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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 000-22751
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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
incorporation or organization) Identification No.)
312 UNION WHARF,
BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 367-2163
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, par value $.01 per share
4.5% Convertible Notes due 2003
6.0% Convertible Notes Due 2001
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K |X|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant totaled $679,852,314 (based on the closing price of the
Company's Common Stock on The Nasdaq National Market on March 15, 1999).
As of March 15, 1999, the Registrant had outstanding an aggregate of
47,294,074 shares of its Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
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CONCENTRA MANAGED CARE, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1998
INDEX
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Page
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PART I
Item 1. Business ................................................................................. 1
Item 2. Properties ............................................................................... 20
Item 3. Legal Proceedings ........................................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .................... 21
Item 6. Selected Financial Data .................................................................. 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ............................... 30
Item 8. Financial Statements and Supplementary Data .............................................. 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 30
PART III
Item 10. Directors and Executive Officers of the Registrant ....................................... 31
Item 11. Executive Compensation ................................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management ........................... 42
Item 13. Certain Relationships and Related Transactions ........................................... 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .......................... 44
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FORWARD LOOKING INFORMATION
This Report contains certain forward-looking statements that are based on
management's current views and assumptions regarding future events, future
business conditions and the outlook for the Company based on currently
available information. Wherever possible, the Company has identified these
"forward-looking statements" (as defined in Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934) by words and
phrases such as "anticipates", "plans", "believes", "estimates", "expects",
"will be developed and implemented", and similar expressions. Readers are
cautioned not to place undue reliance on these forward-looking statements.
These forward-looking statements are subject to risks and uncertainties and
future events could cause the Company's actual results, performance or
achievements to differ materially from those expressed in, or implied by, these
statements. The Company assumes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
ITEM 1. BUSINESS
A. GENERAL
Concentra Managed Care, Inc. (the "Company" or "Concentra")* is the
leading provider of healthcare management and cost containment services to the
workers' compensation, auto insurance and disability insurance markets. The
Company is also the leading provider of out-of-network medical claims review to
the group health marketplace and performs non-injury healthcare services for
over 80,000 local employers. Concentra offers a continuum of services to
employers, insurers and third-party administrators ("TPAs") of all sizes. The
Company's services allow customers to increase the direction of care for injury
claims, aggressively manage the treatment plan and thereby control the total
costs of those claims, and review medical claims retrospectively, thus reducing
overall workers' compensation, auto insurance, disability and out-of-network
group health costs. The Company has demonstrated that by both providing
healthcare and offering claims management services, Concentra is in a unique
position to offer and provide a full continuum of services on a bundled or
unbundled basis to national or regional accounts and local employers.
Concentra's comprehensive services are comprised of three distinct
categories: (i) healthcare services, (ii) specialized cost containment
services, and (iii) field case management services. For the year ended December
31, 1998, revenues from healthcare services, specialized cost-containment
services and field case management services represented approximately 43%, 30%
and 27% of total revenues, respectively.
Healthcare services are provided through the Company's network of 169
owned and managed occupational healthcare centers, located in 50 markets in 25
states as of March 15, 1999. Healthcare services include injury care and
physical therapy services for work-related injuries and illnesses, physical
examinations, substance abuse testing and certain other loss-prevention
services.
Specialized cost containment services are comprised of the Company's first
report of injury service provided through its First Notice Systems* subsidiary
("First Notice"), telephonic case management services, provider bill review
services, preferred provider organization ("PPO") access through the Company's
Focus Healthcare Management* subsidiary ("Focus"), out-of-network bill review
services through the Company's Concentra Preferred Systems subsidiary ("CPS"),
independent medical exams ("IMEs") and peer reviews. CPS provides
out-of-network medical bill review services primarily to the group health
market, but Concentra is now marketing this service to its workers'
compensation and auto insurance customers.
Field case management services are provided to a national customer base
utilizing over 1,100 full time field case managers. Field case management
services involve working on a one-on-one basis with injured employees and
facilitating communication among their various healthcare professionals,
employers and insurance company adjusters. Field case management services are
designed both to assist in maximizing medical improvement and, where
appropriate, to expedite return to work.
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* "Concentra", "First Notice Systems" and "Focus Healthcare Management" are
registered service marks of Concentra Managed Care, Inc.
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On March 2, 1999, Concentra entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Yankee Acquisition Corp., a Delaware corporation
("Yankee"). On March 24, 1999, Concentra entered into an Amended and Restated
Agreement and Plan of Merger (the "Amended Merger Agreement") with Yankee,
amending the Merger Agreement. The Amended Merger Agreement contemplates the
merger (the "Merger") of Yankee with and into Concentra. As a result of the
Merger, each outstanding share of Concentra Common Stock will be converted into
the right to receive $16.50 in cash. The Merger is conditioned upon, among
other things, approval by the stockholders of Concentra, receipt of financing
and certain regulatory approvals. The transaction is structured to be accounted
for as a recapitalization.
B. INDUSTRY OVERVIEW
WORKERS' COMPENSATION
Workers' compensation is a state-mandated, comprehensive insurance program
that requires employers to fund medical expenses, lost wages and other costs
resulting from work-related injuries and illnesses. Since their introduction in
the early 1900s, these programs have been expanded to all fifty states, the
District of Columbia and Canada. In addition, federal statutes provide workers'
compensation benefits for federal employees. Each state is responsible for
implementing and regulating its own program. Consequently, workers'
compensation benefits and arrangements vary on a state-by-state basis and are
often highly complex.
Workers' compensation legislation generally requires employers, directly
or indirectly through an insurance vehicle, to fund all of an employee's costs
of medical treatment and a significant portion of lost wages, legal fees and
other associated costs. Typically, work-related injuries are broadly defined,
and injured or ill employees are entitled to extensive benefits. Employers are
required, directly or indirectly, to provide first-dollar coverage with no
co-payment or deductible due from the injured or ill employee for medical
treatment and, in many states, there is no lifetime limit on expenses. However,
in exchange for providing this coverage for employees, employers are not
subject to litigation by employees for benefits in excess of those provided
pursuant to the relevant state statute. In most states, the extensive benefits
coverage (for both medical costs and lost wages) is provided through the
purchase of commercial insurance from private insurance companies,
participation in state-run insurance funds or employer self-insurance.
According to statistics published in the 1998 Workers' Compensation Year
Book, total workers' compensation costs to employers in the United States were
estimated to be approximately $92 billion in 1996. Although the industry as a
whole is fragmented with a large number of competitors in the various
sub-segments of workers' compensation services, Concentra believes that it is
the only integrated provider of healthcare management and cost-containment
services offering a full continuum of services on a nationwide basis.
OCCUPATIONAL HEALTHCARE
Occupational healthcare is largely provided by independent physicians, who
have experienced increasing pressures in recent years from cost containment
efforts, growing regulatory complexity, and increased competition. The Company
anticipates that competition in the occupational healthcare industry may shift
from individual practitioners to specialized provider groups, such as those
managed by the Company.
Occupational healthcare services consist of two primary components: (i)
workers' compensation injury care and related services; and (ii) non-injury
healthcare services related to employer needs or statutory requirements.
INJURY CARE
The dollar amount of workers' compensation claims has increased
significantly in recent years, resulting in escalating costs to employers. The
Company anticipates that employers' direct costs of workers' compensation will
continue to escalate primarily because of broader definitions of work-related
injuries and illnesses covered by workers' compensation laws, the shifting of
medical costs from group health plans to the workers' compensation system, an
aging work force and, most importantly, the absence of comprehensive cost
containment programs (such as those that encourage early return-to-work and
limited duty).
As workers' compensation costs increase, Concentra expects that employers
will continue to seek and implement strategies and programs to reduce workers'
compensation costs and to improve worker productivity, health and safety. The
Company believes that clients' use of its healthcare services at the primary
care level, focusing on proactively managing each injury episode and
encouraging early return to work (as appropriate), can result in substantial
savings in indemnity and medical costs.
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Provider reimbursement methods vary on a state-by-state basis. Forty
states have adopted fee schedules pursuant to which all healthcare providers
are uniformly reimbursed. The fee schedules are set by each state and generally
prescribe the maximum amounts that may be reimbursed for a designated
procedure. In states without fee schedules, healthcare providers are reimbursed
based on usual, customary and reasonable ("UCR") fees charged in the particular
state in which the services are provided. Of the 25 states in which the Company
currently operates occupational healthcare centers, 21 have fee schedules.
Limitations on an employee's right to choose a specific healthcare
provider are dependent upon the particular state statute. According to the
Workers' Compensation Research Institute, as of March 1999, 25 states limited
the employee's choice of provider and 32 states placed restrictions on
switching providers, including provisions requiring employer approval for any
changes. Twelve states place restrictions on switching providers via managed
care arrangements. Generally, the employer will also have the ability to direct
the employee when the employer is self-insured. Concentra believes that
employers greatly influence their employees' choices of physicians even in
states in which the employees may select their providers. As a result, it has
been the Company's experience that its results of operations and prospects in a
particular state are not materially dependent upon state statutes regarding
direction of care.
NON-INJURY HEALTHCARE SERVICES
Non-injury occupational healthcare services include employment-related
physical examinations, drug and alcohol testing, functional capacity testing
and other related programs designed to meet specific employer needs. Non-injury
healthcare services also include programs to assist employers in complying with
a continuously expanding list of federal and state requirements, including
hearing conservation programs, toxic chemical exposure surveillance and
monitoring programs, and Department of Transportation and Federal Aviation
Administration physical examinations. Federal laws governing health issues in
the workplace, including the Americans with Disabilities Act (the "ADA"), have
increased employers' demand for healthcare professionals who are experts in the
delivery of these regulated services.
MANAGED CARE SERVICES: SPECIALIZED COST CONTAINMENT AND FIELD CASE MANAGEMENT
Managed care techniques are intended to control the cost of healthcare
services and to measure the performance of providers through intervention and
on-going review of services proposed and actually provided. Managed care
techniques were originally developed to stem the rising costs of group
healthcare. Historically, employers were slow to apply managed care techniques
to workers' compensation costs primarily because the aggregate costs are
relatively small compared to those associated with group health benefits and
because state-by-state regulations related to workers' compensation are far
more complex than those related to group health. However, in recent years,
employers and insurance carriers have been increasing their focus on applying
managed care techniques to control their workers' compensation costs.
A number of states have adopted legislation encouraging the use of
workers' compensation managed care organizations ("MCOs") in an effort to allow
employers to control their workers' compensation costs. MCO laws generally
provide employers an opportunity to channel injured employees into provider
networks. In certain states, MCO laws require licensed MCOs to offer certain
specified services, such as utilization management, case management, peer
review and provider bill review. Most of the MCO laws adopted to date establish
a framework within which a company such as Concentra can provide its customers
a full range of managed care services for greater cost control.
Because workers' compensation benefits are mandated by law and are subject
to extensive regulation, payors and employers do not have the same flexibility
to alter benefits as they have with other health benefit programs. In addition,
workers' compensation programs vary from state to state, making it difficult
for payors and multi-state employers to adopt uniform policies to administer,
manage and control the costs of benefits. As a result, managing the cost of
workers' compensation requires approaches that are tailored to the specific
state regulatory environment in which the employer operates.
Workers' compensation managed care services include two broad categories:
specialized cost containment services and field case management services.
Specialized cost containment services are designed to reduce the cost of
workers' compensation claims through a variety of techniques such as first
report of injury services, utilization management (precertification and
concurrent review), retrospective bill review services, telephonic case
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management, PPO network access, out-of-network bill review services, IMEs and
peer reviews. Field case management services involve working on a one-on-one
basis with injured employees and facilitating communication among their various
healthcare professionals, employers and insurance company adjusters. Field case
management services are designed both to assist in maximizing medical
improvement and, where appropriate, to expedite return to work.
GROUP HEALTH COST CONTAINMENT SERVICES
All healthcare payors have out-of-network exposure due to healthcare
claims that are outside their coverage area or network either as a matter of
choice on the part of the insured or as a result of geographic circumstances
where the insured does not have local access to contracted providers.
Out-of-network healthcare claims expose payors to greater incidence of
over-utilization, cost-shifting, omission of appropriate discounts and possible
billing errors. Out-of-network bill review service providers produce savings
for their clients by analyzing these out-of-network medical claims and reducing
the costs which otherwise would be payable through a variety of methods,
including professional negotiation, line item analysis, specialized audit and
bill review processes and broad access to preferred provider networks.
AUTO MANAGED CARE SERVICES
The automobile insurance industry, like the workers' compensation
industry, is regulated on a state-by-state basis. Although regulatory approval
is not required for Concentra to offer most of its services to the automobile
insurance market (including voluntary network access), state regulatory
approval is required in order to offer automobile insurers' products that
permit them to direct claimants into a network of medical providers.
It is relatively recent that the auto insurance market has provided
legislative support of healthcare management and cost management services.
However, in states that have adopted auto managed care legislation, direction
of care to designated providers of treatment have lowered the costs of Personal
Injury Protection coverage. The lowering of this threshold has an impact as to
whether further damages claims can be made with regard to injury costs. As a
result of performance in the states of Colorado and Hawaii, new opportunities
have arisen in other states with existing no-fault legislation. Concentra is
pursuing auto-related business using cost management strategies in those states
that permit such programs.
C. CONCENTRA'S BUSINESS STRATEGY
Concentra's objective is to capitalize on its national presence by
providing an integrated platform of comprehensive healthcare management and
cost containment services. The Company's strategy is to (i) increase market
penetration of early intervention services such as healthcare services, first
report of injury and telephonic case management, (ii) increase market
penetration of out-of-network bill review services to the group health,
workers' compensation and auto insurance markets, (iii) streamline patient
care, outcomes reporting and claims resolution through enhanced information
technology, (iv) continue to acquire and develop occupational healthcare
centers and expand healthcare network services by developing direct
affiliations with primary care physicians, specialists, hospitals and other
ancillary providers and (v) capitalize on the Company's national organization
and local market presence to win new customers and to increase cross-selling of
services to existing accounts.
Concentra will seek to implement this strategy as follows:
INCREASE MARKET PENETRATION OF EARLY INTERVENTION SERVICES
Concentra intends to increase its development and marketing of early
intervention services, such as access to its network of occupational healthcare
centers and other providers in its PPO network, first report of injury,
precertification, and telephonic case management. Early intervention enables
Concentra to identify promptly cases that have the potential to result in
significant expenses and to take appropriate measures to control these expenses
before they are incurred. In addition, Concentra believes that providing early
intervention services generally results in the Company obtaining earlier access
to claims files. Such earlier access improves the Company's opportunity to
provide the full range of its healthcare management and cost containment
services, which should result in lowering the total costs of the claim.
INCREASE MARKET PENETRATION OF OUT-OF-NETWORK BILL REVIEW SERVICES
Concentra will further expand its reach into the group health marketplace
by offering new and existing customers CPS's comprehensive retrospective bill
review services which will help customers contain costs
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related to out-of-network group health medical charges. CPS is the market
leader in this line of business and is expanding its services into the workers'
compensation market and auto insurance market in states that have not
established fee schedules. Concentra believes that expansion in these areas
represents a significant opportunity for the Company in the future.
Streamline Patient Care, Outcomes Reporting and Claims Resolution Through
Enhanced Information Technology
Concentra's ongoing development of enhanced information technology will
strengthen the Company's ability to provide a full continuum of integrated
services to its customers. Concentra will continue to develop its information
systems to make more effective use of the Company's extensive proprietary
knowledge base relating to workplace injuries, treatment protocols, outcomes
data and the workers' compensation system's complex web of regulations. These
enhanced information systems will enable Concentra to streamline patient care
and outcomes reporting, thus augmenting the Company's ability to furnish
high-quality, efficient healthcare services in compliance with the regulations
governing healthcare services. Further, Concentra believes it can more
efficiently process bill review and field case management claims through the
use of enhanced information technology and will continue to devote resources to
improving such systems.
CONTINUE TO ACQUIRE AND DEVELOP OCCUPATIONAL HEALTHCARE CENTERS AND EXPAND
HEALTHCARE NETWORK SERVICES
Concentra estimates that there are more than 2,000 healthcare centers in
the United States in which physicians who specialize in occupational medicine
are providing occupational healthcare services. The Company will continue to
acquire and develop occupational healthcare centers in new and existing markets
and will continue to organize its occupational healthcare centers in each
market into clusters to serve employers, payors and workers more effectively,
to leverage management and other resources and to facilitate the development of
integrated networks of affiliated physicians and other healthcare providers. In
addition, Concentra will develop occupational healthcare centers in new markets
and within existing markets through joint ventures and management agreements.
Finally, through Focus, Concentra will continue to expand its
vertically-integrated networks of specialists, hospitals and other healthcare
providers. These networks, and the Company's occupational healthcare centers,
are designed to provide quality care to patients, while reducing total costs to
employers and insurers.
CAPITALIZE ON NATIONAL ORGANIZATION AND LOCAL MARKET PRESENCE TO WIN NEW
CUSTOMERS AND TO INCREASE CROSS-SELLING OF SERVICES TO EXISTING ACCOUNTS
Concentra believes that national and regional insurance carriers and
self-insured employers will benefit greatly from the Company's ability to
provide a full continuum of healthcare management and cost containment services
on a nationwide basis. Concentra offers these large payors a comprehensive
solution to their healthcare management and cost containment needs from a
service provider that is adept at understanding and working with many different
and complex state legislative environments. Concentra's national organization
of local service locations enables the Company to meet the needs of these
large, national payors while maintaining the local market presence necessary to
monitor changes in state-specific regulations and to facilitate case resolution
through locally provided managed care services. Concentra's national marketing
personnel will continue to target these large payors to expand the Company's
customer base. In addition, Concentra is well-positioned to capitalize on the
relationships developed through the Company's broad-based national and local
marketing efforts by cross-selling its full continuum of healthcare management
and cost containment services to its existing customer base.
D. SERVICES AND OPERATIONS
Concentra's business and operations span the workers' compensation, group
health, auto and disability insurance markets. Each of these markets represents
a significant opportunity for the full continuum of healthcare management and
cost containment services provided by Concentra. In each of these markets,
insurance companies, self-insured employers and TPAs have a need for Concentra
service offerings.
Healthcare Services
Occupational Healthcare Centers
The Company's 169 occupational healthcare centers at March 15, 1999
provide treatment for work-related injuries and illnesses, physical therapy,
preplacement physical examinations and evaluations, certain diagnostic
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testing, drug and alcohol testing and various other employer-requested or
government-mandated occupational health services. During the year ended
December 31, 1998, approximately 52% of all patient visits to the Company's
centers were for the treatment of injuries or illnesses and 48% were for
substance abuse testing, physical examinations and other non-injury
occupational healthcare services.
Preplacement physical examinations and drug and alcohol testing are most
frequently conducted on a walk-in basis but may be scheduled in advance. More
specialized services, such as audiogram testing or pulmonary function testing,
are sometimes scheduled in advance. Employees suffering from work-related
injuries or illnesses are treated on an urgent basis.
Each of Concentra's centers is staffed with at least one licensed
physician who is an employee of a professional association or professional
corporation affiliated with the Company (the "Physician Groups") and at least
one licensed physical therapist. The licensed physicians are generally trained
and experienced in occupational medicine or have emergency, family practice,
internal medicine or general medicine backgrounds. Most centers utilize a staff
of between 10 and 15 full-time persons (or their part-time equivalents),
including licensed physicians, nurses, licensed physical therapists and
administrative support personnel.
