Corporation (the "Outstanding
Corporation Common Stock") or (y) the combined voting power of the then
outstanding voting securities of the Corporation entitled to vote generally
in the election of directors (the "Outstanding Corporation Voting
Securities"); provided, however, that for purposes of this Subparagraph (i),
the following acquisitions shall not constitute a Change of Control: (A) any
acquisition directly from the Corporation, (B) any acquisition by the
Corporation, (C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Corporation or any corporation
controlled by the Corporation or (D) any acquisition by any corporation
pursuant to a transaction which complies with clauses (A), (B) and (C) of
paragraph (iii) below; or
(ii) Individuals who, as of the date of this Plan,
constitute the Board of Directors cease for any reason to constitute at least
a majority of the Incumbent Board;
(iii) Consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
assets of the Corporation or an acquisition of assets of another corporation
(a "Business Combination"), in each case, unless, following such Business
Combination, (A) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly, more
than 50% of, respectively, the then outstanding shares of common stock and
the combined voting power of the then outstanding voting securities entitled
to vote generally in the election of directors, as the case may be, of the
corporation resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns the
Corporation or all or substantially all of the Corporation's assets either
directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business
Combination, of the Outstanding Corporation Common Stock and Outstanding
Corporation Voting Securities, as the case may be, (B) no Person (excluding
any employee benefit plan (or related trust) of the Corporation or the
corporation resulting from the Business Combination) beneficially owns,
directly or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership of
the Corporation existed prior to the Business Combination and (C) at least a
majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent Board
at the time of the execution of the initial agreement, or of the action of
the Board, providing for such Business Combination; or
(iv) Approval by the stockholders of the Corporation of a
complete liquidation or dissolution of the Corporation.
(c) "Claim" means any threatened, pending, or completed action,
suit, or proceeding (including, without limitation, securities laws actions,
suits, and proceedings), or any inquiry or investigation (including
discovery), whether conducted by the Corporation or any other party, that
Indemnitee in good faith believes might lead to the institution of any
action, suit, or proceeding, whether civil, criminal, administrative,
investigative, or other.
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(d) "Expenses" means all costs, expenses (including attorneys'
and expert witnesses' fees), and obligations paid or incurred in connection
with investigating, defending (including affirmative defenses and
counterclaims), being a witness in, or participating in (including on
appeal), or preparing to defend, be a witness in, or participate in, any
Claim relating to any Indemnifiable Event.
(e) "Incumbent Board" means the individuals who, as of the date
of this Agreement, constitute the Board of Directors and any other individual
who becomes a director of the Corporation after that date and whose election
or appointment by the Board of Directors or nomination for election by the
Corporation's stockholders was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened solicitation
of proxies or consents by or on behalf of a Person other than the Incumbent
Board.
(f) "Indemnifiable Event" means any event or occurrence related
to the fact that Indemnitee is or was a director, member of a committee of
the board of directors, officer, employee, agent, or fiduciary of the
Corporation, or is or was serving at the request of the Corporation as a
director, member of a committee of the Board of Directors, officer, employee,
trustee, agent, or fiduciary of another corporation, partnership, joint
venture, employee benefit plan, trust, or other enterprise, or by reason of
any thing done or not done by Indemnitee in any such capacity. For purposes
of this Agreement, the Corporation agrees that Indemnitee's service on behalf
of or with respect to any Subsidiary of the Corporation shall be deemed to be
at the request of the Corporation.
(g) "Person" means any person or entity of any nature whatsoever,
specifically including (but not limited to) an individual, a firm, a company,
a corporation, a limited liability company, a partnership, a trust or other
entity. A Person, together with that Person's affiliates and associates (as
those terms are defined in Rule 12b-2 under the Exchange Act for purposes of
this definition only), and any Persons acting as a partnership, limited
partnership, joint venture, association, syndicate or other group (whether or
not formally organized), or otherwise acting jointly or in concert or in a
coordinated or consciously parallel manner (whether or not pursuant to any
express agreement), for the purpose of acquiring, holding, voting or
disposing of securities of the Corporation with that Person, shall be deemed
a single "Person."