Physician and physical therapy services are provided at Concentra's
occupational healthcare centers under agreements with the Physician Groups,
which are independently organized professional corporations that hire licensed
physicians and physical therapists to provide healthcare services to the
centers' patients. The management agreements between Concentra and the
Physician Groups with respect to the 300 affiliated physicians as of February
28, 1999 have 40-year terms. Pursuant to each management agreement, the Company
provides a wide array of business services to the Physician Groups, such as
providing nurses and other medical support personnel, practice and facilities
management, billing and collection, accounting, tax and financial management,
human resource management, risk management, marketing and information-based
services such as process management and outcomes analysis. As another service
to the Physician Groups, the Company recruits physicians, nurses, physical
therapists and other healthcare providers. Concentra collects receivables on
behalf of the Physician Groups and advances funds for payment of each Physician
Group's expenses, including salaries, shortly after services are rendered to
patients. The Company receives a management fee based on all services performed
at the centers. The management fee is subject to renegotiation and may be
adjusted from time to time to reflect industry practice, business conditions
and actual expenses for contractual allowances and bad debts. Concentra
provides services to the Physician Groups as an independent contractor and is
responsible only for the non-medical aspects of the Physician Groups'
practices. The Physician Groups retain sole responsibility for all medical
decisions.
Individual physicians who perform services pursuant to contracts with a
Physician Group are employees of the Physician Group. The physicians providing
services for the Physician Groups do not maintain other practices. The owners
of the Physician Groups are physicians. It is the responsibility of the owners
of the Physician Group to hire and manage all physicians associated with the
Physician Group and to develop operating policies and procedures and
professional standards and controls. Pursuant to each management agreement, the
Physician Group indemnifies the Company from any loss or expense arising from
acts or omissions of the Physician Group or its professionals or other
personnel, including claims for malpractice.
Joint Ventures and Management Agreements
Concentra's strategy is to continue to develop clusters of occupational
healthcare centers in new and existing geographic markets through the formation
of strategic joint ventures in addition to the acquisition and development of
physician practices. In selected markets in which a hospital management
company, hospital system or other healthcare provider has a significant
presence, the Company may focus its expansion efforts on the establishment of
joint ventures or management contracts. In its joint venture relationships,
Concentra typically acquires a majority ownership interest in the venture and
agrees to manage the venture for a management fee based on net revenues.
Concentra currently is the managing member of eight joint ventures through
which it operates 22 centers and has entered into two management agreements
through which it operates five centers.
Other Ancillary Programs
Concentra offers other ancillary programs as described below. It has been
the Company's experience that, by offering a full range of programs to
complement its core healthcare management operations, it strengthens its
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relationships with existing clients and increases the likelihood of attracting
new clients. Concentra anticipates expanding its ancillary programs as needed
to address occupational legislation and regulations enacted in the future.
Compliance With ADA. The ADA is a federal statute that generally prohibits
employers from discriminating against qualified disabled individuals in the
areas of the job application process, hiring, discharge, compensation and job
training. The ADA now applies to all employers with 15 or more employees.
Through its "ADApt Program," Concentra assists employers with ADA compliance
issues by proactively addressing ADA requirements relating to job descriptions,
pre-placement physical examinations, analysis and compliance and
confidentiality of applicant/employee information. ADApt helps employers adapt
their hiring and termination procedures, job descriptions and injury/illness
management programs in order to comply with ADA guidelines.
Risk Assessment and Injury Prevention Programs. Concentra assists clients
in reducing workplace injuries and illnesses through its on-site risk
assessment and injury prevention programs. These programs include identifying
workplace hazards, designing plant-specific safety programs and helping clients
comply with federal and state occupational health regulations. The Company also
provides ongoing educational programs for its clients.
Healthcare services collectively represented approximately 46%, 43% and
43% of Concentra's total revenues for the fiscal years ending December 31,
1996, 1997 and 1998, respectively.
SPECIALIZED COST CONTAINMENT SERVICES
Concentra provides a number of specialized services focused directly on
helping to reduce the medical and indemnity costs associated with workers'
compensation and the medical costs associated with group health claims. These
specialized cost containment services include first report of injury service
through First Notice, utilization management (precertification and concurrent
review), retrospective bill review services, telephonic case management, PPO
network access through Focus, out-of-network bill review services through CPS,
IMEs and peer reviews.
Concentra is able to offer its services on an unbundled basis or on a
bundled basis as a full-service managed care program, beginning with the first
report of injury and including all specialized cost containment services needed
to manage aggressively the costs associated with a work-related injury.
Concentra's comprehensive approach to managing workers' compensation costs
serves the needs of a broad range of clients, from local adjusters to national
accounts. In addition to providing specialized cost containment services for
work-related injuries and illnesses, the Company also provides out-of-network
bill review services to the group health market, cost containment services to
payors of automobile accident medical claims and social security disability
advocacy services to payors of long term disability claims.
Concentra believes that the demand for specialized cost containment
services will continue to increase due to a number of factors, including: (i)
the increasing payor awareness of the availability of these techniques for cost
containment and case management; (ii) the effectiveness of managed care
techniques at reducing costs for group health insurance plans; (iii) the
verifiable nature of the savings that can be obtained by application of
specialized cost containment techniques applicable to workers' compensation;
and (iv) the broad applicability of these techniques to all injured employees,
not just severely injured employees likely to be absent from work.
First Report of Injury
Through First Notice, Concentra provides a computerized first report of
injury/loss reporting service utilizing two centralized national call centers
to which an employer or insurance company claims adjuster communicates reports
of injuries or losses as soon as they occur. First Notice provides its services
primarily to the auto industry for first notice of loss reporting and to
workers' compensation carriers for first report of injuries reporting, as well
as to property and casualty carriers that write both auto and workers'
compensation insurance. For injuries, each report is electronically transferred
or mailed to the state agency, the employer and the insurance company. This
service assists in the timely preparation and distribution of state-mandated
injury reports and also provides Concentra and its customers with an early
intervention tool to maximize control over workers' compensation and auto
claims.
Utilization Management: Precertification and Concurrent Review
Concentra's precertification and concurrent review services are used by
clients to ensure that certain medical procedures are precertified by a
Concentra registered nurse and/or physician for medical necessity and
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appropriateness of treatment before the medical procedure is performed.
Concentra's determinations represent only recommendations to the customer; the
ultimate decision to approve or disapprove the request is made by the claims
adjuster. Precertification calls are made by either the claimant or the
provider to one of Concentra's national utilization management reporting units.
After a treatment plan has been precertified, a Concentra employee performs a
follow-up call (concurrent review) at the end of an approved time period to
evaluate compliance and/or discuss alternative plans.
Retrospective Bill Review
Through a sophisticated software program, Concentra reviews and reduces
its customers' medical bills (including hospital bills) to either the various
state-mandated fee schedules for workers' compensation claims or a percentage
of the UCR rates that exist in non-fee schedule states. Additionally, this
automated retrospective bill review service enables clients to access certain
PPO pricing schedules that represent additional savings below the fee schedules
or UCR rates. The savings to Concentra's clients as a result of this service
can be significant. Retrospective bill review also creates an important
historical database for provider practice patterns and managed care provider
compliance requirements.
Telephonic Case Management
This service provides for short-duration (30 to 90 days) telephonic
management of workers' compensation claims. The telephonic case management
units accept first reports of injury, negotiate discounts with hospitals and
other providers, identify care alternatives and work with injured employees to
minimize lost time on the job. Each of the telephonic case management units is
overseen by nurses who are experienced in medical case management. The
telephonic case management units represent an important component of early
intervention and act as a referral source of appropriate cases to Concentra's
field case management offices.
Access to Preferred Provider Networks
Through Focus, Concentra provides its clients with access to a national
PPO network. This network provides injured workers with access to quality
medical care and pre-negotiated volume discounts, thereby offering Concentra's
clients the ability to influence, or in certain states to direct, their
employees into the PPO network as a means of managing their work-related
claims. In addition to providing a vehicle for managing the delivery of
appropriate care by qualified providers, the discounts associated with these
PPO arrangements generate additional savings through the retrospective bill
review program described above. Focus's national network includes approximately
219,000 individual providers and 2,900 hospitals covering 41 states and the
District of Columbia.
Out-of-Network Bill Review
Through CPS, Concentra continues to expand its market presence in
retrospective bill review services. CPS is the market leader in this line of
business in the group health arena and is expanding its services into the
workers' compensation market in states that have not established fee schedules
and into the auto insurance market when appropriate. CPS utilizes a variety of
techniques to reduce expenses by repricing hospital and other facilities'
bills. Utilizing its comprehensive portfolio of products, CPS reduces costs
ordinarily payable on medical bills submitted by healthcare providers and the
administrative expense associated with reviewing and analyzing medical bills.
These services include professional fee negotiation, line-item analysis, and
other specialized audit and bill review processes, as well as access to a
nationwide PPO network.
CPS provides out-of-network bill review services to healthcare payors in
most risk categories: indemnity, PPO, health maintenance organization, ERISA
self-insured plans, Taft-Hartley Plans, reinsurance carriers and intermediaries
such as administrative services organizations and TPAs. CPS is the largest
provider of these specific services in the managed care industry and
specializes in out-of area and non-network cost management services that reduce
exposure to over-utilization, upcoding, cost shifting, various forms of revenue
enhancement tactics and inflated retail charge practices.
The current service delivery model employed at CPS is designed to review
most provider bill types, employ four distinct transmission modalities to
facilitate the exchange of bill data, utilize various database technologies as
part of the bill screening process, score each bill referred based on the
individual service requirements of each client group, and route each bill to
the most appropriate bill review service included in a consolidated portfolio
of cost containment services. CPS has packaged this process and markets it as
the Healthcare Bill Management
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System ("HBMS"). The system affords large payor clients scale and capacity,
consolidated and uniform cost management capability, rigorous due diligence and
superior performance.
INDEPENDENT MEDICAL EXAMS
IMEs are provided to assess the extent and nature of an employee's injury
or illness. Concentra provides its clients with access to independent
physicians who perform the IMEs from 14 of the Company's service locations and,
upon completion, prepare reports describing their findings.
Peer Reviews
Peer review services are provided by a physician, therapist, chiropractor
or other provider who reviews medical files to confirm that the care being
provided appears to be necessary and appropriate. The reviewer does not meet
with the patient, but merely reviews the file as presented.
AUTOMOBILE INSURANCE MANAGED CARE
Concentra offers an integrated service to the automobile insurance market
that, where permitted by law, includes the direction of automobile accident
victims into networks of medical providers. The Company currently offers a
fully-integrated service in only 2 states and offers voluntary network access
in several other states. The Company's program has produced significant savings
for its insurance company clients. Services offered to the automobile insurance
market include precertification, telephonic case management, direction of
injured persons into specialized PPO networks, medical bill review and field
case management.
Specialized cost containment services collectively represented
approximately 22%, 29% and 30% of Concentra's total revenues for the fiscal
years ending December 31, 1996, 1997 and 1998, respectively.
FIELD CASE MANAGEMENT SERVICES
Concentra provides field case management services to the workers'
compensation insurance industry through nurse case managers working at the
local level on a one-on-one basis with injured employees and their various
healthcare professionals, employers and insurance company adjusters. The
Company's services are designed to assist in maximizing medical improvement
and, where appropriate, to expedite employees' return to work through medical
management and vocational rehabilitation services.
Concentra's field case management services consist of one-on-one
management of a work-related injury by over 1,100 field case managers in 89
offices in 49 states, the District of Columbia and Canada. This service
typically involves a case with a significant potential or actual amount of lost
work time or a catastrophic injury that requires detailed management and
therefore is referred out by the local adjuster to the Concentra marketer.
Concentra field case managers specialize in expediting the injured employee's
return to work through both medical management and vocational rehabilitation.
Medical management services provided by Concentra's field case managers include
coordinating the efforts of all the healthcare professionals involved and
increasing the effectiveness of the care being provided by encouraging
compliance and active participation on the part of the injured worker.
Vocational rehabilitation services include job analysis, work capacity
assessments, labor market assessments, job placement assistance and return to
work coordination.
The Company believes that the following factors will contribute to
continued growth of its field case management services: (i) increased
acceptance of field case management techniques due to greater exposure to the
workers' compensation managed care market; (ii) earlier identification of
individuals in need of field case management services due to increased
utilization of the Company's specialized cost containment services,
particularly early intervention services; (iii) increased market share at the
expense of smaller, undercapitalized competitors; and (iv) the ability to
access national accounts for use of case management services.
Field case management services represented approximately 32%, 28% and 27%
of Concentra's total revenues for the years ended December 31, 1996, 1997 and
1998, respectively.
Financial information regarding the Company's segments is set forth in
Note 13 of Notes to Consolidated Financial Statements, beginning on Page F-21.
E. CUSTOMERS
Concentra's occupational healthcare centers currently serve more than
80,000 employers, ranging from large corporations to businesses with only a few
employees. The Company serves more than 2,000 specialized
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cost containment and field case management customers across the United States
and Canada, including most of the major underwriters of workers' compensation
insurance, TPAs and self-insured employers.
Concentra is compensated primarily on a fee-for-service or percentage of
savings basis. The Company's largest customer represented less than 6% of
Concentra's total revenue in 1998. The Company has not entered into written
agreements with most of its healthcare services customers. Many of the
Company's specialized cost containment and field case management relationships
are based on written agreements. However, either the customer or the Company
can terminate most of these agreements on short notice.
F. SALES AND MARKETING
Concentra actively markets its services primarily to workers' compensation
insurance companies, TPAs, employers and employer groups. The Company also
markets to the group health, automobile insurance and disability insurance
markets. The Company's marketing organization includes over 350 full-time sales
and marketing personnel.
Concentra markets its services at both the local insurance company
adjuster and employer level. In addition, the Company markets its services at
the national and regional level for large managed care accounts and for
self-insured corporations where a more sophisticated sales presentation is
required. Concentra has a dedicated staff of national accounts salespeople
responsible for marketing and coordinating the Company's full range of services
to corporate offices.
Concentra's local marketing has been a critically important component of
the Company's strategy, because of the decision-making authority that resides
at the local level and the relationship-driven nature of that portion of the
business. However, the expansion of comprehensive managed care legislation,
continuing receptiveness to workers' compensation change and a more
comprehensive product offering by Concentra, demand that the Company continue
to focus on marketing to national headquarters offices of insurance companies
and self-insured companies. As part of its coordinated marketing effort,
Concentra periodically distributes follow-up questionnaires to patients,
insurers and employers to monitor satisfaction with the Company's services.
G. QUALITY ASSURANCE
Concentra routinely uses internal audits to test the quality of its
delivery of services. The Company conducts audits of compliance with special
instructions, completion of activities in a timely fashion, quality of
reporting, identification of savings, accuracy of billing and professionalism
in contacts with healthcare providers. The Company conducts audits on a
nationwide basis for particular customers or on a local office basis by
selecting random files for review. A detailed report is generated outlining the
audit findings and providing specific recommendations for service delivery
improvements. When appropriate, the Company conducts follow-up audits to ensure
that recommendations from the initial audit have been implemented.
H. COMPETITION
HEALTHCARE SERVICES
The market to provide healthcare services within the workers' compensation
system is highly fragmented and competitive. Concentra's competitors typically
have been independent physicians, hospital emergency departments and other
urgent care providers. The Company believes that, as integrated networks
continue to be developed, its competitors will increasingly consist of
specialized provider groups.
Concentra competes effectively because of its specialization in the
occupational healthcare industry, its broad knowledge and expertise, the
effectiveness of its services as measured by favorable outcomes, its ability to
offer services in multiple markets and its information systems. The Company
believes that it enjoys a unique competitive advantage by specializing in and
focusing on occupational healthcare at the primary care provider level, which
is the entry point to the occupational healthcare delivery system.
The recruiting of physicians, physical therapists, nurses and other
healthcare providers can be competitive. However, Concentra continues to
experience greater ease in recruiting as the Company grows and becomes more
widely known by healthcare providers. The loss of services provided by
physicians, physical therapists, nurses and other providers for an extended
period of time, or the inability to attract such individuals, could have an
adverse effect on the Company's business.
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SPECIALIZED COST CONTAINMENT AND FIELD CASE MANAGEMENT SERVICES
The managed care services market is fragmented, with a large number of
competitors. Concentra competes with numerous companies, including national
managed care providers, smaller independent providers, and insurance companies.
The Company's primary competitors are companies that offer one or more workers'
compensation managed care services on a national basis. The Company also
competes with numerous smaller companies that generally provide unbundled
services on a local level where such companies often have a relationship with a
local adjuster. Several large workers' compensation insurance carriers offer
managed care services for their insurance customers either through the
insurance carrier's own personnel or by outsourcing various services to
providers such as Concentra. Concentra believes that this competitive
environment will continue into the foreseeable future.
Concentra competes effectively because of its specialized knowledge and
expertise in the workers' compensation managed care services industry, the
effectiveness of its services, its ability to offer a full continuum of
services in multiple markets, its information systems and the prices at which
its offers its services.
I. INFORMATION SYSTEMS AND TECHNOLOGY
Concentra maintains a fundamental commitment to the development and
implementation of advanced information technology, with a considerable focus on
web-based applications. These applications further the Company's systems and
product integration, enhancing the delivery of quality customer service and
increasing customer communication by augmenting Concentra's ability to
demonstrate cost savings across the entire episode of care.
Concentra has substantially completed the implementation of a wide area
network ("WAN") in each market in which it provides healthcare services. When
the implementation is complete, all occupational healthcare centers in a market
will utilize a patient administration system (named "OccuSource") which runs on
a client/server architecture allowing each center to access and share a common
database for its market. The database contains employer protocols, patient
records and other information regarding Concentra's operations in the market.
Creating a WAN in each market allows the centers in the market to share
information and thereby improve center and physician efficiencies and enhance
customer service. Concentra is linking each market WAN into a nationwide WAN in
order to create a centralized repository of Company data to be used, among
other things, for clinical outcomes analysis. Concentra believes that its
commitment to continued development of its healthcare information system
provides a unique and sustainable competitive advantage within the occupational
healthcare industry.
Concentra has developed a new internet-based first notice of loss
reporting system for all lines of insurance (named "FNSNet"). The application
extends the Company's call center technology through the internet, enabling
users to report first notices of loss, as well as providing the user with
immediate access to customized networks and routing to appropriate and
qualified healthcare providers. FNSNet can be accessed through hyperlinks on
customers' web pages. This application enhances both internal integration and
customer communication and creates an effective platform for Concentra's First
Notice Systems division to handle calls with greater speed and efficiency.
Concentra's newly-developed Integrated Case Management Software System
("ICMS") facilitates and expedites the daily tasks of the Company's field and
telephonic case managers, allowing them to devote more time to consistent
delivery of quality service. This software allows immediate exchange of
information among Concentra's offices, as well as among employees in the same
office. ICMS is integrated with the FNSNet web-based product. The ICMS
application enables a clear, precise and immediate transmission of data from
First Notice into the ICMS system. This pre-population of data eliminates
redundant and duplicative data entry for nurse case managers, thus resulting in
greater time efficiency and cost savings. The development and implementation of
ICMS allow for shared data in situations in which multiple case managers are
working on a case. The new ICMS also creates better customer access to
information and allows Concentra to produce specific, user-friendly reports to
demonstrate the value of the Company's services.
Finally, Concentra's CPS subsidiary utilizes its proprietary,
technology-based HBMS system for its out-of-network medical claims review
services. Client bills are accessed and entered into HBMS in a variety of ways,
including electronic bill identification within the client's claim adjudication
system with subsequent EDI transfer to CPS, entry of appropriate bills into a
customized, CPS-supplied Data Access Point ("DAP") system,
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on-site bill entry by a CPS employee into the DAP system, and overnight mail or
facsimile of client bills to a CPS service center. These access strategies are
designed to increase the number of appropriate bills that CPS receives, while
minimizing the administrative cost to the client. Once a bill is electronically
or manually entered into HBMS, the bill is evaluated against CPS's licensed and
proprietary databases that are designed to identify instances of cost shifting,
improper coding and utilization and pricing issues. Following analysis of the
bill, the bill passes through CPS's client preference profile that is created
at the time of CPS's initial engagement with the client. HBMS then evaluates
the compatibility of the service with the greatest expected savings with the
service requirements of the client and electronically sends the bill for
processing to the appropriate CPS service department.
J. GOVERNMENT REGULATION
GENERAL
As a provider of healthcare management and cost containment services,
Concentra is subject to extensive and increasing regulation by a number of
governmental entities at the federal, state and local levels. The Company is
also subject to laws and regulations relating to business corporations in
general. Applicable laws and regulations are subject to frequent changes.
Laws and regulations affecting Concentra's operations fall into four
general categories: (i) workers' compensation and other laws that regulate the
provision of healthcare services or the provision of cost containment services
or require licensing, certification or other approval of such services provided
by the Company; (ii) laws regarding the provision of healthcare services
generally; (iii) laws regulating the operation of managed care provider
networks; and (iv) other laws and regulations of general applicability.
WORKERS' COMPENSATION LAWS AND REGULATIONS
In performing workers' compensation healthcare services and cost
containment services, Concentra must comply with state workers' compensation
laws. Workers' compensation laws require employers to assume financial
responsibility for medical costs, a portion of lost wages and related legal
costs of work-related illnesses and injuries. These laws establish the rights
of workers to receive benefits and to appeal benefit denials. Workers'
compensation laws generally prohibit charging medical co-payments or
deductibles to employees. In addition, certain states restrict employers'
rights to select healthcare providers and establish maximum fee levels for
treatment of injured workers.
Many states are considering or have enacted legislation reforming their
workers' compensation laws. These reforms generally give employers greater
control over who will provide healthcare services to their employees and where
those services will be provided and attempt to contain medical costs associated
with workers' compensation claims. At present, 40 of the states in which
Concentra does business have implemented treatment-specific fee schedules that
set maximum reimbursement levels for healthcare services. The District of
Columbia and 10 states provide for a "reasonableness" review of medical costs
paid or reimbursed by workers' compensation. When not governed by a fee
schedule, Concentra adjusts its charges to the usual, customary and reasonable
levels accepted by the payor.
Many states, including a number of those in which Concentra transacts
business, have licensing and other regulatory requirements that apply to the
Company's specialized cost containment and field case management business.
Approximately half of the states have enacted laws that require licensing of
businesses that provide medical review services, such as Concentra's. Some of
these laws apply to medical review of care covered by workers' compensation.
These laws typically establish minimum standards for qualifications of
personnel, confidentiality, internal quality control and dispute resolution
procedures. In addition, new laws regulating the operation of managed care
provider networks have been adopted by a number of states. These laws may apply
to managed care provider networks having contracts with the Company or to
provider networks that the Company has organized and may organize in the
future. To the extent that Concentra is governed by these regulations, it may
be subject to additional licensing requirements, financial oversight and
procedural standards for beneficiaries and providers.
CORPORATE PRACTICE OF MEDICINE AND OTHER LAWS
Most states limit the practice of medicine to licensed individuals or
professional organizations comprised of licensed individuals. Many states also
limit the scope of business relationships between business entities such as
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the Company and licensed professionals and professional corporations,
particularly with respect to fee-splitting between physicians and
non-physicians. Laws and regulations relating to the practice of medicine,
fee-splitting and similar issues vary widely from state to state, are often
vague, and are seldom interpreted by courts or regulatory agencies in a manner
that provides guidance with respect to business operations such as Concentra's.
The Company attempts to structure all of its healthcare services operations to
comply with applicable state statutes regarding medical practice, fee-splitting
and similar issues. However, there can be no assurance (i) that courts or
.governmental officials with the power to interpret or enforce these laws and
regulations will not assert that Concentra is in violation of such laws and
regulations or (ii) that future interpretations of such laws and regulations
will not require Concentra to modify the structure and organization of its
business.
FRAUD AND ABUSE LAWS
A federal law (the "Anti-Kickback Statute") prohibits the offer, payment,
solicitation or receipt of any form of remuneration to induce or in return for
the referral of Medicare or other governmental health program patients or
patient care opportunities, or in return for the purchase, lease or order of
items or services that are covered by Medicare or other governmental health
programs. Violations of the statute can result in the imposition of substantial
civil and criminal penalties. In addition, as of January 1, 1995, certain
anti-referral provisions (the "Stark Amendments") prohibit a physician with a
"financial interest" in an entity from referring a patient to that entity for
the provision of any of 11 "designated medical services" (some of which are
provided by Physician Groups affiliated with the Company).
At least six of the states in which the Company conducts its healthcare
services business (Florida, California, Texas, Arizona, New Jersey and
Maryland) have enacted statutes similar in scope and purpose to the Anti-
Kickback Statute, with applicability to services other than those covered by
Medicare or other governmental health programs. In addition, most states have
statutes, regulations or professional codes that restrict a physician from
accepting various kinds of remuneration in exchange for making referrals.
Several states are considering legislation that would prohibit referrals by a
physician to an entity in which the physician has a specified financial
interest. Even in states which have not enacted such statutes, the Company
believes that regulatory authorities and state courts interpreting these
statutes may regard federal law under the Anti-Kickback Statute and the Stark
Amendments as persuasive.
Concentra believes that its arrangements with the Physician Groups comply
with the Anti-Kickback Statute, the Stark Amendments and applicable state laws.
However, all of the foregoing laws are subject to modification and
interpretation, have not often been interpreted by appropriate authorities in a
manner applicable to the Company's business and are enforced by authorities
vested with broad discretion. Concentra has attempted to structure all of its
operations so that they comply with all applicable anti-kickback and
anti-referral prohibitions. Concentra also continually monitors developments in
this area. If these laws are interpreted in a manner contrary to Concentra's
interpretation or are reinterpreted or amended, or if new legislation is
enacted with respect to healthcare fraud and abuse, illegal remuneration or
similar issues, the Company will seek to restructure any affected operations to
maintain compliance with applicable law. No assurance can be given that such
restructuring will be possible, or, if possible, will not adversely affect
Concentra's business or results of operations.
SPECIALIZED COST CONTAINMENT SERVICES
Many of the Company's specialized cost containment services include
prospective or concurrent review of requests for medical care or therapy.
Approximately half of the states have enacted laws that require licensure,
certification or other approval of businesses, such as Concentra's, that
provide medical review services. Some of these laws apply to medical review of
care covered by workers' compensation. These laws typically establish minimum
standards for qualifications of personnel, confidentiality, internal quality
control and dispute resolution procedures. These regulatory programs may result
in increased costs of operation for Concentra, which may have an adverse impact
upon the Company's ability to compete with other available alternatives for
healthcare cost control.
USE OF PROVIDER NETWORKS
Concentra's ability to provide comprehensive healthcare management and
cost containment services depends in part on its ability to contract with or
create networks of healthcare providers which share the Company's objectives.
For some of its clients, Concentra offers injured workers access to networks of
providers who
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are selected by the Company for quality of care and pricing. Laws regulating
the operation of managed care provider networks have been adopted by a number
of states. These laws may apply to managed care provider networks having
contracts with Concentra or to provider networks that the Company may organize
or acquire. To the extent Concentra is governed by these regulations, it may be
subject to additional licensing requirements, financial oversight and
procedural standards for beneficiaries and providers.
ERISA
The provision of goods and services to certain types of employee health
benefit plans is subject to the Employee Retirement Income Security Act of 1974
("ERISA"). ERISA is a complex set of laws and regulations subject to periodic
interpretation by the Internal Revenue Service and the Department of Labor
("DOL"). ERISA regulates certain aspects of the relationship between
Concentra's managed care contracts and employers that maintain employee benefit
plans subject to ERISA. DOL is engaged in ongoing ERISA enforcement activities
that may result in additional constraints on how ERISA-governed benefit plans
conduct their activities. There can be no assurance that future revisions to
ERISA or judicial or regulatory interpretations of ERISA will not have a
material adverse effect on Concentra's business or results of operations.
AUTOMOBILE INSURANCE REGULATION
The automobile insurance industry, like the workers' compensation
industry, is regulated on a state-by-state basis. Although regulatory approval
is not required for the Company to offer most of its services to the automobile
insurance market (including voluntary network access), state regulatory
approval is required in order to offer automobile insurers products that permit
them to direct claimants into a network of medical providers. To date, only
Colorado and Hawaii have permitted such direction of care, and the Company
offers this managed care service to automobile insurers in those states. No
assurance can be given that other states will permit such direction of care for
automobile accident victims or, if such a program is permitted, that the
Company will be able to obtain regulatory approval, if any is required, to
provide such services.
ENVIRONMENTAL
Concentra is subject to various federal, state and local statutes and
ordinances regulating the disposal of infectious waste, including medical and
other waste generated at the Company's occupational healthcare centers. If an
environmental regulatory agency finds any of the Company's centers to be in
violation of waste laws, penalties and fines may be imposed for each day of
violation, and the affected facility could be forced to cease operations.
Concentra believes that its waste handling and discharge practices are in
material compliance with applicable law.
K. SEASONALITY
Concentra's healthcare services business is seasonal in nature. Although
Concentra's expansion of services and continuing growth may obscure the effect
of seasonality in the Company's financial results, the Company's first and
fourth quarters generally reflect lower net healthcare services revenues on a
same market basis when compared to the second and third quarters.
Plant closings, vacations and holidays during the first and fourth
quarters result in fewer patient visits at the Company's occupational
healthcare centers, primarily because of fewer occupational injuries and
illnesses during those periods. In addition, employers generally hire fewer
employees during the fourth quarter, thereby reducing the number of
pre-employment physical examinations and drug and alcohol tests conducted at
the Company's centers during that quarter.
L. INSURANCE
The Company and the Physician Groups maintain medical malpractice
insurance in the amount of $1,000,000 per incident/$3,000,000 annual aggregate
per provider, subject to an annual aggregate limit in the amount of
$20,000,000. Pursuant to the management agreements between the Company and the
Physician Groups, each Physician Group has agreed to indemnify the Company from
certain losses, including medical malpractice. The Company maintains an errors
and omissions liability insurance policy covering all aspects of the Company's
managed care services. This policy has limits of $1,000,000 per
claim/$3,000,000 annual aggregate.
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In addition, Concentra maintains $3,000,000 of general liability insurance
and an umbrella policy that provides excess insurance coverage for medical
malpractice and for errors and omissions in the amount of $20,000,000 per
occurrence and $20,000,000 in the aggregate.
M. Employees
Concentra had approximately 7,800 employees at December 31, 1998. None of
Concentra's employees is subject to a collective bargaining agreement. The
Company has experienced no work stoppages and believes that its employee
relations are good. All physicians, physician assistants and physical
therapists providing professional services in the Company's occupational
healthcare centers are either employed by or contract with the Physician
Groups.
N. RISK FACTORS
DEPENDENCE ON FUTURE ACQUISITIONS AND JOINT VENTURES; ACQUISITION RISKS
The growth of Concentra's healthcare services in new and current markets
is dependent upon an aggressive acquisition and joint venture strategy. The
success of this acquisition strategy will be determined by numerous factors,
including the Company's ability to identify suitable acquisition candidates,
competition for such acquisitions, purchase price, the financial performance of
the acquired businesses after acquisition and the ability of the Company to
integrate effectively the operations of acquired businesses. Although Concentra
is currently in various stages of negotiations to complete acquisitions from
several prospective selling groups, there can be no assurance that additional
suitable acquisition candidates can be found, that acquisitions can be financed
or consummated on favorable terms or that acquisitions, if completed, will be
successful. In addition, there can be no assurance that Concentra will be able
to integrate successfully the operations of acquired businesses or institute
Company-wide systems and procedures to operate successfully the combined
enterprises. A strategy of growth by acquisition also involves the risk of
assuming unknown or contingent liabilities of acquired businesses. Such
liabilities could be material, individually or in the aggregate.
Any failure by Concentra to identify suitable candidates for acquisition,
to integrate or operate acquired businesses effectively or to insulate itself
from unwanted liabilities of acquired businesses could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, the Emerging Issues Task Force of the Financial
Accounting Standards Board is currently evaluating certain matters relating to
the accounting for business combinations. Concentra is unable to predict the
impact, if any, that this review may have on the Company's acquisition
strategy.
Concentra has also entered into, and is in various stages of negotiations
to form, joint ventures to own and operate occupational healthcare centers in
selected markets and to enter into management agreements in selected markets.
The Company's strategy is to form these joint ventures or enter into these
management agreements with competitively-positioned hospital management
companies, hospital systems and other healthcare providers. There can be no
assurances that Concentra will continue to utilize joint ventures or management
agreements as part of its growth strategy, that further suitable joint ventures
or management agreements can be entered into or that such existing or future
joint ventures or management relationships will be successful.
EFFECT OF AMORTIZATION ON RESULTS OF OPERATIONS
Concentra has had, and will continue to have, significant charges for
depreciation and amortization expense related to the fixed assets and goodwill
and other intangibles acquired, or to be acquired, in its acquisitions.
Consequently, the Company expects that such depreciation and amortization will
continue to have an impact on its results of operations. The Company
periodically reviews whether changes have occurred, either specific to the
business or generally in the industry, which might require revision of the
remaining estimated useful life of the assigned goodwill or render all or a
portion of the goodwill non-recoverable. In accordance with Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of," impairments are determined by
comparing undiscounted estimated future cash flows to the carrying value of
long-lived assets. At December 31, 1998, intangible assets were approximately
$278.0 million compared to total assets of $656.8 million and stockholders'
equity of $239.9 million.
MANAGEMENT OF GROWTH
Concentra has experienced rapid growth. Continued growth could place a
significant strain on the Company's management and other resources. The Company
anticipates that continued growth, if any, will require it to
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continue to recruit, hire, train and retain a substantial number of new and
highly-skilled administrative, information technology, finance, sales and
marketing and support personnel. Concentra's ability to compete effectively and
to manage future growth, if any, will depend on its ability to continue to
implement and improve operational, financial and management information systems
on a timely basis and to expand, train, motivate and manage its work force.
Should Concentra continue to experience rapid growth, there can be no assurance
that the Company's personnel, systems, procedures and controls will be adequate
to support the Company's operations or that management will anticipate
adequately all demands that growth will place on the Company. If Concentra's
management is unable to manage growth effectively, the quality of the Company's
products and its business, operating results and financial condition could be
materially and adversely affected.
COMPETITION
The market to provide healthcare services within the workers' compensation
system is highly fragmented and competitive. Concentra's primary competitors
have typically been independent physicians, hospital emergency departments and
other urgent care providers. The Company believes that, as integrated networks
continue to be developed, its healthcare services competitors will increasingly
consist of specialized provider groups.
Concentra faces managed care services competition from national managed
care providers, smaller independent providers, and insurance companies. The
Company believes that, as managed care techniques continue to gain acceptance
in the workers' compensation marketplace, the Company's competitors will
increasingly consist of nationally focused workers' compensation managed care
service companies, insurance companies, and other significant providers of
managed care products. Legislative reforms in some states permit employers to
designate health plans such as PPOs to cover workers' compensation claimants.
Because many health plans have the ability to manage medical costs for workers'
compensation claimants, such legislation may intensify competition in the
markets served by the Company.
In the face of such competition, there can be no assurance that Concentra
will continue to maintain its existing performance or be successful with any
new products or in any new geographic markets it may enter.
UNCERTAINTIES REGARDING HEALTHCARE REFORM
There have been numerous initiatives at the federal and state levels for
comprehensive reforms affecting the payment for and availability of healthcare
services. Concentra believes that such initiatives will continue in the
foreseeable future. Aspects of certain of these reforms as proposed in the past
could, if adopted, adversely affect the Company.
RISKS INHERENT IN PROVISION OF MEDICAL SERVICES; POSSIBLE LITIGATION AND LEGAL
LIABILITY
The Physician Groups and certain employees of the Company are involved in
the delivery of healthcare services to the public and, therefore, are exposed
to the risk of medical malpractice claims. Claims of this nature, if
successful, could result in substantial damage awards against the Company and
the Physician Groups that could exceed the limits of any applicable insurance
coverage. Concentra is indemnified under its management agreements with the
Physician Groups from certain losses, including medical malpractice and
maintains medical malpractice insurance. However, successful malpractice claims
asserted against the Physician Groups or the Company could have a material
adverse effect on the Company's financial condition and profitability.
Through its specialized cost containment and field case management
services, Concentra makes recommendations concerning the appropriateness of
providers' proposed medical treatment of patients throughout the country, and
as a result the Company could be subject to claims arising from any adverse
medical consequences. The Company does not grant or deny claims for payment of
benefits, and the Company does not believe that it engages in the practice of
medicine or the delivery of medical services in the provision of its
specialized cost containment and field case management services. However, there
can be no assurance that Concentra will not be subject to claims or litigation
related to the grant or denial of claims for payment of benefits or allegations
that the Company engages in the practice of medicine or the delivery of medical
services in this context. In addition, there can be no assurance that the
Company will not be subject to other litigation that may adversely affect the
Company's business or results of operations. Concentra maintains errors and
omissions insurance and such other lines of coverage as the Company believes
are reasonable in light of the Company's experience to date. There
16
<PAGE>
can be no assurance, however, that such insurance will be sufficient or
available at reasonable cost to protect Concentra from liability which might
adversely affect the Company's business or results of operations.
CORPORATE PRACTICE OF MEDICINE AND OTHER LAWS AND REGULATIONS
Most states limit the practice of medicine to licensed individuals or
professional organizations comprised of licensed individuals. Many states also
limit the scope of business relationships between business entities such as the
Company and licensed professionals and professional corporations, particularly
with respect to fee-splitting between physicians and non-physicians. Laws and
regulations relating to the practice of medicine, fee-splitting and similar
issues vary widely from state to state, are often vague, and are seldom
interpreted by courts or regulatory agencies in a manner that provides guidance
with respect to business operations such as Concentra's. The Company attempts
to structure all of its healthcare services operations to comply with
applicable state statutes regarding medical practice, fee-splitting and similar
issues. However, there can be no assurance (i) that courts or governmental
officials with the power to interpret or enforce these laws and regulations
will not assert that Concentra is in violation of such laws and regulations or
(ii) that future interpretations of such laws and regulations will not require
Concentra to modify the structure and organization of its business.