(h) "Potential Change in Control" shall be deemed to have
occurred if (i) the Corporation enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control; (ii) any Person
(including the Corporation) publicly announces an intention to take or to
consider taking actions that, if consummated, would constitute a Change in
Control; (iii) after the Corporation has become a reporting company under the
Exchange Act, any Acquiring Person who is or becomes the beneficial owner,
directly or indirectly, of securities of the Corporation representing 10% or
more of the combined voting power of the then outstanding Voting Securities
of the Corporation increases his beneficial ownership of such securities by
5% or more over the percentage so owned by that Person on the date hereof; or
(iv) the Board of Directors of the Corporation adopts a resolution to the
effect that, for purposes of this Agreement, a Potential Change in Control
has occurred.
(i) "Reviewing Party" means any appropriate person or body
consisting of a member or members of the Corporation's Board of Directors or
any other person or body appointed by the Board (including Special Counsel
referred to in Section 3) who is not a party to the particular Claim for
which Indemnitee is seeking indemnification.
(j) "Special Counsel" means special, independent counsel selected
by Indemnitee and approved by the Corporation (which approval shall not be
unreasonably withheld), and who has not otherwise performed services for the
Corporation or for Indemnitee within the last three years (other than as
Special Counsel under this Agreement or similar agreements).
(k) "Subsidiary" means, with respect to any Person, any
corporation or other entity of which a majority of the voting power of the
voting equity securities or equity interest is owned, directly or indirectly,
by that Person.
(l) "Voting Securities" means any securities that vote generally
in the election of directors or in the selection of any other similar
governing body.
2. Basic Indemnification and Expense Reimbursement Arrangement.
------------------------------------------------------------
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(a) In the event Indemnitee was, is, or becomes a party to or
witness or other participant in, or is threatened to be made a party to or
witness or other participant in, a Claim by reason of (or arising in part out
of) an Indemnifiable Event, the Corporation shall indemnify Indemnitee to the
fullest extent permitted by law as soon as practicable but in any event no
later than 30 days after written demand is presented to the Corporation,
against any and all Expenses, judgments, fines, penalties, and amounts paid
in settlement (including all interest, assessments, and other charges paid or
payable in connection with or in respect of such Expenses, judgments, fines,
penalties, or amounts paid in settlement) of or with respect to that Claim.
Notwithstanding the foregoing, the obligations of the Corporation under
Section 2(a) shall be subject to the condition that the Reviewing Party shall
not have determined (in a written opinion, in any case in which Special
Counsel referred to in Section 3 hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law. Nothing contained in
this Agreement shall require any determination under this Section 2(a) to
made by the Reviewing Party prior to the disposition or conclusion of the
Claim against the Indemnitee; provided, however, that Expense Advances shall
continue to be made by the Corporation pursuant to and to the extent required
by the provisions of Section 2(b).
(b) If so requested by Indemnitee, the Corporation shall pay any
and all Expenses incurred by Indemnitee (or, if applicable, reimburse
Indemnitee for any and all Expenses incurred by Indemnitee and previously
paid by Indemnitee) within two business days after such request (an "Expense
Advance"). The Corporation shall be obligated to make or pay an Expense
Advance in advance of the final disposition or conclusion of any Claim. In
connection with any request for an Expense Advance, if requested by the
Corporation, Indemnitee or Indemnitee's counsel shall submit an affidavit
stating that the Expenses incurred were reasonable. Any dispute as to the
reasonableness of any Expense shall not delay an Expense Advance by the
Corporation, and the Corporation agrees that any such dispute shall be
resolved only upon the disposition or conclusion of the underlying Claim
against the Indemnitee. If, when, and to the extent that the Reviewing Party
determines that Indemnitee would not be permitted to be indemnified with
respect to a Claim under applicable law, the Corporation shall be entitled to
be reimbursed by Indemnitee and Indemnitee hereby agrees to reimburse the
Corporation without interest (which agreement shall be an unsecured
obligation of Indemnitee) for all related Expense Advances theretofore made
or paid by the Corporation; provided, however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law, any
determination made by the Reviewing Party that Indemnitee would not be
permitted to be indemnified under applicable law shall not be binding and
Indemnitee shall not be required to reimburse the Corporation for any Expense
Advance, and the Corporation shall be obligated to continue to make Expense
Advances, until a final judicial determination is made with respect thereto
(as to which all rights of appeal therefrom have been exhausted or lapsed).