Many states, including a number of those in which the Company transacts
business, have licensing and other regulatory requirements that apply to the
Company's specialized cost containment and field case management business.
Approximately half of the states have enacted laws that require licensing of
businesses that provide medical review services, such as Concentra's. Some of
these laws apply to medical review of care covered by workers' compensation.
These laws typically establish minimum standards for qualifications of
personnel, confidentiality, internal quality control and dispute resolution
procedures. These regulatory programs may result in increased costs of
operation for the Company, which may have an adverse impact upon the Company's
ability to compete with other available alternatives for healthcare cost
control. In addition, new laws regulating the operation of managed care
provider networks have been adopted by a number of states. These laws may apply
to managed care provider networks having contracts with the Company or to
provider networks that the Company has organized and may organize in the
future. To the extent that Concentra is governed by these regulations, it may
be subject to additional licensing requirements, financial oversight and
procedural standards for beneficiaries and providers.
Regulation in the healthcare and workers' compensation fields is
constantly evolving. Concentra is unable to predict what additional government
regulations, if any, affecting its business may be promulgated in the future.
The Company's business may be adversely affected by failure to comply with
existing laws and regulations, failure to obtain necessary licenses and
government approvals or failure to adapt to new or modified regulatory
requirements.
FRAUD AND ABUSE AND ILLEGAL REMUNERATION LAWS
The Anti-Kickback Statute prohibits the offer, payment, solicitation or
receipt of any form of remuneration to induce or in return for the referral of
Medicare or other governmental health program patients or patient care
opportunities, or in return for the purchase, lease or order of items or
services that are covered by Medicare or other governmental health programs.
Violations of the statute can result in the imposition of substantial civil and
criminal penalties. In addition, the Stark Amendments prohibit a physician with
a "financial interest" in an entity from referring a patient to that entity for
the provision of any of eleven "designated health services" (some of which are
provided by Physician Groups affiliated with Concentra).
At least six of the states in which the Company conducts its healthcare
services business (Florida, California, Texas, Arizona, New Jersey and
Maryland) have enacted statutes similar in scope and purpose to the Anti-
Kickback Statute, with applicability to services other than those covered by
Medicare or other governmental health programs. In addition, most states have
statutes, regulations or professional codes that restrict a physician from
accepting various kinds of remuneration in exchange for making referrals.
Several states are considering legislation that would prohibit referrals by a
physician to an entity in which the physician has a specified financial
interest. Even in states which have not enacted such statutes, the Company
believes that regulatory authorities and state courts interpreting these
statutes may regard federal law under the Anti-Kickback Statute and the Stark
Amendments as persuasive.
17
<PAGE>
Concentra believes that its arrangements with the Physician Groups comply
with the Anti-Kickback Statute, the Stark Amendments and applicable state laws.
However, all of the foregoing laws are subject to modification and
interpretation, have not often been interpreted by appropriate authorities in a
manner applicable to the Company's business and are enforced by authorities
vested with broad discretion. Concentra has attempted to structure all of its
operations so that they comply with all applicable anti-kickback and
anti-referral prohibitions. Concentra also continually monitors developments in
this area. If these laws are interpreted in a manner contrary to Concentra's
interpretation or are reinterpreted or amended, or if new legislation is
enacted with respect to healthcare fraud and abuse, illegal remuneration or
similar issues, the Company will seek to restructure any affected operations to
maintain compliance with applicable law. No assurance can be given that such
restructuring will be possible, or, if possible, will not adversely affect
Concentra's business or results of operations.
RELIANCE ON DATA PROCESSING AND LICENSED SOFTWARE
Certain aspects of Concentra's business are dependent upon its ability to
store, retrieve, process and manage data and to maintain and upgrade its data
processing capabilities. Interruption of data processing capabilities for any
extended length of time, loss of stored data, programming errors or other
computer problems could have a material adverse effect on the Company's
business and results of operations.
Certain of the software Concentra uses within its medical bill review
operation is licensed from an independent third-party software company pursuant
to a non-exclusive license that may be terminated by either party upon six
months notice. Although the Company has historically maintained a good
relationship with the licensor, there can be no assurance that this software
license will not be terminated or that the licensor will be able to continue
the license on its existing terms. The Company is currently negotiating an
extension of this software license. Although management believes that
alternative software would be available if the existing license were
terminated, such termination could be disruptive and could have a material
adverse effect on Concentra's business and results of operations.
INFORMATION SYSTEM UPGRADES AND YEAR 2000 COMPLIANCE
The Year 2000 concern, which is common to most companies, involves the
inability of information and non-information systems, primarily computer
software programs, to properly recognize and process date-sensitive information
as the year 2000 approaches. System database modifications and/or
implementation modifications will be required to enable such information and
non-information systems to distinguish between 20th and 21st century dates.
Concentra has completed a number of acquisitions in recent years, and the
information systems of some of the acquired businesses have not been fully
integrated with the Company's information systems.
Concentra has formed a Year 2000 Program Office to provide a centralized
management function for the entire Company that will assist in identifying,
addressing and monitoring the Company's Year 2000 readiness and compliance
programs. The Year 2000 Program Office has organized teams in each business
unit of the Company to research Year 2000 compliance status and implement
appropriate solutions. Concentra's Year 2000 Program includes five phases -
awareness, assessment, remediation, testing and implementation. The awareness
and assessment phases are substantially complete with the exception of the
assessment phase of the Company's information systems infrastructure (i.e.,
desktops and other hardware) Year 2000 compliance.
The Company's Year 2000 Program Office engaged an outside consultant to
assist in an inventory and assessment of Year 2000 affected areas, with a
primary focus on information technology systems, third party software and key
suppliers and selected customers. This inventory and assessment was completed
in the fourth quarter of 1998. The Company's Year 2000 Program Office engaged
an outside consultant in the first quarter of 1999 to assist in an inventory,
and assessment and remediation efforts of the Company's information systems
infrastructure Year 2000 compliance. The Company completed in the fourth
quarter of 1998 an internal inventory and assessment of non-information
technology systems (e.g., embedded systems contained in medical equipment).
Remediation or replacement of noncompliant Year 2000 medical equipment began in
the first quarter of 1999 and Concentra expects this effort to be completed by
the third quarter of 1999.
18
<PAGE>
The Year 2000 Program Office has established a protocol for soliciting
Year 2000 compliance information from third parties. Concentra sent requests
for compliance information from all key suppliers and selected customers in the
fourth quarter of 1998 and first quarter of 1999. The Company continues to
gather Year 2000 compliance information from third parties and anticipates
receiving the majority of responses by the end of the second quarter of 1999.
To the extent responses have not been received, the Year 2000 Program Office
has ranked the third parties by level of importance to the Company's operations
and is following up with phone surveys, additional mailings and research of
public information issued by the third party (i.e., internet research). These
responses should indicate the extent to which Concentra is vulnerable to those
third parties' failure to remediate their own Year 2000 issues.
The Company's identified Year 2000 projects overlap with its ongoing
investments in information technology. As such, there are presently Year 2000
projects at the assessment, remediation, testing and implementation phases.
Concentra believes that it has identified most "mission critical" issues and
has developed or is in the process of modifying appropriate action plans which
may include software upgrades, replacement of noncompliant components or
referral of problems related to third party-provided software to the original
supplier. The Company has prepared its plans to have all "mission critical"
projects Year 2000 compliant by the end of the fourth quarter of 1999. While
some non-critical systems may not be addressed until after December 1999, the
Company believes such systems will not disrupt the Company's operations in a
material manner. Any additional issues that may arise will be classified as
either "mission critical" or non-critical, and appropriate action plans will be
developed and implemented. Concentra expects to have formulated any necessary
contingency plans by the third quarter of 1999.
Concentra currently estimates that the total cost of implementing its Year
2000 Program will be between $5,000,000 and $10,000,000. This preliminary
estimate is based upon presently available information and will be updated as
the Company finalizes its assessments and continues through implementation. In
particular, the estimate may also need to be increased as the Company receives
feedback from key suppliers and selected customers and formulates contingency
plans, if required. It is expected these costs will not be significantly
different from Concentra's current 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. However, until the information systems infrastructure assessment
phase is completed in the second quarter of 1999, the Company is uncertain if
its present plans and resources will be sufficient to ensure Year 2000
compliance of all "mission critical" projects by January 1, 2000.
Although Concentra does not anticipate any disruption in its operations or
financial reporting as a result of system upgrades or system integrations,
there can be no assurance that such disruption will not occur or that Year 2000
compliance of the Company's information and non-information systems will be
realized. If the Company does not identify and remediate Year 2000 issues prior
to January 1, 2000, its operations could be disrupted which could have a
material adverse effect on the Company's business or operating results or
financial condition. In addition, the Company places a high degree of reliance
on computer systems of third parties, such as customers, trade suppliers and
computer hardware and commercial software suppliers. Although the Company is
assessing the readiness of these third parties, there can be no guarantee that
the failure of these third parties to modify their systems in advance of
December 31, 1999 would not have a material adverse effect on the Company. In
addition, Concentra's operations could be disrupted if the companies with which
Concentra does business do not identify and correct any Year 2000 issues and
their failure adversely affects their ability to do business with Concentra. If
all Year 2000 issues are not identified and all action plans are not completed
and contingency plans become necessary, Concentra may not be Year 2000
compliant which could have a material adverse effect on the Company's long-term
results of operations, liquidity, or consolidated financial position. The
amount of potential liability and lost revenue has not been estimated.
VOLATILITY OF STOCK PRICE
The market price of Concentra's Common Stock has been volatile and may be
volatile in the future. Future developments concerning the Company or its
competitors, including developments related to governmental regulations,
acquisitions, operating results, the healthcare industry generally and general
market and economic conditions, may have a significant impact on the market
price of Concentra's Common Stock.
19
<PAGE>
DIVIDEND POLICY AND RESTRICTIONS
Concentra does not intend to pay cash dividends on the Common Stock in the
foreseeable future and anticipates that future earnings will be retained to
finance future operations and expansion. Concentra's revolving credit agreement
with its senior lenders prohibits the Company from paying dividends and making
other distributions on its Common Stock.
ANTI-TAKEOVER PROVISIONS
Certain provisions of Concentra's Certificate of Incorporation and certain
provisions of the Delaware General Corporation Law may make it difficult to
change control of the Company and replace incumbent management. For example,
Concentra's Certificate of Incorporation provides for a staggered Board of
Directors. The Certificate of Incorporation also permits the Board of
Directors, without stockholder approval, to issue additional shares of Common
Stock or establish one or more series of Preferred Stock having such number of
shares, designations, relative voting rights, dividend rates, liquidation and
other rights, preferences and limitations as the Board of Directors may
determine. Concentra has also adopted a Rights Agreement, which is intended to
deter certain takeover practices or takeover bids.
In connection with the Merger, effective March 2, 1999, Concentra amended
its Rights Agreement. The amendment provides, among other things, that Yankee
and its affiliates will not be deemed an Acquiring Person (as such term is
defined in the Rights Agreement) and the Rights Agreement will expire
immediately prior to the effective time of the Merger.
ITEM 2. PROPERTIES
The Company's principal corporate office is located in Boston,
Massachusetts. The Company leases the 11,000 square feet of space in this site
pursuant to a lease agreement expiring in 2003. Except for 13 occupational
medical centers owned by the Company, the Company leases all of its offices
located in 49 states, the District of Columbia and Canada. Twelve of the
Company's offices are leased from Colonial Realty Trust, of which Lois E.
Silverman, a director of the Company, is a trustee and beneficiary. The Company
believes that its facilities are adequate for its current needs and that
suitable additional space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof, Concentra is aware of three lawsuits that have been
filed by alleged stockholders of Concentra relating to the Merger. All three
lawsuits were filed in the Chancery Court for New Castle County, Delaware. Each
of the lawsuits names Concentra, its directors and Yankee as defendants. The
plaintiff in each lawsuit seeks to represent a putative class of all public
holders of Concentra common stock. The lawsuits allege, among other things,
that the directors of Concentra breached their fiduciary duties to Concentra's
stockholders by approving the Merger. The lawsuits seek, among other things,
preliminary and permanent injunctive relief prohibiting consummation of the
Merger, unspecified damages, attorneys' fees and other relief. Concentra
expects that these lawsuits will be consolidated into a single action. The
Company intends to contest these lawsuits vigorously.
The Company is party to certain other claims and litigation in the
ordinary course of business. Other than as described in the preceding
paragraph, the Company is not involved in any legal proceeding that it believes
will result, individually or in the aggregate, in a material adverse effect
upon its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matter was submitted to a vote of
security holders.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed in the NASDAQ National Market System
under the trading symbol "CCMC." The high and low prices of Concentra's common
stock for the past eight quarters are shown in the table below:
<TABLE>
<CAPTION>
High Low
----------- -----------
<S> <C> <C> <C>
1997
First Quarter $ 28.00 $ 22.00
Second Quarter $ 29.50 $ 17.25
Third Quarter $ 35.88 $ 27.50
Fourth Quarter $ 38.50 $ 31.38
1998
First Quarter $ 35.50 $ 27.25
Second Quarter $ 34.25 $ 22.00
Third Quarter $ 26.00 $ 5.63
Fourth Quarter $ 12.50 $ 5.44
</TABLE>
The Company has neither declared nor paid cash dividends on its Common
Stock during 1997 and 1998.
RECENT SALES OF UNREGISTERED SECURITIES
On January 6, 1998, Concentra issued 10,500 shares of Common Stock to
Robert D. Kirkpatrick, M.D., P.C. ("Kirkpatrick"), as a portion of the purchase
price for the Company's purchase of substantially all of the assets of
Kirkpatrick's business. These shares were issued in reliance on Section 4(2) of
the Securities Act of 1933 and Rule 506 promulgated thereunder.
On January 22, 1998, Concentra issued 3,500 shares of Common Stock to
Meadowlands Medical Associates, P.A. ("Meadowlands"), as a portion of the
purchase price for the Company's purchase of substantially all of the assets of
Meadowlands' business. These shares were issued in reliance on Section 4(2) of
the Securities Act of 1933 and Rule 506 promulgated thereunder.
On February 24, 1998, Concentra issued 7,100,690 shares of Common Stock to
certain of the shareholders of Preferred Payment Systems, Inc. ("PPS"), in
connection with the merger of PPS into a subsidiary of the Company. These
shares were issued in reliance on Section 4(2) of the Securities Act of 1933
and Rule 506 promulgated thereunder.
On March 1, 1998, Concentra issued 279,250 shares of Common Stock to the
shareholders of Rehabilitation Consultants for Industry, Inc. ("RCI"), as the
purchase price for the Company's purchase of the outstanding stock of RCI.
These shares were issued in reliance on Section 4(2) of the Securities Act of
1933 and Rule 506 promulgated thereunder.
On May 1, 1998, Concentra issued 70,000 shares of Common Stock to AMAX
Occupational Medicine ("AMAX"), as a portion of the purchase price for the
Company's purchase of substantially all of the assets of AMAX's business. These
shares were issued in reliance on Section 4(2) of the Securities Act of 1933
and Rule 506 promulgated thereunder.
On July 24, 1998, Concentra issued 45,000 shares of Common Stock to the
shareholders of New England Medical Claims Analysts Corp. ("NMCA"), as a
portion of the purchase price for the Company's purchase of the outstanding
stock of NMCA. These shares were issued in reliance on Section 4(2) of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
On July 29, 1998, Concentra issued 4,500 shares of Common Stock to Howard
E. Boulter as a portion of the purchase price for the Company's purchase of the
outstanding stock of The Exam Center, Inc. These shares were issued in reliance
on Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated
thereunder.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data is included in this Form 10-K in note 15 to the
Company's Consolidated Financial Statements on page F-23.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section contains certain forward-looking statements that are based on
management's current views and assumptions regarding future events, future
business conditions and the outlook for the Company based on currently
available information. Wherever possible, the Company has identified these
"forward-looking statements" (as defined in Section 27A of the Securities Act
and Section 21E of the Exchange Act) by words and phrases such as
"anticipates", "plans", "believes", "estimates", "expects", "will be developed
and implemented", and similar expressions. Readers are cautioned not to place
undue reliance on these forward-looking statements. These forward-looking
statements are subject to risks and uncertainties and future events could cause
the Company's actual results, performance or achievements to differ materially
from those expressed in, or implied by, these statements. The Company assumes
no obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
OVERVIEW
On August 29, 1997, Concentra Managed Care, Inc. ("Concentra" or the
"Company"), a Delaware corporation, was formed by the merger (the "1997
Merger") of CRA Managed Care, Inc. ("CRA") and OccuSystems, Inc.
("OccuSystems"). The 1997 Merger was a tax-free stock for stock exchange
accounted for as a pooling of interests.
Concentra Health Services, Inc. ("Health Services"), an operating
subsidiary of Concentra, which was formerly OccuSystems, Inc., manages
occupational healthcare centers at which it provides support personnel,
marketing, information systems and management services to its affiliated
physicians. Health Services owns all of the operating assets of the
occupational healthcare centers, including leasehold interests and medical
equipment. Health Services generates its net patient service revenues primarily
from the diagnosis, treatment and management of work-related injuries and
illnesses and from other occupational healthcare services, such as employment-
related physical examinations, drug and alcohol testing, functional capacity
testing and other related programs. For the years ended December 31, 1996, 1997
and 1998, Health Services derived 63.8%, 63.5% and 63.1% of its net revenues
from the treatment of work-related injuries and illnesses, respectively and
36.2%, 36.5% and 36.9% of its net revenues from non-injury related medical
services, respectively.
Physician and physical therapy services are provided at the Health
Services centers under management agreements with affiliated physician
associations (the "Physician Groups"), which are organized professional
corporations that hire licensed physicians and physical therapists to provide
medical services to the centers' patients. Health Services has a nominee
shareholder relationship with the Physician Groups as defined in EITF 97-2,
Application of APB Opinion No. 16 and FASB Statement No. 94 to Physician
Practice Entities, and as a result, the financial statements of the Physician
Groups are consolidated. Specifically:
o Health Services can at all times establish or effect change in the
nominee shareholder;
o Health Services can cause a change in the nominee shareholder an
unlimited number of times;
o Health Services has sole discretion without cause to establish or change
the nominee shareholders;
o Health Services has sole discretion as to the choice of new nominee
shareholder;
o Health Services and the Physician Groups would incur no more than
a nominal cost to cause a change in the nominee shareholder; and,
o Neither Health Services nor the Physician Groups are subject to
any significant adverse impact upon a change in the nominee shareholder.
The Company's management fees from the Physician Groups are calculated as
collected revenue net of compensation, benefits and other expenses incurred by
the Physician Groups.
Concentra Managed Care Services, Inc. ("Managed Care Services"), an
operating subsidiary of Concentra which was formerly CRA Managed Care, Inc.,
provides specialized cost containment and field case management services.
Specialized cost containment includes first report of injury, utilization
management (precertification and concurrent review), retrospective medical bill
review, telephonic case management, preferred provider organization ("PPO")
network access, independent medical examinations ("IMEs"), peer reviews and
out-of-network bill
22
<PAGE>
review services that are designed to reduce the cost of workers' compensation
claims, automobile accident injury claims and group health claims. On February
24, 1998, the Company merged with Preferred Payment Systems, Inc. ("PPS") in a
pooling-of-interests transaction and significantly expanded its presence in the
out-of-network group health bill review market. PPS, now operating as Concentra
Preferred Systems ("CPS"), is a nationwide 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. Managed Care Services has
experienced significant growth in its specialized cost containment services by
virtue of the following acquisitions: (1) FOCUS HealthCare Management, Inc.
("FOCUS") on April 2, 1996, (2) Prompt Associates, Inc. ("PROMPT") on October
29, 1996, (3) First Notice Systems, Inc. ("FNS"), on June 4, 1997, (4) About
Health, Inc. ("ABOUT HEALTH") by PPS in a two-step transaction on August 1,
1997 and October 31, 1997 and (5) other smaller acquisitions. Managed Care
Services currently derives most of its revenues on a fee-for-service or
percentage of savings basis.
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; however, field case management gross profit
margins deteriorated in the second half of 1998 prompting a reorganization in
the fourth quarter of 1998 to improve efficiency. As a result, the Company
recorded a non-recurring charge of $20,514,000 primarily associated with the
reorganization of its Managed Care Services division to improve efficiency
through facility consolidations and related headcount reductions, to recognize
an impairment loss on the intangible related to an acquired contract and costs
associated with settling claims on other expired contracts. Managed Care
Services believes that the current size of its field case management office
network is sufficient to serve the needs of its nationwide customers. As a
result, Managed Care Services anticipates opening only a few new field case
management offices per year if client needs in selected regions require it. The
Company would, however, continue to examine the possibility of acquiring
additional field case management offices or businesses if an appropriate
strategic opportunity arose.
The following table provides certain information concerning the Company's
service locations:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Service locations at the end of the period:
Occupational healthcare centers (1) ................................ 109 140 156
Cost containment services offices .................................. 70 83 85
Field case management offices (2) .................................. 118 123 89
Physician practices acquired during the period (3) .................. 32 22 12
Physician practices developed during the period ..................... 10 8 4
Number of affiliated physicians at the end of the period ............ 196 252 278
Occupational healthcare centers - same market revenue growth (4)..... 10.7% 11.0% 11.4%
</TABLE>
- --------
(1) Does not include the assets of the practices which were acquired and
subsequently divested or consolidated into existing centers within the
market.
(2) The decline in field case management offices in 1998 is primarily due to
the fourth quarter of 1998 reorganization which included facility
consolidations.
(3) Represents the assets of practices which were acquired during each period
presented and not subsequently divested.
(4) 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).
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
Total revenues increased 24.9% in 1998 to $611,056,000 from $489,318,000
in 1997. Health Services' revenues increased 24.9% in 1998 to $259,481,000 from
$207,676,000 in 1997. Managed Care Services' revenues increased 24.8% in 1998
to $351,575,000 from $281,642,000 in 1997, as specialized cost containment
revenues
23
<PAGE>
increased 28.6% in 1998 to $183,734,000 from $142,919,000 in 1997 and field
case management revenues increased 21.0% in 1998 to $167,841,000 from
$138,723,000 in 1997.
The Health Services revenue growth resulted from the acquisition of
practices (including the acquisition of 16 occupational medical centers and the
management of an additional four medical centers from Vencor, Inc. ("VMC") in
the fourth quarter of 1997), an increase in business in existing markets,
development of sites in new markets, as well as an increase in consulting and
other ancillary services. The specialized cost containment revenue growth is
largely attributable to the growth of PPS (including the impact of its
acquisition of ABOUT HEALTH in August 1997), the acquisition of FNS and other
immaterial acquisitions, as well as revenue increases attributable to growth in
retrospective medical bill review, telephonic case management and claims review
services in existing service locations. The field case management revenue
growth is primarily due to the business generated from two field case
management acquisitions and continued growth in revenues from existing service
locations.
The Company's total contractual allowances offset against revenues during
the years ended December 31, 1998 and 1997 were $16,095,000 and $14,718,000,
respectively.
COST OF SERVICES
Total cost of services increased 25.9% in 1998 to $469,297,000 from
$372,639,000 in 1997. Health Services' cost of services increased 29.5% in 1998
to $201,181,000 from $155,376,000 in 1997, while Managed Care Services' cost of
services increased 23.4% in 1998 to $268,116,000 from $217,263,000 in 1997.
Total gross profit margins decreased slightly to 23.2% in 1998 compared to
23.8% in 1997. Health Services' gross profit margins decreased to 22.5% in 1998
compared to 25.2% in 1997, while Managed Care Services' gross profit margins
increased to 23.7% in 1998 compared to 22.9% in 1997.
Health Services' gross profit margins 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 gross profit 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 gross
profit margins of acquired or developed practices have tended to improve.
Managed Care Services has seen improvement in gross profit margins
primarily resulting from a shift in its revenue mix towards specialized cost
containment services, including the services provided by PPS (including its
acquisition of ABOUT HEALTH) and FNS, which historically have had higher gross
profit margins than revenues derived from field case management. Although the
gross profit margins improved slightly in 1998, they were negatively affected
by a decrease in provider bill review gross profit margins and a slow down in
the growth of field case management revenues and resulting gross profit
margins. The provider bill review gross profit margins decrease was due
primarily to start- up costs, pricing concessions on new customers and an
increase in the level of uncollectable accounts receivable charges. Concentra
expects the gross profit margin for provider bill review to continue to be
affected negatively for the first half of 1999 compared to the first half of
1998 due to the impact of pricing concessions made in the second half of 1998
and a higher level of bad debt provision.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 13.8% in 1998 to $45,326,000
from $39,831,000 in 1997, or 7.4% and 8.1% as a percentage of revenue for 1998
and 1997, respectively. The increase in general and administrative expenses in
1998 was due primarily to the continued investment in the Information Services
and Technology Group and in accounting and administrative personnel.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased 37.4% in 1998 to $8,119,000 from
$5,908,000 in 1997, or 1.3% and 1.2% as a percentage of revenues for 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 FNS, ABOUT HEALTH by PPS, VMC and
various smaller acquisitions by Health Services.
NON-RECURRING CHARGE
The Company recorded non-recurring charges for the years ended December
31, 1998 and 1997 of $33,114,000 and $38,625,000, respectively.
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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 utilization of
this charge through December 31, 1998, was approximately $5,136,000 for
professional fees and services, $2,355,000 in costs associated with personnel
reductions, $746,000 in facility consolidations and closings, $1,627,000
associated with the write-off of deferred financing fees on PPS indebtedness
retired and $1,264,000 of other non-recurring costs. At December 31, 1998,
approximately $1,472,000 of the non-recurring charge remains primarily related
to remaining facility lease obligations. In the fourth quarter of 1998,
the Company recorded a non-recurring charge of $20,514,000 primarily associated
with the reorganization of its Managed Care Services division to improve
efficiency through facility consolidations and related headcount reductions, to
recognize an impairment loss on the intangible related to an acquired contract
and costs associated with settling claims on other expired contracts. The
utilization of this charge through December 31, 1998 was approximately
$7,416,000 in charges related to the recognition of an impairment loss on the
intangible related to an acquired contract, $2,490,000 in costs associated with
personnel reductions and $1,140,000 in facility consolidations. At December 31,
1998, approximately $9,468,000 of the non- recurring charge remains primarily
related to remaining facility lease obligations and costs associated with
settling claims or other expired contracts.
The Company's reorganization plan of its Managed Care Services division,
including headcount reductions and facility consolidations, was developed
between early September and the end of October 1998. The reorganization plan
was carried out in late October and early November 1998 with all headcount
reductions of 168 employees completed and most of the facility consolidations
completed or underway in the fourth quarter of 1998. The restructuring plan has
not changed significantly from the Company's original estimate since most of
the actions were completed or underway by December 31, 1998. The Company is
realizing savings of approximately $2,400,000 per quarter in personnel and
facility related expenses and has not experienced any significant interruptions
in its operations as a result of the restructuring.
In the third quarter of 1997, the Company recorded a non-recurring charge
of $38,625,000 associated with the merger of CRA Managed Care, Inc. and
OccuSystems, Inc. The Company finalized its merger and transition plan during
the third quarter of 1997 with much of the detailed planning occurring in
August and September 1997, prior to the end of the quarter. The merger and
transition plan was approved by senior management in September 1997 and it
identified all significant actions to be taken, including reductions in
duplicative personnel The utilization of this charge through December 31, 1998,
was approximately $11,569,000 for professional fees and services, $16,216,000
in costs associated with personnel reductions and the consolidation of CRA's
and OccuSystems' employee benefits, $5,945,000 in facility consolidations and
closings, $2,541,000 for the write-off of start-up costs and $2,354,000 of
other charges.
The Company expects to expend approximately $8,400,000 over the next
twelve months relating to the first quarter of 1998 and fourth quarter of 1998
non-recurring changes, consisting of approximately $1,800,000 of severance
related costs, $3,200,000 of facility related costs, $3,000,000 of costs
associated with settling claims on expired contracts and $400,000 of other
costs.
INTEREST EXPENSE
Interest expense increased $5,354,000 in 1998 to $18,021,000 from
$12,667,000 in 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 partially offset by
the repayment of borrowings under the Senior Credit Facility and debt assumed
in the merger with PPS.
INTEREST INCOME
Interest income increased $2,362,000 in 1998 to $4,659,000 from $2,297,000
in 1997 due primarily to the investment of excess cash as a result of the net
proceeds of $223,589,000 from the issuance the 4.5% Convertible Subordinated
Notes after the payment of approximately $122,000,000 of outstanding borrowings
under the Senior Credit Facility, debt assumed in the merger with PPS and the
payment to PPS dissenting shareholders.
OTHER EXPENSE, NET
Other expense, net decreased $839,000 in 1998 to $44,000 from $883,000 in
1997 primarily as a result of PPS' 1997 minority interest expense of $556,000
related to the two-step acquisition of ABOUT HEALTH and the 1997 amortization
of start-up costs of $315,000 recorded prior to the write- off of start-up
costs in the third quarter of 1997, partially offset by earnings in
unconsolidated affiliates.
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PROVISION FOR INCOME TAXES
The Company's provision for income taxes in 1998 and 1997 was $19,308,000
and $11,062,000, respectively. On a pro forma basis, giving effect to the PPS
transaction, the Company's provision for income taxes in 1998 and 1997 would
have been $19,308,000 and $13,873,000, respectively, resulting in pro forma
effective tax rates of 46.2% and 65.9%, respectively. Excluding the tax effects
of the non-recurring charges in the third quarter of 1997, the first quarter of
1998 and the fourth quarter of 1998, the pro forma effective tax rate would
have been 41.0% for 1998 and 39.3% for 1997. The Company expects to provide for
its taxes at an effective tax rate of approximately 41% to 42% for 1999.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Total revenues increased 31.3% in 1997 to $489,318,000 from $372,683,000
in 1996. Health Services' revenues increased 22.1 % in 1997 to $207,676,000
from $170,035,000 in 1996. Managed Care Services' revenues increased 39.0% in
1997 to $281,642,000 from $202,648,000 in 1996, as specialized cost containment
revenues increased 70.6% in 1997 to $142,919,000 from $83,784,000 in 1996 and
field case management revenues increased 16.7% in 1997 to $138,723,000 from
$118,864,000 in 1996.
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 VMC in the fourth quarter
of 1997), development of sites in new markets, an increase in business in
existing markets, as well as an increase in consulting and other ancillary
services. The specialized cost containment revenue growth is largely
attributable to the acquisitions of FOCUS, PROMPT, FNS and ABOUT HEALTH, as
well as revenue increases attributable to growth in retrospective medical bill
review, telephonic case management and claims review services in existing
service locations and the expansion into additional service locations. The
field case management revenue growth is primarily due to growth in revenues
from existing service locations, and the opening of 13 offices during 1996 and
1997.
The Company's total contractual allowances offset against revenues during
the years ended December 31, 1997 and 1996 were $14,718,000 and $3,680,000,
respectively.
COST OF SERVICES
Total cost of services increased 28.5% in 1997 to $372,639,000 from
$289,928,000 in 1996. Health Services' cost of services increased 18.8% in 1997
to $155,376,000 from $130,754,000 in 1996, while Managed Care Services' cost of
services increased 36.5% in 1997 to $217,263,000 from $159,174,000 in 1996.
Total gross profit margins increased to 23.8% in 1997 compared to 22.2% in
1996. Health Services' gross profit margins increased to 25.2% in 1997 compared
to 23.1% in 1996, while Managed Care Services' gross profit margins increased
to 22.9% in 1997 compared to 21.5% in 1996.
Health Services' gross profit margin improvement has resulted from
increased efficiencies and productivity. As certain functions are consolidated
and other staff-related changes occur, coupled with increased patient volume,
the margins of acquired or developed practices have tended to improve. Managed
Care Services has seen improvement in gross margin primarily resulting from a
shift in its revenue mix towards specialized cost containment services,
including the services provided by FOCUS, PROMPT, FNS and ABOUT HEALTH, which
historically have had higher gross profit margins than revenues derived from
field case management.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 20.1% in 1997 to $39,831,000
from $33,155,000 in 1996, or 8.1% and 8.9% as a percentage of revenue for 1997
and 1996, respectively. The increase in general and administrative expenses in
1997 was due primarily to expenses associated with acquisitions and the
continued investment in the Information Services and Technology Group.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased 71.6% in 1997 to $5,908,000 from
$3,442,000 in 1996, or 1.2% and 0.9% as a percentage of revenues for 1997 and
1996, respectively. This increase is the result of amortizing additional
intangible assets such as goodwill, customer lists and assembled workforces
primarily associated with the purchase of FOCUS, PROMPT, FNS, ABOUT HEALTH by
PPS, VMC and other smaller acquisitions.
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NON-RECURRING CHARGE
The Company recorded a non-recurring charge of $38,625,000 associated with
the 1997 Merger. The charges incurred were approximately $11,569,000 for
professional fees and services, $16,216,000 in costs associated with personnel
reductions and the consolidation of CRA's and OccuSystems' employee benefits,
$5,945,000 in facility consolidations and closings, $2,541,000 for the
write-off of start-up costs and $2,354,000 of other charges. At December 31,
1997, approximately $7,527,000 of the non-recurring charge remains primarily
related to personnel related charges and facility consolidations and closings.
INTEREST EXPENSE
Interest expense increased $8,926,000 in 1997 to $12,667,000 from
$3,741,000 in 1996 due primarily to the issuance of $97,750,000 of 6%
Convertible Subordinated Notes in December 1996, the issuance of PPS
indebtedness in August 1996 and to increased outstanding credit facility
borrowings used to finance acquisitions.
INTEREST INCOME
Interest income increased $1,438,000 in 1997 to $2,297,000 from $859,000
in 1996 due primarily to the investment of excess cash generated from the
issuance of the 6% Convertible Subordinated Notes until the funds were utilized
to finance certain acquisitions.
OTHER EXPENSE, NET
Other expense, net increased $47,000 in 1997 to $883,000 from $836,000 in
1996 primarily due to minority interests.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes in 1997 and 1996 was $11,062,000
and $13,437,000, respectively. On a pro forma basis, giving effect to the PPS
transaction, the Company's provision for income taxes in 1997 and 1996 would
have been $13,873,000 and $16,167,000, respectively, resulting in pro forma
effective tax rates of 65.9% and 39.0%, respectively. Excluding the tax effects
of the non-recurring charge, the pro forma effective tax rate would have been
39.3% for 1997.
SEASONALITY
The Company's business is seasonal in nature. Health Services' patient
visits at its medical centers are lower in the first and fourth quarters,
primarily because of fewer occupational injuries and illnesses during those
time periods due to plant closings, vacations and holidays. In addition,
employers generally hire fewer employees in the fourth quarter, thereby
reducing the number of pre-placement physical examinations and drug and alcohol
tests conducted at the medical centers during that quarter. Managed Care
Services' field case management revenues have historically been flat in the
fourth quarter compared to the third quarter due to the impact of vacations and
holidays. Although the Company's revenue growth may obscure the effect of
seasonality in the Company's financial results, the first and fourth quarters
generally reflect lower revenues when compared to the Company's second and
third quarters.
INFORMATION SYSTEMS - YEAR 2000
The Year 2000 concern, which is common to most companies, concerns the
inability of information and non-information systems, primarily computer
software programs, to properly recognize and process date sensitive information
as the Year 2000 approaches. System database modifications and/or
implementation modifications will be required to enable such information and
non-information systems to distinguish between 21st and 20th century dates. The
Company has completed a number of acquisitions in recent years, and the
information systems of some of the acquired operations have not been fully
integrated with the Company's information systems.
The Company has formed a Year 2000 Program Office to provide a centralized
management function for the entire organization that will assist in
identifying, addressing and monitoring the Company's Year 2000 readiness and
compliance programs. The Year 2000 Program Office has organized teams at each
division to research Year 2000 compliance status and implement the appropriate
solutions. The Company's Year 2000 Program includes five phases - awareness,
assessment, remediation, testing and implementation. The awareness and
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assessment phases are substantially complete with the exception of the
assessment phase of the Company's information systems infrastructure (i.e.,
desktops and other hardware) Year 2000 compliance.
The Company's Year 2000 Program Office engaged an outside consultant to
assist in an inventory and assessment of Year 2000 affected areas, with a
primary focus on information technology systems, third party software and key
suppliers and selected customers. This inventory and assessment was completed
in the fourth quarter of 1998. The Company's Year 2000 Program Office engaged
an outside consultant in the first quarter of 1999 to assist in an inventory,
assessment and remediation efforts of the Company's information systems
infrastructure Year 2000 compliance. The Company completed in the fourth
quarter of 1998 an internal inventory and assessment of non-information
technology systems (e.g. embedded systems contained in medical equipment).
Remediation or replacement of noncompliant Year 2000 medical equipment began in
the first quarter of 1999 and is expected to be completed by the third quarter
of 1999.
The Year 2000 Program Office has established a protocol for soliciting
Year 2000 compliance information from third parties and requests for compliance
information from all key suppliers and selected customers were sent in the
fourth quarter of 1998 and the first quarter of 1999. The Company continues to
gather Year 2000 compliance information from third parties and anticipates
receiving the majority of responses by the end of the second quarter of 1999.
To the extent responses have not been received, the Year 2000 Program Office
has ranked the third parties by level of importance to the Company's operations
and is following up with phone surveys, additional mailings and research of
public information issued by the third-party (i.e., "web research"). These
responses should indicate the extent to which the Company is vulnerable to
those third parties' failure to remediate their own Year 2000 issues.
The Company's identified Year 2000 projects overlap with its ongoing
investments in information technology, as such, there are presently Year 2000
projects at the assessment, remediation, testing and implementation phases. The
Company believes that it has identified most "mission critical" issues and has
developed or is in the process of modifying appropriate action plans which may
include software upgrades, replacement of noncompliant components or referral
of problems related to third party-provided software to the original supplier.
The Company has prepared its plans to have all "mission critical" projects Year
2000 compliant by the end of the fourth quarter of 1999. While some
non-critical systems may not be addressed until after December 1999, the
Company believes such systems will not disrupt the Company's operations in a
material manner. Any additional issues that may arise will be classified as
either "mission critical" or non-critical, and appropriate action plans will be
developed and implemented. The Company expects to have formulated any
contingency plans deemed necessary by the third quarter of 1999.