If there has not been a Change in Control, the Reviewing Party shall be
selected by the Board of Directors of the Corporation. If there has been a
Change in Control, the Reviewing Party shall be advised by or shall be
Special Counsel referred to in Section 3 hereof, if and as Indemnitee so
requests. If there has been no determination by the Reviewing Party or if the
Reviewing Party determines that Indemnitee substantively would not be
permitted to be indemnified in whole or in part under applicable law,
Indemnitee shall have the right to commence litigation in any court in the
states of Massachusetts, Delaware, or Texas having subject matter
jurisdiction thereof and in which venue is proper seeking an initial
determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, and the Corporation hereby consents to
service of process and to appear in any such proceeding. Any determination by
the Reviewing Party otherwise shall be conclusive and binding on the
Corporation and Indemnitee.
3. Change in Control. The Corporation agrees that, if there is a
Change in Control and if Indemnitee requests in writing that Special Counsel
advise the Reviewing Party or be the Reviewing Party, then the Corporation
shall not deny any indemnification payments (and Expense Advances shall
continue to be paid by the Corporation pursuant to Section 2(b)) that
Indemnitee requests or demands under this Agreement or any other agreement or
law now or hereafter in effect relating to Claims for Indemnifiable Events.
The Corporation further agrees not to request or seek reimbursement from
Indemnitee of any related Expense Advances unless, with respect to a denied
indemnification payment, Special Counsel has rendered its written opinion to
the Corporation and Indemnitee that the Corporation would not be permitted
under applicable law to pay Indemnitee such indemnification payment. The
Corporation agrees to pay the reasonable fees of Special Counsel referred to
in this Section 3 and to indemnify fully Special Counsel against any and all
expenses (including attorneys' fees), claims, liabilities, and damages
arising out of or relating to this Agreement or Special Counsel's engagement
pursuant hereto.
4. Establishment of Trust. In the event of a Potential Change in
Control, the Corporation shall, upon written request by Indemnitee, create a
trust for the benefit of Indemnitee (the "Trust") and from time to time upon
written request of Indemnitee shall fund the Trust in an amount sufficient to
satisfy any and all Expenses reasonably anticipated at the time of each such
request to be incurred in connection with investigating, preparing for, and
defending any Claim relating to an Indemnifiable Event, and any and all
judgments, fines, penalties, and settlement amounts (including all interest,
assessments, and other charges paid or payable in connection with or in
respect of such expenses, judgments, fines, penalties, and
31
<PAGE>
settlement amounts) of any and all Claims relating to an Indemnifiable Event
from time to time actually paid or claimed, reasonably anticipated, or
proposed to be paid. The amount or amounts to be deposited in the Trust
pursuant to the foregoing funding obligation shall be determined by the
Reviewing Party, in any situation in which Special Counsel referred to in
Section 3 is involved. The terms of the Trust shall provide that, upon a
Change in Control, (i) the Trust shall not be revoked or the principal
thereof invaded, without the written consent of Indemnitee; (ii) the trustee
of the Trust shall advance, within two business days of a request by
Indemnitee, any and all Expenses to Indemnitee (and Indemnitee hereby agrees
to reimburse the Trust under the circumstances in which Indemnitee would be
required to reimburse the Corporation for Expense Advances under Section 2(b)
of this Agreement); (iii) the Trust shall continue to be funded by the
Corporation in accordance with the funding obligation set forth above; (iv)
the trustee of the Trust shall promptly pay to Indemnitee all amounts for
which Indemnitee shall be entitled to indemnification pursuant to this
Agreement or otherwise; and (v) all unexpended funds in that Trust shall
revert to the Corporation upon a final determination by the Reviewing Party
or a court of competent jurisdiction, as the case may be, that Indemnitee has
been fully indemnified under the terms of this Agreement. The trustee of the
Trust shall be chosen by Indemnitee. Nothing in this Section 4 shall relieve
the Corporation of any of its obligations under this Agreement.