The Company currently estimates that the total cost of implementing its
Year 2000 Program will be between $5,000,000 and $10,000,000. This preliminary
estimate is based upon presently available information and will be updated as
the Company finalizes its assessments and continues through implementation. In
particular, the estimate may also need to be increased as the Company receives
feedback from key suppliers and selected customers and formulates contingency
plans, if required. It is expected these costs will not be significantly
different from the Company's current 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. However, until the information systems infrastructure assessment
phase is completed in the second quarter of 1999, the Company is uncertain if
its present plans and resources will be sufficient to ensure Year 2000
compliance of all "mission critical" projects by January 1, 2000. The Company's
capital and noncapital investment in the Information Services and Technology
Group was approximately $32,000,000 in 1998 and is expected to be approximately
$50,000,000 in 1999. Of this investment, the Company's Year 2000 Program Office
incurred expenses of approximately $300,000 in fiscal 1998 primarily associated
with the engagement of an outside consultant to assist in an inventory and
assessment of Year 2000 affected areas.
Although the Company does not anticipate any disruption in its operations
or financial reporting as a result of system upgrades or system integrations,
there can be no assurance that such disruption will not occur or that the
desired benefits from the Year 2000 compliance of the Company's information and
non-information systems will be realized. If the Company does not identify and
remediate Year 2000 issues prior to January 1, 2000, its operations could be
disrupted which could have a material adverse effect on the Company's business
or operating results or financial condition. In addition, the Company places a
high degree of reliance on computer systems of third parties, such as
customers, trade suppliers and computer hardware and commercial software
suppliers. Although the Company is assessing the readiness of these third
parties, there can be no guarantee that the
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failure of these third parties to modify their systems in advance of December
31, 1999 would not have a material adverse effect on the Company. In addition,
the Company's operations could be disrupted if the companies with which the
Company does business do not identify and correct any Year 2000 issues and such
failure adversely affects their ability to do business with the Company. If all
Year 2000 issues are not identified and all action plans are not completed and
contingency plans become necessary, the Company may not be Year 2000 compliant
which could have a material adverse effect on the Company's long-term results
of operations, liquidity, or consolidated financial position. The amount of
potential liability and lost revenue has not been estimated.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from (used for) operations were $34,949,000,
($487,000) and $15,595,000 for the years ended December 31, 1998, 1997 and
1996, respectively. During 1998, working capital used $20,283,000 of cash
primarily due to an increase in accounts receivable of $19,765,000 and prepaid
expenses and income taxes of $1,480,000 and offset by an increase in accounts
payable, accrued expenses and income taxes of $962,000. Accounts receivable
increased primarily due to continued revenue growth, while accounts payable,
accrued expenses and income taxes was affected by the timing of payments and
the remaining obligations relating to the first quarter and fourth quarter of
1998 non-recurring charges.
The Company expects to expend approximately $8,400,000 over the next
twelve months relating to the first quarter of 1998 and fourth quarter of 1998
non-recurring charges, consisting of approximately $1,800,000 of severance
related costs, $3,200,000 of facility related costs, $3,000,000 of costs
associated with settling claims on expired contracts and $400,000 of other
costs.
The Company utilized net cash of $18,070,000 in connection with
acquisitions, $15,523,000 to purchase marketable securities and $34,187,000 of
cash to purchase property and equipment during 1998, the majority of which was
spent on new computer hardware and software technology. The Company's capital
and non-capital investment in the Information Services and Technology Group was
approximately $32,000,000 in 1998 and are expected to be approximately
$50,000,000 in 1999.
Cash flows provided by financing activities of $121,555,000 were derived
primarily from the issuance of $230,000,000 in 4.5% Convertible Subordinated
Notes, or $223,589,000 net of deferred finance fees. A portion of the proceeds
from the issuance of the 4.5% Convertible Subordinated Notes was used to repay
borrowings under the Senior Credit Facility, repay debt assumed in the merger
with PPS, and for the payment of $15,047,000 to PPS dissenting shareholders.
Net proceeds from the issuance of Common Stock under employee stock purchase
and option plans and the related tax benefit was $14,403,000.
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, if needed, will be sufficient to fund the Company's
working capital, medical center acquisitions and capital expenditure
requirements for at least the next twelve months. As a result of the fourth
quarter 1998 non-recurring charge, the Company was not in compliance with
certain leverage ratio covenants under the $100,000,000 Senior Credit Facility
in the fourth quarter of 1998 and the Company expects it will not be in
compliance with those covenants in the first quarter of 1999. The Company
received a waiver on all financial covenants through the first quarter of 1999.
The Company does not have any borrowings outstanding under the Senior Credit
Facility and does not anticipate the need to borrow under the Senior Credit
Facility for the next twelve months.
The Company's long-term liquidity needs consist of working capital and
capital expenditure requirements, the funding of any future acquisitions and
the repayment of the 6% Convertible Subordinated Notes in 2001 and 4.5%
Convertible Subordinated Notes in 2003. The Company intends to fund these
long-term liquidity needs from the cash generated from operations, available
borrowings under the Senior Credit Facility and, if necessary, future debt or
equity financing. There can be no assurance that any future debt or equity
financing will be available on terms favorable to the Company.
SUBSEQUENT EVENTS
On March 2, 1999, Concentra entered into a definitive agreement to merge
(the "Merger") with Yankee Acquisition Corp. ("Yankee"), a corporation formed
by Welsh, Carson, Anderson & Stowe ("WCAS"), a 14.9% stockholder of the
Company. Concentra's Board of Directors unanimously approved the transaction
based upon the recommendation of its special committee of the Board of
Directors, which was formed on October 29, 1998 to evaluate strategic
alternatives in response to several unsolicited expressions of interest
regarding the possible acquisition of some or all of the Company's Common
Stock. On March 24, 1999, Concentra entered into an
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Amended and Restated Agreement and Plan of Merger with Yankee (the "Amended
Merger Agreement"). Pursuant to the Amended Merger Agreement, Yankee will
acquire approximately 87%, funds managed by Ferrer Freeman Thompson & Co.
("FFT") will acquire approximately 7% and other investors will acquire
approximately 6% of the post-merger shares of common stock of the Company for
$16.50 per share. As a result of the Merger, each outstanding share of
Concentra Common Stock will be converted into the right to receive $16.50 in
cash.
In connection with the Merger, effective March 2, 1999, Concentra amended
its Rights Agreement. The amendment provides, among other things, that Yankee
and its affiliates will not be deemed an Acquiring Person (as such term is
defined in the Rights Agreement) and that the Rights Agreement will expire
immediately prior to the effective time of the Merger.
The transaction is valued at approximately $1,100,000,000, including the
refinancing of $327,750,000 of the 6% and 4.5% Convertible Subordinated Notes
which contain change in control provisions in the related indentures. The
transaction is structured to be accounted for as a recapitalization and is
expected to be completed in the third quarter of 1999. The transaction is
conditioned upon, among other things, approval of the shareholders of Concentra,
receipt of financing and certain regulatory approvals.
To finance the acquisition of the Company, WCAS will invest approximately
$369,432,000 in equity financing, including the value of shares and convertible
notes already owned by WCAS, and up to $110,000,000 in subordinated
indebtedness. Additionally, FFT will invest approximately $30,600,000 and other
investors will invest approximately $23,000,000 in equity. WCAS has also
received commitments from various lenders to provide Yankee with $190,000,000
in senior subordinated notes, a $375,000,000 term loan and a $100,000,000
revolving credit facility to replace the Company's existing Senior Credit
Facility. Additionally, Yankee would also utilize the Company's excess cash on
hand at the time of the merger to help finance the purchase of the Common
Stock. Subsequent to the exchange of shares for cash, Yankee would merge with
Concentra Managed Care, Inc. with Concentra Managed Care, Inc. surviving.
As of March 26, 1999, Concentra is aware of three lawsuits that have been
filed by alleged stockholders of Concentra relating to the Merger. All three
lawsuits were filed in the Chancery Court for New Castle County, Delaware. Each
of the lawsuits names Concentra, its directors and Yankee as defendants. The
plaintiff in each lawsuit seeks to represent a putative class of all public
holders of Concentra common stock. The lawsuits allege, among other things,
that the directors of Concentra breached their fiduciary duties to Concentra's
stockholders by approving the Merger. The lawsuits seek, among other things,
preliminary and permanent injunctive relief prohibiting consummation of the
Merger, unspecified damages, attorneys' fees and other relief. Concentra
expects that these lawsuits will be consolidated into a single action. The
Company intends to contest these lawsuits vigorously.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Concentra has not entered into derivative financial instruments or
derivative commodity instruments. Other financial instruments are described in
Note 7 of Notes to Consolidated Financial Statements, beginning on page F-13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements of the Company and other
information required by this Item 8 are included in this Form 10-K beginning on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
GOVERNANCE OF THE COMPANY; BOARD OF DIRECTORS AND COMMITTEES
Pursuant to the Delaware General Corporation Law, as implemented by the
Company's Certificate of Incorporation and Bylaws, the business, property and
affairs of the Company are managed under the direction of the Board of
Directors. Members of the Board are kept informed of the Company's business
through discussions with the Chairman, the President and other officers, by
reviewing materials provided to them and by participating in meetings of the
Board and its committees.
The Board of Directors is divided into three classes and is presently
comprised of eight members. The directors of each class are elected for
three-year terms, with terms of the three classes staggered so that directors
from a single class are elected at each annual meeting of stockholders. George
H. Conrades, Robert A. Ortenzio, and Lois E. Silverman are Class II directors
whose terms of office expire at the annual meeting of stockholders in 1999.
John K. Carlyle is a Class III director whose term of office expires at the
annual meeting of stockholders in 2000. Hon. Willis D. Gradison, Jr., Mitchell
T. Rabkin, M.D., Richard D. Rehm, M.D. and Daniel J. Thomas are Class I
directors whose terms of office expire at the annual meeting of stockholders in
2001.
During 1998, the Board of Directors held a total of 13 meetings, including
4 regular meetings and 9 special meetings. Each director attended more than 75%
of the aggregate of (i) the total number of meetings held by the Board of
Directors and (ii) the total number of meetings held by all committees of the
Board of Directors on which he served.
COMMITTEES OF THE BOARD OF DIRECTORS
During 1998, the Board of Directors of the Company had two standing
committees: an Audit Committee and an Option and Compensation Committee.
The Audit Committee held two meetings in 1998. The Audit Committee reviews
the adequacy of the Company's system of internal controls and accounting
practices. In addition, the Audit Committee reviews the scope of the annual
audit of the Company's independent public accountants, Arthur Andersen LLP,
prior to its commencement, and reviews the types of services for which the
Company retains Arthur Andersen LLP. Commencing in December 1998, the Board of
Directors designated the Audit Committee as the committee charged with primary
oversight of the Company's Corporate Integrity Program, currently under
development.
The Option and Compensation Committee held six meetings in 1998. The
functions of the Option and Compensation Committee are to establish annual
salary levels, approve fringe benefits and administer any special compensation
plans or programs for officers of the Company, review and approve the salary
administration program for the Company and administer the Company's incentive
and stock option plans.
Hon. Willis D. Gradison, Jr., Mitchell T. Rabkin, M.D. and Lois E.
Silverman currently serve on the Audit Committee. John K. Carlyle, George H.
Conrades and Robert A. Ortenzio currently serve on the Option and Compensation
Committee.
VOTING AGREEMENT
Pursuant to an agreement entered into between Lois E. Silverman and Donald
J. Larson, Mr. Larson has agreed to vote his shares in favor of Ms. Silverman
or her designee as a member of the Board for as long as Ms. Silverman, her
family and trusts established by her hold at least 519,113 shares of Common
Stock.
31
<PAGE>
Tabular information and a brief biography of each Director of the Company
follow.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ----- ------------------------------------------------
<S> <C> <C>
John K. Carlyle 44 Chairman, Director
Daniel J. Thomas 40 President and Chief Executive Officer, Director
George H. Conrades 60 Director
Hon. Willis D. Gradison, Jr. 70 Director
Robert A. Ortenzio 41 Director
Mitchell T. Rabkin, M.D. 68 Director
Richard D. Rehm, M.D. 53 Director
Lois E. Silverman 58 Director
</TABLE>
JOHN K. CARLYLE has served as a Director of the Company since August 1997.
Mr. Carlyle has served as Chairman of the Board of Directors of the Company
since September 1998. In addition, he served as Chairman of the Board of
Directors of the Company from August 1997 to January 1998. Mr. Carlyle is
currently President and CEO of MAGELLA Healthcare Corporation, a private
physician practice management company devoted to the areas of neonatology and
perinatology. Mr. Carlyle served as Chairman and Chief Executive Officer of
OccuSystems, Inc., one of Concentra's predecessor companies ("OccuSystems"),
from January 1997 until August 1997. He joined OccuSystems in 1990 as its
President and served in that capacity until December 1996. Mr. Carlyle served
as the Chief Executive Officer and a director of OccuSystems from 1991 until
August 1997. Mr. Carlyle has served as a director of National Surgery Centers,
Inc., an owner and operator of free standing, multi-specialty ambulatory
surgery centers, since 1991. He also serves as a director of several private
companies. Mr. Carlyle is a certified public accountant.
DANIEL J. THOMAS has served as a Director of the Company since January
1998. He has served as President and Chief Executive Officer since September
1998, and he served as President and Chief Operating Officer of the Company
from January 1998 until September 1998. He served as Executive Vice President
and President of the Practice Management Services subsidiary of the Company
from August 1997 until January 1998. He served as a director of OccuSystems and
as its President and Chief Operating Officer from January 1997 to August 1997.
From April 1993 through December 1996, Mr. Thomas served as OccuSystems'
Executive Vice President and Chief Operating Officer. Prior to joining
OccuSystems in 1993, Mr. Thomas served in various capacities with Medical Care
International, Inc., most recently as its Senior Vice President and Divisional
Director. Mr. Thomas is a certified public accountant.
GEORGE H. CONRADES has served as a Director of the Company since August
1997. He served as a director of CRA Managed Care, Inc., one of Concentra's
predecessor companies ("CRA"), from July 1994 until August 1997. Since August
1998, Mr. Conrades has been a Venture Partner with Polaris Venture Partners.
Mr. Conrades served as President and Chief Executive Officer of BBN
Corporation/GTE Internetworking, a provider of internetworking services,
products and application solutions from 1994 to August 1998. He had served as
Chairman of the Board of BBN from November 1995 to July 1997, when GTE
Corporation acquired BBN. From 1992 to 1994, Mr. Conrades was a partner in
Conrades/Reilly Associates, a business consulting company. From 1961 to 1992,
Mr. Conrades held a number of management positions with International Business
Machines Corp., most recently as Senior Vice President and a member of IBM's
Corporate Management Board. Mr. Conrades is also a director of CBS Corporation,
Infinity Broadcasting, and Cubist Pharmaceuticals, Inc.
HON. WILLIS D. GRADISON, JR. has served as a Director of the Company since
May 1998. He currently serves as Senior Public Policy Counselor for Patton
Boggs, L.L.P. From 1993 to December 1998, Mr. Gradison served as President of
the Health Insurance Association of America ("HIAA"), the trade group
representing the nation's commercial health insurance companies. Prior to
assuming his position with HIAA, Mr. Gradison served in the United States House
of Representatives for 18 years where, most recently, he was ranking Minority
Member of the House Budget Committee and the Health Subcommittee of the House
Ways and Means Committee.
ROBERT A. ORTENZIO has served as a Director of the Company since August
1997. He served as director of OccuSystems from May 1992 until August 1997. Mr.
Ortenzio currently serves as the President of Select Medical Corporation, a
private healthcare company based in Mechanicsburg, Pennsylvania, and has served
in such capacity since August 1996. From 1986 to 1996, Mr. Ortenzio was
employed by Continental Medical Systems, Inc., a nationwide provider of
rehabilitation services, from 1986 until 1988 as its Senior Vice President,
from 1988 until June 1995
32
<PAGE>
as its President and Chief Operating Officer and from July 1995 to August 1996
as its President and Chief Executive Officer. Mr. Ortenzio also served as the
Executive Vice President and a director of Horizon/CMS Healthcare Corporation
from July 1995 to August 1996.
MITCHELL T. RABKIN, M.D. has served as a Director of the Company since
August 1997. He served as a director of CRA from February 1995 until August
1997. Dr. Rabkin is currently a Distinguished Institute Scholar for the
Institute for Education and Research of Beth Israel Deaconess Medical Center.
From 1966 to September 1996, Dr. Rabkin served as Chief Executive Officer of
Boston's Beth Israel Hospital. He holds the rank of Professor of Medicine at
Harvard Medical School. From October 1996 to October 1998, Dr. Rabkin served as
Chief Executive Officer of CareGroup, Inc., the parent corporation of Beth
Israel Deaconess Medical Center. Dr. Rabkin is a graduate of Harvard College
and received his M.D. from Harvard Medical School.
RICHARD D. REHM, M.D. has served as a Director of the Company since May
1998. He currently serves as President of Network Health Services, a private
company based in Nashville, Tennessee. Dr. Rehm founded OccuSystems in 1990 and
served as its Chairman of the Board from 1991 through December 1996 and as a
director through August 1997. Dr. Rehm has owned, operated and developed
occupational healthcare centers since 1979.
LOIS E. SILVERMAN has served as a Director of the Company since August
1997. She co-founded CRA in 1978 and served as Chairman of the Board of
Directors of CRA from March 1994 until August 29, 1997 and as Chief Executive
Officer of CRA from 1988 to December 31, 1995. Prior to founding CRA, Ms.
Silverman held the position of Northeast Regional Manager at IntraCorp., a
Division of Cigna Corporation. Ms. Silverman is a director of Sun Healthcare
Group, Inc., and CareGroup, Inc., parent corporation of Beth Israel Deaconess
Medical Center, and serves as a Trustee of Simmons College and Overseer of
Tufts Medical Schools.
EXECUTIVE OFFICERS
Executive officers are generally elected annually by the Board of
Directors to serve, subject to the discretion of the Board of Directors, until
their respective successors are elected. Tabular information and a brief
biography of each executive officer of the Company follow. For information
about Mr. Carlyle and Mr. Thomas, see their biographies under "Directors"
above.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- ----- ------------------------------------------------------
<S> <C> <C>
John K. Carlyle 44 Chairman, Director
Daniel J. Thomas 40 President and Chief Executive Officer, Director
James M. Greenwood 38 Executive Vice President of Corporate Development
Richard A. Parr II 40 Executive Vice President, General Counsel and
Secretary
Joseph F. Pesce 50 Executive Vice President, Chief Financial Officer and
Treasurer
W. Tom Fogarty, M.D. 51 Senior Vice President and Chief Medical Officer
Kenneth Loffredo 41 Senior Vice President of Marketing and Sales
</TABLE>
JAMES M. GREENWOOD has served as Executive Vice President of Corporate
Development since February 1998 and as Senior Vice President of Corporate
Development of the Company from August 1997 to February 1998. He served as
OccuSystems' Chief Financial Officer from 1993 when he joined OccuSystems as a
Vice President until August 1997. Mr. Greenwood served as a Senior Vice
President of OccuSystems since May 1994. From 1988 until he joined OccuSystems
in 1993, Mr. Greenwood served in numerous positions with Bank One, Texas, N.A.,
and its predecessors, most recently as Senior Vice President and Manager of
Mergers and Acquisitions. Mr. Greenwood is a certified public accountant.
RICHARD A. PARR II has served as Executive Vice President, General Counsel
and Secretary of the Company since August 1997. He served as OccuSystems'
Executive Vice President, General Counsel and Secretary from August 1996 to
August 1997. Prior to joining OccuSystems, Mr. Parr served as Vice President
and Assistant General Counsel of OrNda HealthCorp, a national hospital
management company, from April 1993 through August 1996 and as Associate
General Counsel of OrNda HealthCorp from September 1991 through March 1993.
33
<PAGE>
JOSEPH F. PESCE has served as Executive Vice President, Chief Financial
Officer and Treasurer of the Company since August 1997. He served as Senior
Vice President-Finance and Administration of CRA from August 1996 to August
1997 and as Chief Financial Officer and Treasurer of CRA from October 1994 to
August 1997. Mr. Pesce served as Vice President-Finance and Administration of
CRA from October 1994 to August 1996. From October 1981 to September 1994, Mr.
Pesce held various financial positions with Computervision Corporation and its
predecessor, Prime Computer, Inc., including Director of Corporate Planning and
Analysis, Director of Leasing, Corporate Controller, Treasurer and, most
recently, Vice President-Finance and Chief Financial Officer. Mr. Pesce is a
certified public accountant.
W. TOM FOGARTY, M.D. has served as Senior Vice President and Chief Medical
Officer of the Company since August 1997. He served as OccuSystems' Senior Vice
President and Chief Medical Officer from September 1995 to August 1997. From
1993 to September 1995, Dr. Fogarty served as Vice President and Medical
Director of OccuSystems. From 1992 to 1993, he served as a Regional Medical
Director of OccuSystems and, from 1985 until 1992, as a medical director of one
of OccuSystems' centers.
KENNETH LOFFREDO has served as Senior Vice President of Marketing and
Sales of the Company since August 1997. Mr. Loffredo served as Vice President
of Sales of CRA from February 1995 to August 1997. From July 1993 to January
1995 he was CRA's Regional Sales Manager for the New England states. Mr.
Loffredo joined CRA in July of 1981, and from 1981 to June 1993, he held
positions of Case Manager, Account Manager and Regional Manager.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Directors, executive officers and persons who own more than 10% of
the Company's Common Stock to file reports of holdings and transactions in
Common Stock with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc. Based on Company records and other
information, the Company believes that all applicable Section 16(a) reporting
requirements were complied with for all transactions which occurred in 1998.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid to the Company's
Chief Executive Officer, to the Company's former Chief Executive Officer, and
to the Company's four most highly compensated executive officers other than the
Chief Executive Officer and the former Chief Executive Officer who were serving
as executive officers at the end of fiscal year 1998 (the "Named Executive
Officers") during (a) fiscal year 1998 by the Company, and (b) fiscal years
1997 and 1996 by the Company and its predecessors, CRA Managed Care, Inc., or
OccuSystems, Inc.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL OTHER
-------------------------------------- OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS ($) (#)(2) ($)(3)
- ------------------------------- ------ --------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Daniel J. Thomas 1998 294,241 0 250,000 3,276(4)
President and Chief Executive 1997 248,807 65,000 130,000 198
Officer, Director 1996 225,000 60,000 0 198
James M. Greenwood 1998 247,495 0 250,000 3,250
Executive Vice President of 1997 212,974 52,500 85,000 198
Corporate Development 1996 170,000 40,000 0 198
Richard A. Parr II 1998 230,000 0 30,000 5,718
Executive Vice President, 1997 212,879 52,500 50,000 198
General Counsel and Secretary 1996 79,166 35,000 50,000 66
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL OTHER
-------------------------------------- OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS ($) (#)(2) ($)(3)
- --------------------------------- ------ --------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Joseph F. Pesce 1998 289,221 0 230,000 9,243
Executive Vice President, Chief 1997 245,096 86,500 130,000 12,720
Financial Officer and Treasurer 1996 235,000 108,100 160,740 17,955
W. Tom Fogarty, M.D. 1998 240,000 0 30,000 3,416
Senior Vice President and Chief 1997 223,671 55,000 75,000 864
Medical Officer 1996 166,667 15,000 - 522
Donald J. Larson 1998 434,540 0 - 5,161(5)
Former Chairman, President and 1997 320,204 116,500 100,000 3,200
Chief Executive Officer 1996 250,000 161,000 178,600 3,000
</TABLE>
- --------
(1) Salaries for the currently-employed N amed Executives Officers effective
January 1, 1999 are $400,000 for Mr. Thomas, $300,000 for Mr. Pesce,
$270,000 for Mr. Greenwood, $260,000 for Dr. Fogarty and $250,000 for Mr.
Parr.
(2) Represents long-term awards of options and restricted stock. See the tables
"Option Grants in Last Fiscal Year" and "Long-Term Incentive Plans-Awards
in Last Fiscal Year."
(3) Amounts shown represent, to the extent that the Named Executive Officer
participated in the Employee Stock Purchase and the 401(k) Plans, (i) the
purchase discount on shares of the Company's Common Stock purchased
pursuant to the Company's Employee Stock Purchase Plan, (ii) the Company's
matching provision under the Company's 401(k) Plan and (iii) premiums paid
by the Company for group term life insurance that is taxable compensation
to the Named Executive Officers.
(4) Excludes relocation related costs and benefits totaling $158,709 paid to
Mr. Thomas in 1998 associated with his relocation from Dallas, Texas to
Boston, Massachusetts.
(5) Excludes payments totaling $1,354,092 paid to Mr. Larson in connection with
his resignation from the Company as its Chairman, President and Chief
Executive Officer in September of 1998 comprised of salary continuation
payments of $1,150,000, transfer of the cash surrender value of a
split-dollar life insurance policy of $168,592, consulting fees of $25,000
and other benefits of $10,500. The Company is further obligated to pay Mr.
Larson an additional $125,000 under his consulting agreement in 1999.
35
<PAGE>
OPTION AND RESTRICTED STOCK GRANTS IN 1998
The following tables set forth certain information concerning grants by
the Company of stock options and restricted stock to each of the Company's
Named Executive Officers during 1998. In accordance with the rules of the
Securities and Exchange Commission, the potential realizable values under such
options are shown based on assumed rates of annual compound stock price
appreciation of 5% and 10% over the full option term from the date the option
was granted.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM ($)(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------------
GRANTED (#)(1) FISCAL YEAR ($/SHARE) DATE 5% 10%
---------------- -------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Daniel J. Thomas 220,000 7.47% $ 30.44 3/18/08 4,457,606 11,064,401
James M. Greenwood 200,000 6.79% $ 29.44 5/13/08 3,702,617 9,383,159
Richard A. Parr II 30,000 1.02% $ 29.44 5/13/08 555,393 1,407,474
Joseph F. Pesce 200,000 6.79% $ 29.44 5/13/08 3,702,617 9,383,159
W. Tom Fogarty, M.D. 30,000 1.02% $ 29.44 5/13/08 555,393 1,407,474
Donald J. Larson - - - - - -
</TABLE>
- --------
(1) The vesting of each option is cumulative, and no vested portion will expire
until the expiration of the option. These options vest over a four-year
period beginning on the January 1 subsequent to the date of the grant,
with 25% of the options vesting and becoming exercisable on each
subsequent January 1. All options will vest immediately upon the
occurrence of a change in control triggering event, which includes a
consolidation or merger of the stock of the Company, or a sale of
substantially all of the assets of the Company. The Merger of the Company
with Yankee (see "Item 1. Business-General") would be considered a change
in control triggering event, and, therefore, all unexercisable shares
would become vested at the time of the Merger.
(2) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises will depend upon the future
performance of the Common Stock.
LONG-TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES UNDERLYING % OF TOTAL ANNUAL RATES OF STOCK
AWARDS GRANTED (#) PERFORMANCE OPTIONS EXERCISE PRICE APPRECIATION FOR
---------------------- PERIOD UNTIL GRANTED TO PRICE OF OPTION TERM ($)(2)
STOCK RESTRICTED MATURATION EMPLOYEES IN OPTIONS --------------------------
OPTIONS STOCK OR PAYOUT (1) FISCAL YEAR ($/SHARES) 5% 10%
--------- ------------ --------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel J. Thomas 21,000 9,000 1998-2005 1.02% $ 29.44 820,240 1,672,322
James M. Greenwood 35,000 15,000 1998-2005 1.70% $ 29.44 1,367,067 2,787,202
Richard A. Parr II - - - - - - -
Joseph F. Pesce 21,000 9,000 1998-2005 1.02% $ 29.44 820,240 1,672,322
W. Tom Fogarty, M.D. - - - - - - -
Donald J. Larson - - - - - - -
</TABLE>
- --------
(1) The awards listed in the table relate to the performance period beginning
January 1, 1998 and ending December 31, 2005. The vesting of awards for
each officer will be based on the level of attainment of an earnings per
share growth objective. All options will vest immediately upon the
occurrence of a change in control triggering event, which includes a
consolidation or merger of the stock of the Company, or a sale of
substantially all of the assets of the Company. The Merger of the Company
with Yankee (see "Item 1. Business-General") would be considered a change
in control triggering event, and, therefore, all unexercisable shares
would become vested at the time of the Merger.
(2) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises will depend upon the future
performance of the Common Stock of the Company.
36
<PAGE>
OPTION EXERCISES AND FISCAL YEAR END VALUES
The following table provides information about option exercises by the
Named Executive Officers during 1998 and the value realized by them (whether
through the Company or one of its predecessors). The table also provides
information about the number and value of options held by the Named Executive
Officers at December 31, 1998.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION AND RESTRICTED STOCK VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES YEAR END (#) YEAR END ($)(2)(3)
ACQUIRED ON VALUE ------------------------------- ---------------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- -------------- -------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Daniel J. Thomas - - 389,000 266,000 1,020,312 352,357
James M. Greenwood - - 123,000 262,000 - 352,358
Richard A. Parr II - - 62,750 67,250 - 160,163
Joseph F. Pesce - - 179,803 368,834 272,857 364,754
W. Tom Fogarty, M.D. - - 103,800 79,500 211,719 192,195
Donald J. Larson - - - - - -
</TABLE>
- --------
(1) Market value of underlying securities based on the closing price of the
Company's Common Stock on the Nasdaq National Market on the date of
exercise, minus the exercise price.
(2) Market value of securities underlying in-the-money options based on the
closing price of the Company's Common Stock on December 31, 1998 (the last
trading day of the fiscal year) on the Nasdaq National Market of $10.69,
minus the exercise price.
(3) All options for the Named Executive Officers will vest immediately upon the
occurrence of a change in control triggering event, which includes a
consolidation or merger of the stock of the Company, or a sale of
substantially all of the assets of the Company. The Merger of the Company
with Yankee (see "Item 1. Business-General") would be considered a change
in control triggering event, and, therefore, all unexercisable shares
would become vested at the time of the Merger.
COMPENSATION OF DIRECTORS
Concentra pays each non-employee Director an annual fee of $15,000 in
restricted stock (subject to pro-rata forfeiture in the event a director fails
to attend at least 75% of board meetings in such year) and grants each
non-employee Director options each year to acquire 5,000 shares of Concentra
Common Stock. Each annual grant of options vests, and the restrictions with
respect to each annual grant of restricted stock lapses, after one year. In
addition, each of the Company's Directors receives reimbursement of all
ordinary and necessary expenses incurred in attending any meeting of the Board
of Directors or any committee of the Board of Directors. The Company does not
otherwise compensate, and does not anticipate compensating, its Directors for
their services as Directors.
OTHER COMPENSATION ARRANGEMENTS
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Daniel J. Thomas,
James M. Greenwood, Richard A. Parr II, Joseph F. Pesce, W. Tom Fogarty, M.D.
and Kenneth Loffredo. Each of the agreements provides for the payment of base
salary amounts, bonuses at the discretion of the Company's Board of Directors
and participation in any employee benefit plan adopted by the Company for its
employees. The term of each of the agreements is two years, subject to
automatic renewal for additional terms of one year each. Each of the agreements
entitles each such individual to receive severance payments if the Company
terminates such individual's employment without cause or the individual
terminates his employment for good reason. Such severance payments shall equal
two years' base salary for Mr. Thomas and one year's base salary for Messrs.
Greenwood, Parr, Pesce, Fogarty and Loffredo. The Employment Agreements also
provide that, if the Company
37
<PAGE>
terminates such individual's employment without cause or the individual
terminates his employment for a defined reason within one year following a
change in control of the Company which occurs on or before December 31, 1999,
the severance payments to which the individuals would be entitled would be
increased to two and one-half years' base salary for Mr. Thomas and two year's
base salary for Messrs. Greenwood, Parr, Pesce, Fogarty and Loffredo.
INDEMNITY AGREEMENTS AND LIMITATIONS ON DIRECTORS' LIABILITY
The Company has entered into indemnity agreements with each of its
Directors and executive officers. Pursuant to these agreements, the Company
will, to the extent permitted under applicable law, indemnify these persons
against all expenses, judgments, fines and penalties incurred in connection
with the defense or settlement of any actions brought against them by reason of
the fact that they are or were Directors or officers of the Company or that
they assumed certain responsibilities at the direction of the Company.
In addition, the Company's Certificate of Incorporation provides for
certain limitations on Director liability. The Company's Certificate of
Incorporation provides that no Director of the Company shall be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
Director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend
payments or stock redemptions or repurchases, or (iv) for any transaction from
which the Director derived an improper personal benefit. The effect of these
provisions is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a Director for breach of fiduciary duty as a director
(including breaches resulting from grossly negligent behavior), except in the
situations described above.
COMPENSATION PLANS
1997 LONG-TERM INCENTIVE PLAN
GENERAL
The Company may grant awards with respect to shares of Common Stock under
the Company's 1997 Long-Term Incentive Plan (the "Incentive Plan") to officers,
directors, employees and certain consultants and advisors. The awards under the
Incentive Plan include (i) incentive stock options qualified as such under U.S.
Federal income tax laws, (ii) stock options that do not qualify as incentive
stock options, (iii) stock appreciation rights ("SARs"), (iv) restricted stock
awards and (v) performance units.
The number of shares of Common Stock that may be subject to outstanding
awards under the Incentive Plan at any one time is equal to ten percent of the
total number of outstanding shares of Common Stock (treating as outstanding all
shares of Common Stock issuable within 60 days upon exercise of stock options
or conversion or exchange of outstanding, publicly-traded convertible or
exchangeable securities of the Company) minus the total number of shares of
Common Stock subject to outstanding awards under the Incentive Plan and any
stock-based plan for employees or directors of the Company adopted after the
adoption of the Incentive Plan. The number of shares authorized under the
Incentive Plan and the number of shares subject to an award under the Incentive
Plan will be adjusted for stock splits, stock dividends, recapitalizations,
mergers and other changes affecting the capital stock of the Company.
The Board of Directors or any committee designated by it may administer
the Incentive Plan (the "Committee"). The Option and Compensation Committee of
the Board of Directors is currently designated as the Committee to administer
the Incentive Plan. The Committee has broad discretion to administer the
Incentive Plan, interpret its provisions and adopt policies for implementing
the Incentive Plan. This discretion includes the ability to select the
recipient of an award, determine the type and amount of each award, establish
the terms of each award, accelerate vesting or exercisability of an award,
extend the exercise period for an award, determine whether performance
conditions have been satisfied, waive conditions and provisions of an award,
permit the transfer of an award to family trusts and other persons and
otherwise modify or amend any award under the Incentive Plan. Nevertheless, no
awards for more than 250,000 shares or more than $2.5 million in cash may be
granted to any one employee in a calendar year.
38
<PAGE>
Awards
The Committee determines the exercise price of each option granted under
the Incentive Plan. The exercise price for an incentive stock option must not
be less than the fair market value of the Common Stock on the date of grant,
and the exercise price of non-qualified stock options must not be less than 85%
of the fair market value of the Common Stock on the date of grant. Stock
options may be exercised as the Committee determines, but not later than ten
years from the date of grant in the case of incentive stock options. At the
discretion of the Committee, holders may use shares of stock to pay the
exercise price, including shares issuable upon exercise of the option. Under
the Incentive Plan, each non-employee Director who is a director of the Company
as of both the day immediately preceding the annual meeting of stockholders and
the day immediately following that annual meeting shall automatically be
granted a Nonstatutory Option for the purchase of 5,000 shares of Common Stock
and a Restricted Stock Award having a fair market value of $15,000 effective on
the date of the first meeting of the Board of Directors following that annual
meeting, whether or not that director is in attendance at that Board meeting.
An SAR may be awarded in connection with or separate from a stock option.
An SAR is the right to receive an amount in cash or stock equal to the excess
of the fair market value of a share of the Common Stock on the date of exercise
over the exercise price specified in the agreement governing the SAR (for SARs
not granted in connection with a stock option) or the exercise price of the
related stock option (for SARs granted in connection with a stock option). An
SAR granted in connection with a stock option will require the holder, upon
exercise, to surrender the related stock option or portion thereof relating to
the number of shares for which the SAR is exercised. The surrendered stock
option or portion will then cease to be exercisable. Such an SAR is exercisable
or transferable only to the extent that the related stock option is exercisable
or transferable. An SAR granted independently of a stock option will be
exercisable as the Committee determines. The Committee may limit the amount
payable upon exercise of any SAR. SARs may be paid in cash or stock, as the
Committee provides in the agreement governing the SAR.
A restricted stock award is a grant of shares of Common Stock that are
nontransferable or subject to risk of forfeiture until specific conditions are
met. The restrictions will lapse in accordance with a schedule or other
conditions as the Committee determines. During the restriction period, the
holder of a restricted stock award may, in the Committee's discretion, have
certain rights as a stockholder, including the right to vote the stock subject
to the award or receive dividends on that stock. Restricted stock may also be
issued upon exercise or settlement of options, SARs or performance units.
Performance units are performance-based awards payable in cash, stock or a
combination of both. The Committee may select any performance measure or
combination of measures as conditions for cash payments or stock issuances
under the Incentive Plan, except that performance measures for executive
officers must be objective measures chosen from among the following choices:
(a) total stockholder return (Common Stock appreciation plus dividends); (b)
net income; (c) earnings per share; (d) cash flow per share; (e) return on
equity; (f) return on assets, (g) revenues; (h) costs; (i) costs as a
percentage of revenues; (j) increase in the market price of Common Stock or
other securities; (k) the performance of the Company in any of the items
mentioned in clause (a) through (j) in comparison to the average performance of
the companies included in the Nasdaq Health Services Stocks Index; or (1) the
performance of the Company in any of the items mentioned in clause (a) through
(j) in comparison to the average performance of the companies used in a
self-constructed peer group established before the beginning of the performance
period. The Committee may choose different performance measures if the
stockholders so approve, if tax laws or regulations change so as not to require
stockholder approval of different measures in order to deduct the compensation
related to the award for federal income tax purposes, or if the Committee
determines that it is in the Company's best interest to grant awards not
satisfying the requirements of Section 162(m) of the Internal Revenue Code or
any successor law.