5. Indemnification for Additional Expenses. The Corporation shall
indemnify Indemnitee against any and all costs and expenses (including
attorneys' and expert witnesses' fees) and, if requested by Indemnitee, shall
(within two business days of that request) advance those costs and expenses
to Indemnitee, that are incurred by Indemnitee in connection with any claim
asserted against or action brought by Indemnitee for (i) indemnification or
advance payment of Expenses by the Corporation under this Agreement or any
other agreement or provision of the Corporation's Certificate of
Incorporation or By-laws now or hereafter in effect relating to Claims for
Indemnifiable Events or (ii) recovery under any directors' and officers'
liability insurance policies maintained by the Corporation, regardless of
whether Indemnitee ultimately is determined to be entitled to that
indemnification, advance expense payment, or insurance recovery, as the case
may be.
6. Partial Indemnity. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Corporation for some or a portion
of the Expenses, judgments, fines, penalties, and amounts paid in settlement
of a Claim but not, however, for all of the total amount thereof, the
Corporation shall nevertheless indemnify Indemnitee for the portion thereof
to which Indemnitee is entitled. Moreover, notwithstanding any other
provision of this Agreement, to the extent that Indemnitee has been
successful on the merits or otherwise in defense of any or all Claims
relating in whole or in part to an Indemnifiable Event or in defense of any
issue or matter therein, including dismissal without prejudice, Indemnitee
shall be indemnified against all Expenses incurred in connection therewith.
7. Contribution.
(a) Contribution Payment. To the extent the indemnification
provided for under any provision of this Agreement is determined (in the
manner hereinabove provided) not to be permitted under applicable law, then
in the event Indemnitee was, is, or becomes a party to or witness or other
participant in, or is threatened to be made a party to or witness or other
participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Corporation, in lieu of indemnifying Indemnitee,
shall contribute to the amount of any and all Expenses, judgments, fines, or
penalties assessed against or incurred or paid by Indemnitee on account of
that Claim and any and all amounts paid in settlement of that Claim
(including all interest, assessments, and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties,
or amounts paid in settlement) for which such indemnification is not
permitted ("Contribution Amounts"), in such proportion as is appropriate to
reflect the relative fault with respect to the Indemnifiable Event giving
rise to the Contribution Amounts of Indemnitee, on the one hand, and of the
Corporation and any and all other parties (including officers and directors
of the Corporation other than Indemnitee) who may be at fault with respect to
such Indemnifiable Event (collectively, including the Corporation, the "Third
Parties") on the other hand.
(b) Relative Fault. The relative fault of the Third Parties and
the Indemnitee shall be determined (i) by reference to the relative fault of
Indemnitee as determined by the court or other governmental agency assessing
the Contribution Damages or (ii) to the extent such court or other
governmental agency does not apportion relative fault, by the Reviewing Party
(which shall include Special Counsel) after giving effect to, among other
things, the relative intent, knowledge, access to information, and
opportunity to prevent or correct the applicable Indemnifiable Event and
other relevant equitable considerations of each party. The Corporation and
Indemnitee agree that it would not be just and equitable if contribution
pursuant to this Section 7 were determined by pro rata allocation or by any
other method of allocation which does take account of the equitable
considerations referred to in this Section 7(b).
32
<PAGE>
8. Burden of Proof. In connection with any determination by the
Reviewing Party or otherwise as to whether Indemnitee is entitled to be
indemnified under any provision of this Agreement or to receive contribution
pursuant to Section 7 of this Agreement, the burden of proof shall be on the
Corporation to establish that Indemnitee is not so entitled.
9. No Presumption. For purposes of this Agreement, the termination
of any claim, action, suit, or proceeding, by judgment, order, settlement
(whether with or without court approval), or conviction, or upon a plea of
nolo contendere, or its equivalent, shall not create a presumption that
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court has determined that indemnification is not
permitted by applicable law.
10. Action of Others. The knowledge and/or actions, or failure to
act, of any director, officer, agent, or employee of the Corporation shall
not be imputed to the Indemnitee for purposes of determining the right to
indemnification under this Agreement.
11. Indemnitee's Individual Capacity. The Corporation acknowledges
that the Indemnitee is undertaking to act as a director of the Corporation at
the request of the Corporation and solely in the Indemnitee's individual
capacity and not in any capacity as a director, officer, member, partner,
employee, trustee, or other representative of any other corporation,
partnership, association, business trust, trust, or similar organization or
entity. The Corporation covenants and agrees to indemnify any such
organization or entity from and against any and all judgments, fines, or
penalties assessed against or incurred or paid by such organization or entity
and any and all amounts paid in settlement (including all interest,
attorneys' and expert witnesses' fees, and other charges paid or payable in
connection with such judgments, fines, penalties, or amounts paid in
settlement) with respect to any action or inaction taken in the course of the
Indemnitee's duties as a director of the Corporation.
12. Non-exclusivity. The rights of Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Corporation's
By-laws or Certificate of Incorporation or the Delaware General Corporation
Law or otherwise. To the extent that a change in the Delaware General
Corporation Law (whether by statute or judicial decision) permits greater
indemnification by agreement than would be afforded currently under the
Corporation's By-laws or Certificate of Incorporation and this Agreement, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits so afforded by that change.
13. Liability Insurance. Except as otherwise agreed to by the
Corporation and Indemnitee in a written agreement, to the extent the
Corporation maintains an insurance policy or policies providing directors'
and officers' liability insurance, Indemnitee shall be covered by that policy
or those policies, in accordance with its or their terms, to the maximum
extent of the coverage available for any Corporation director or officer.
14. Period of Limitations. No legal action shall be brought and no
cause of action shall be asserted by or on behalf of the Corporation or any
affiliate of the Corporation against Indemnitee or Indemnitee's spouse,
heirs, executors, or personal or legal representatives after the expiration
of three years from the date of accrual of that cause of action, and any
claim or cause of action of the Corporation or its affiliate shall be
extinguished and deemed released unless asserted by the timely filing of a
legal action within that three-year period; provided, however, that, if any
shorter period of limitations is otherwise applicable to any such cause of
action, the shorter period shall govern.
15. Amendments. No supplement, modification, or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed
or shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall that waiver constitute a continuing waiver.
16. Subrogation. In the event of payment under this Agreement, the
Corporation shall, subject to the conflicting rights of an insurer pursuant
to any policy contemplated by Section 13 hereof, be subrogated to the extent
of that payment to all of the rights of recovery of Indemnitee, who shall
execute all papers required and shall do everything that may be necessary to
secure those rights, including the execution of the documents necessary to
enable the Corporation effectively to bring suit to enforce those rights.
17. No Duplication of Payments. The Corporation shall not be liable
under this Agreement to make any payment in connection with any claim made
against Indemnitee to the extent Indemnitee has otherwise actually received
payment (under any insurance policy, provision of the Corporation's
Certificate of Incorporation or By-laws, or otherwise) of the amounts
otherwise indemnifiable hereunder.
33
<PAGE>
18. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns (including any direct or indirect successor by
purchase, merger, consolidation, or otherwise to all or substantially all of
the business or assets of the Corporation), spouses, heirs, and personal and
legal representatives. This Agreement shall continue in effect regardless of
whether Indemnitee continues to serve as an officer or director of the
Corporation or another enterprise at the Corporation's request.
19. Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective
during the term hereof, that provision shall be fully severable; this
Agreement shall be construed and enforced as if that illegal, invalid, or
unenforceable provision had never comprised a part hereof; and the remaining
provisions shall remain in full force and effect and shall not be affected by
the illegal, invalid, or unenforceable provision or by its severance from
this Agreement. Furthermore, in lieu of that illegal, invalid, or
unenforceable provision, there shall be added automatically as a part of this
Agreement a provision as similar in terms to the illegal, invalid, or
unenforceable provision as may be possible and be legal, valid, and
enforceable.
20. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Delaware applicable
to contracts made and to be performed in that state without giving effect to
the principles of conflicts of laws.
21. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
22. Notices. Whenever this Agreement requires or permits notice to
be given by one party to the other, such notice must be in writing to be
effective and shall be deemed delivered and received by the party to whom it
is sent upon actual receipt (by any means) of such notice. Receipt of a
notice by any officer of the Corporation shall be deemed receipt of such
notice by the Corporation.
23. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but in making proof
hereof it shall not be necessary to produce or account for more than one such
counterpart.
EXECUTED as of the date first written above.
THE CORPORATION:
CONCENTRA MANAGED CARE, INC.
By: /s/ Donald J. Larson
--------------------------------------
Donald J. Larson
Chairman and Chief Executive Officer
INDEMNITEE:
/s/ Willis D. Gradison, Jr.
------------------------------
Willis D. Gradison, Jr.
34
<PAGE>
Exhibit 11
Concentra Managed Care, Inc.
Statement Re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
1997 1998 1997 1998
-------------- ------------- ------------ -------------
Restated Restated
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Pro forma net income available to shareholders (1) $ 9,440,000 $14,161,000 $16,520,000 $15,008,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common shares outstanding 42,494,000 46,744,000 42,439,000 45,842,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic pro forma earnings per share (1) $ 0.22 $ 0.30 $ 0.39 $ 0.33
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted Earnings Per Share:
Pro forma net income available to shareholders (1) $ 9,440,000 $14,161,000 $16,520,000 $15,008,000
Interest on common stock equivalents, net of tax 77,000 - 154,000 52,000
----------- ----------- ----------- -----------
Diluted pro forma net income $ 9,517,000 $14,161,000 $16,674,000 $15,060,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common shares outstanding 42,494,000 46,744,000 42,439,000 45,842,000
Dilutive options, warrants and notes payable 1,121,000 1,072,000 1,163,000 1,270,000
Dilutive convertible notes 2,722,000 - 2,722,000 681,000
----------- ----------- ----------- -----------
Weighted average common shares and equivalents outstanding 46,337,000 47,816,000 46,324,000 47,793,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted pro forma earnings per share $ 0.21 $ 0.30 $ 0.36 $ 0.32
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
(1) Net income and earnings per share for the three and six months ended
June 30, 1997 have 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 during the first quarter of
1998, PPS elected to be taxed as an S corporation, and accordingly, was not
subject to federal and state income taxes in certain jurisdictions.
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 121,922,000
<SECURITIES> 0
<RECEIVABLES> 119,955,000
<ALLOWANCES> 21,839,000
<INVENTORY> 0
<CURRENT-ASSETS> 270,715,000
<PP&E> 124,418,000
<DEPRECIATION> 45,011,000
<TOTAL-ASSETS> 635,761,000
<CURRENT-LIABILITIES> 64,385,000
<BONDS> 327,769,000
0
0
<COMMON> 469,000
<OTHER-SE> 226,815,000
<TOTAL-LIABILITY-AND-EQUITY> 635,761,000
<SALES> 0
<TOTAL-REVENUES> 304,428,000
<CGS> 0
<TOTAL-COSTS> 228,768,000
<OTHER-EXPENSES> 38,668,000
<LOSS-PROVISION> 11,373,000
<INTEREST-EXPENSE> 8,470,000
<INCOME-PRETAX> 29,811,000
<INCOME-TAX> 14,803,000
<INCOME-CONTINUING> 15,008,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,008,000
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.32
</TABLE>