Other Provisions
At the Committee's discretion and subject to conditions that the Committee
may impose, a participant's tax withholding with respect to an award may be
satisfied by the withholding of shares of Concentra Common Stock issuable
pursuant to the award or the delivery of previously owned shares of Concentra
Common Stock, in either case based on the fair market value of the shares.
39
<PAGE>
The Committee has discretion to determine whether an award under the
Incentive Plan will have change-of-control features. The Committee also has
discretion to vary the change of control features as its deems appropriate. The
following describes the change of control features that the Company generally
expects may apply to additional awards, if any such feature applies. An award
agreement under the Incentive Plan may provide that, upon a change of control
of the Company with respect to awards held by Participants who are employees or
directors at the occurrence of the change of control, (1) all outstanding SARs
and options will become immediately and fully vested and exercisable in full,
(2) the restriction period on any restricted stock award will be accelerated
and the restrictions will expire, and (3) the target payout opportunity
attainable under the performance units will be deemed to have been fully earned
for all performance periods as of the effective date of the change in control
and the holder will be paid a pro rata portion of all associated targeted
payout opportunities (based on the number of complete and partial calendar
months elapsed as of the change of control) in cash within thirty days
following the change of control or in stock effective as of the change of
control, for cash and stock-based performance units, respectively. The award
may also provide that it will remain exercisable for its original term whether
or not employment is terminated at or following a change in control. In
general, a change in control of the Company occurs in any of four situations:
(1) a person other than the Company or certain affiliated companies or benefit
plans becomes the beneficial owner of 20% or more of the voting power of the
Company's outstanding voting securities (except acquisitions from the Company
or in a transaction meeting the requirements of the parenthetical exception in
clause (3) below); (2) a majority of the Board of Directors is not comprised of
the members of the Board immediately following August 29, 1997 and persons
whose elections as directors were approved by those directors or their approved
successors; (3) the Company merges or consolidates with another corporation or
entity (whether Concentra or the other entity is the survivor), or the Company
and the holders of the voting securities of such other corporation or entity
(or the stockholders of Concentra and such other corporation or entity)
participate in a securities exchange (other than a merger, consolidation or
securities exchange in which the Company's voting securities are converted into
or continue to represent securities having the majority of voting power in the
surviving company, in which no person other than that surviving company owns
20% or more of the outstanding shares of common stock or voting shares of the
surviving corporation, and in which at least a majority of the board of
directors of the surviving corporation were members of the incumbent board of
Concentra); or (4) Concentra liquidates or sells all or substantially all of
its assets, except sales to an entity having substantially the same ownership
as Concentra.
If a restructure of Concentra occurs that does not constitute a change in
control of Concentra, the Committee may (but need not) cause Concentra to take
any one or more of the following actions: (1) accelerate in whole or in part
the time of vesting and exercisability of any outstanding stock options and
stock appreciation rights in order to permit those stock options and SARs to be
exercisable before, upon or after the completion of the restructure; (2) grant
each optionholder corresponding cash or stock SARS; (3) accelerate in whole or
in part the expiration of some or all of the restrictions on any restricted
stock award; (4) treat the outstanding performance units as having fully or
partially met their targets and pay, in full or in part, the targeted payout;
(5) if the restructure involves a transaction in which Concentra is not the
surviving entity, cause the surviving entity to assume in whole or in part any
one or more of the outstanding awards under the Incentive Plan upon such terms
and provisions as the Committee deems desirable; or (6) redeem in whole or in
part any one or more of the outstanding awards (whether or not then
exercisable) in consideration of a cash payment, adjusted for withholding
obligations. A restructure generally is any merger of the Company or the direct
or indirect transfer of all or substantially all of the Company's assets
(whether by sale, merger, consolidation, liquidation or otherwise) in one
transaction or a series of transactions.
Without stockholder approval, the Board of Directors may not amend the
Incentive Plan to increase materially the aggregate number of shares of Common
Stock that may be issued under the Incentive Plan (except for adjustments
pursuant to the terms of the Incentive Plan). Otherwise, the Concentra Board of
Directors may at any time and from time to time alter, amend, suspend or
terminate the Incentive Plan in whole or in part and in any way, subject to
requirements that may exist in stock exchange rules or in securities, tax and
other laws from time to time. No award may be issued under the Incentive Plan
after August 29, 2007.
OTHER OUTSTANDING OPTIONS AND WARRANTS
In addition to the options and awards granted under the Incentive Plan and
warrants to purchase 350,000 shares of Common Stock for $7.00 per Warrant
granted to Creditanstalt-Bankverein (of which 200,000 were unexercised as of
December 31, 1998), the Company has as of December 31, 1998 issued or assumed
from its
40
<PAGE>
predecessors or acquired companies options or warrants to purchase an aggregate
of 2,525,564 shares of Common Stock pursuant to separate agreements between the
Company and the holders thereof. The 2,525,564 options that are currently
outstanding have an average exercise price of $15.96 per share, and are subject
to various vesting provisions.
Unexercised options and warrants, and their exercise price, are subject to
adjustment if the Company issues Common Stock for a price per share less than
the exercise price or if there is a subdivision or consolidation of the
Company's Common Stock, the payment of a stock dividend or other increase or
decrease in the number of shares of Common Stock outstanding, and the Company
does not receive compensation therefor. In addition, the number (and type) of
securities subject to an option or warrant are subject to adjustment if the
Company is party to a merger or consolidation.
401(K) PLAN
The Company has a defined contribution retirement plan which complies with
Section 401(k) of the Internal Revenue Code. Substantially all employees of the
Company, including certain officers and Directors of the Company, who have
completed six months of service are eligible to participate in the Concentra
Managed Care, Inc. 401(k) Plan (the "Plan"). Generally, Employees may
contribute amounts up to a maximum of 15% of the employee's compensation. Under
the Plan, the Company has the option of matching up to 50% of participants'
pretax contributions up to a maximum of 6% of compensation. For fiscal year
1998, the Company elected to match 50% of up to 4% of compensation.
EMPLOYEE STOCK PURCHASE PLAN
Until March 2, 1999, the Company maintained an Employee Stock Purchase
Plan that permitted substantially all employees to acquire the Company's Common
Stock at the end of each specified period at a purchase price of 85% of the
lower of the fair market value at the beginning or the end of the participation
period. Periods were semi-annual and began on January 1 and July 1 of each
year. Employees were allowed to designate up to 15% of their base compensation
for the purchase of Common Stock. The Option and Compensation Committee
administered the Employee Stock Purchase Plan. On March 2, 1999, the Company
terminated the Employee Stock Purchase Plan. The final period for which
participating employees acquired shares of the Company's common stock began on
January 1, 1999 and ended March 2, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
John K. Carlyle, Concentra's non-employee Chairman, has served as a member
of the Option and Compensation Committee since December, 1998.
41
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the amount
and nature of the beneficial ownership of the Common Stock as of March 15,
1999, by (i) each person known by the Company to own beneficially more than 5%
of any class of the Company's outstanding voting securities, (ii) each of the
Company's directors, (iii) each currently-employed officer of the Company named
in the Summary Compensation Table under the heading "Compensation of Executive
Officers," and (iv) all current directors and executive officers of the Company
as a group. Unless otherwise indicated, the Company believes that each person
or entity named below has sole voting and investment power with respect to all
shares shown as beneficially owned by such person or entity, subject to
community property laws where applicable and the information set forth in the
footnotes to the table below.
<TABLE>
<CAPTION>
STOCK OPTIONS
AND
CONVERTIBLE SHARES
SUBORDINATED BENEFICIALLY PERCENTAGE OF
NAME SHARES NOTES(1) OWNED (2) CLASS
- -------------------------------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Welsh, Carson, Anderson
& Stowe and affiliates 6,433,203 836,364 7,269,567 15.1%(3)
320 Park Avenue
New York, NY 10022
Massachusetts Financial
Services Company 5,852,888 672,785 6,525,673 13.6%
500 Boylston
Boston, MA 02116
T. Rowe Price Associates 5,629,587 - 5,629,587 11.9%
100 E. Pratt Street
Baltimore, MD 21202
Directors
John K. Carlyle 510 75,000 75,510 *
George H. Conrades 1,326 51,971 53,297 *
Hon. Willis D. Gradison, Jr. 1,510 5,000 6,510 *
Robert A. Ortenzio 15,188 25,000 40,188 *
Mitchell T. Rabkin, M.D. 1,326 51,971 53,297 *
Richard D. Rehm, M.D. 10,000 38,750 48,750 *
Lois E. Silverman 641,512 10,000 651,512 1.4%
Executive Officers
Daniel J. Thomas 33,367 369,000 402,367 *
James M. Greenwood 33,000 123,000 156,000 *
Richard A. Parr II 17,773 62,750 80,523 *
Joseph F. Pesce 40,411 179,803 220,214 *
W. Tom Fogarty, M.D. 99,389 103,800 203,189 *
All directors and executive officers
as a group (14 persons) 921,859 1,160,338 2,082,197 4.3%
</TABLE>
- --------
* Less than 1%
(1) Includes shares that may be acquired within 60 days pursuant to conversion
of convertible subordinated notes or pursuant to exercise of stock options
awarded under incentive compensation plans.
(2) A person is considered to beneficially own any shares (a) over which such
person exercises sole or shared voting or investment power, or (b) of
which such person has the right to acquire beneficial ownership at any
time within 60 days of March 15, 1999 (i.e. through the conversion of
securities or the exercise of stock options). Shares are deemed to be
outstanding for the purposes of computing the percentage ownership of the
person holding such shares, but are not deemed outstanding for purposes of
computing the percentage of any other person shown on the table.
(3) The ownership percentage includes both shares and shares which would be
issued upon the conversion of convertible subordinated notes owned as of
March 15, 1999. Between July 2, 1999 and July 6, 1999, WCAS sold 90,000
shares decreasing its beneficial ownership to 14.9% as of July 6, 1999
42
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 2, 1999, Concentra entered into the Merger Agreement with Yankee.
On March 24, 1999, Concentra entered into an Amended Merger Agreement with
Yankee, amending the Merger Agreement. The Amended Merger Agreement contemplates
Merger of Yankee with and into Concentra. As a result of the Merger, each
outstanding share of Concentra Common Stock will be converted into the right to
receive $16.50 in cash. The Merger is conditioned upon, among other things,
approval by the stockholders of Concentra, receipt of financing and certain
regulatory approvals. The transaction is structured to be accounted for as a
recapitalization.
Lois E. Silverman, a Director of the Company, is one of the trustees and
beneficiaries of Colonial Realty Trust, which leases twelve offices to the
Company for an annual aggregate consideration of $700,000. The Company believes
that the rental rates paid to Colonial Realty Trust are fair market rental
rates.
The Company is party to a Registration Rights Agreement with Comprehensive
Rehabilitation Associates Inc., J.H. Whitney & Co., Whitney 1990 Equity Fund,
L.P., Whitney Subordinated Debt Fund, L.P., First Union Corporation, Ms.
Silverman and Donald J. Larson, which was entered into on March 8, 1994.
Pursuant to the Registration Rights Agreement, the holders of at least 25% of
the shares of Common Stock of the Company subject to the Agreement (excluding
Ms. Silverman and Mr. Larson) may require the Company to effect the
registration of the shares of Common Stock of the Company held by such parties
for sale to the public on three occasions, subject to certain conditions and
limitations. In addition, under the terms of the Registration Rights Agreement,
if the Company proposes to register any of its securities under the Securities
Act of 1933, whether for its own account or otherwise, the parties to the
Registration Rights Agreement (including Ms. Silverman and Mr. Larson) are
entitled to receive notice of such registration and to include their shares
therein, subject to certain conditions and limitations. The Company has agreed
to pay fees, costs and expenses of any registration effected on behalf of the
parties to the Registration Rights Agreement (other than underwriting discounts
and commissions).
W. Tom Fogarty, M.D., an executive officer of the Company, is the
President, a director and a member of Occupational Health Centers of the
Southwest, P.A. ("OHCSW"), and several other Physician Groups. The Company has
entered into a 40 year management agreement with each of the Physician Groups.
OHCSW paid approximately $119,091,000 in management fees to the Company in 1998
under its management agreement.
The Company has entered into employment agreements with Daniel J. Thomas,
James M. Greenwood, Richard A. Parr II, Joseph F. Pesce, W. Tom Fogarty, M.D.
and Kenneth Loffredo. See "Executive Compensation-Other Compensation
Arrangements" for a discussion of the terms of these agreements.
43
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements
The following consolidated financial statements of the Company are
included in Item 8.
<TABLE>
<S> <C>
Report of Independent Public Accountants ....................... F-1
Consolidated Balance Sheets-December 31, 1997 and 1998 ......... F-2
Consolidated Statements of Operations-Years Ended
December 31, 1996, 1997 and 1998 .............................. F-3
Consolidated Statements of Cash Flows-Years Ended
December 31, 1996, 1997 and 1998 .............................. F-4
Consolidated Statements of Stockholders' Equity-Years Ended
December 31, 1996, 1997 and 1998 .............................. F-5
Notes to Consolidated Financial Statements ..................... F-6
</TABLE>
2. Financial Statement Schedule
The financial statement schedule, Supplemental Schedule II - Valuation and
Qualifying Accounts for the years ended December 31, 1996, 1997 and 1998, is
filed with this report and appears on page S-1.
The Report of Independent Public Accountants on Financial Statement
Schedule is filed with this report and appears on page S-2.
All other schedules for which provision is made in Regulation S-X of the
Securities and Exchange Commission are not required under the related
instructions or are not applicable and, therefore, have been omitted.
3. Exhibits:
The following is a list of exhibits filed as part of the Form 10-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -------------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger dated February 24, 1998 among the Registrant and Preferred Payment Sys-
tems, Inc. (incorporated by reference to Exhibit 2.2 to the Registrant's Annual Report on Form 10-K (File
No. 000-22751) filed with the SEC on March 31, 1998)
2.2 Agreement and Plan of Merger dated March 2, 1999 between Yankee Acquisition Corp. and the Registrant
(incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K (File No. 000-
22751) filed with the SEC on March 3, 1999)
2.3 Amended and Restated Agreement and Plan of Merger dated March 24, 1999 between Yankee Acquisition
Corp. and the Registrant (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on
Form 8-K (File No. 000-22751) filed with the SEC on July 14, 1999)
3.1 Amended and Restated Certificate of Incorporation dated August 27, 1997 (incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K (File No. 000-22751) filed with the SEC on
March 31, 1998)
3.2 Bylaws of Registrant (incorporated by reference to Exhibit 3.3 to the Registrant's Registration Statement on
Form S-4 (File No. 333-27105) filed with the SEC on July 31, 1997)
4.1 Form of Certificate of Common Stock, par value $.01 per share, of the Registrant (incorporated by refer-
ence to Exhibit 4.1 to the Registrant's Registration Statement on Form S-4 (File No. 333-27105) filed with
the SEC on July 31, 1997)
4.2 Indenture dated December 24, 1996 between OccuSystems and United States Trust Company of New York,
as Trustee, (the "OccuSystems Indenture") relating to the 6% Convertible Subordinated Notes due 2001
(incorporated by reference to Exhibit 4.1 to OccuSystems' Registration Statement on Form S-3 (File No.
333-20933) as filed with the SEC on January 31, 1997)
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------------------------------------------------------------------------------------------------------------
<S> <C>
4.3 First Supplemental Indenture dated August 29, 1997 between OccuSystems, the Registrant and United States
Trust Company of New York, as Trust, relating to the 6% Convertible Subordinated Notes due 2001 (incor-
porated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K (File No. 00-22751)
filed with the SEC on March 31, 1998)
4.4 Indenture dated as of March 16, 1998 between the Registrant and Chase Bank of Texas, N.A., as Trustee,
(the "Concentra Indenture") relating to the 4.5% Convertible Subordinated Notes due 2003 (incorporated by
reference to the Registrant's Current Report on Form 8-K (File No. 000-22751) filed with the SEC on
March 30, 1998)
4.5 Form of 6% Convertible Subordinated Note due 2001, establishing the terms of the 6% Convertible Subor-
dinated Notes due 2001 pursuant to the OccuSystems Indenture (incorporated by reference to Exhibit A to
the OccuSystems Indenture which Indenture is incorporated by reference to Exhibit 4.1 to OccuSystems'
Registration Statement on Form S-3 (File No. 333-20933) as filed with the SEC on January 31, 1997)
4.6 Form of 4.5% Convertible Subordinated Notes due 2003, establishing the terms of the 4.5% Convertible
Subordinated Notes due 2003 pursuant to the Concentra Indenture (incorporated by reference to the Regis-
trant's Current Report on Form 8-K (File No. 000-22751) filed with the SEC on March 30, 1998)
4.7 Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference to
Exhibit 4.6 to the Registrant's Annual Report on Form 10-K (File No. 000-22751) filed with the SEC on
March 31, 1998)
4.8 Form of Right Certificate (included as Exhibit B to the Rights Agreement filed as Exhibit 10.2 hereto). Pur-
suant to the Rights Agreement, printed Right Certificates will not be delivered until as soon as practicable
after the Distribution Date (as defined in the Rights Agreement)
4.9 Registration Rights Agreement dated as of March 11, 1998, among the Registrant, BT Alex. Brown Incor-
porated, BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities Corporation and Piper
Jaffray Inc. (incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-22751)
filed with the SEC on March 30, 1998)
4.10 Registration Rights Agreement dated as of March 8, 1994, among Comprehensive Rehabilitation Associates,
Inc., J.H. Whitney & Co., Whitney 1990 Equity Fund, L.P., Whitney Subordinated Debt Fund, L.P., First
Union Corporation, Lois E. Silverman and Donald J. Larson (incorporated by reference to Exhibit 10.7 to
CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.1 Amended and Restated Credit Agreement dated as of February 20, 1998, between the Registrant, as Bor-
rower, and First Union National Bank, as Administrative Agent, Fleet National Bank, as Documentation
Agent, and the banks and financial institutions listed as signatories thereto, as amended by that certain letter
agreement dated as of March 9, 1998, and as further amended by that certain letter agreement dated as of
March 12, 1998 (incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K
(File No. 000-22751) filed with the SEC on March 31, 1998)
10.2 Purchase Agreement dated as of March 11, 1998, among the Registrant, BT Alex. Brown Incorporated,
BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities Corporation and Piper Jaffray,
Inc. (incorporated by reference to the Registrant's Current Form on Form 8-K (File No. 000-22751) filed
with the SEC on March 30, 1998)
10.3 Rights Agreement dated September 29, 1997 between the Registrant and ChaseMellon Shareholder Ser-
vices, L.L.C. (incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A
filed with the SEC on October 1, 1998)
10.4 Concentra Managed Care, Inc. 1997 Long-Term Incentive Plan (incorporated by reference to Appendix G
to the Joint Proxy Statement/Prospectus forming a part of the Registrant's Registration Statement on Form
S-4 (File No. 333-27105) filed with the SEC on July 31, 1997)
10.5 Concentra Managed Care, Inc. 1997 Employee Stock Purchase Plan (incorporated by reference to Appendix
H to the Joint Proxy Statement/Prospectus forming a part of the Registrant's Registration Statement on Form
S-4 (File No. 333-27105) filed with the SEC on July 31, 1997)
10.6 CRA Managed Care, Inc. 1995 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.25
to CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- ------------------------------------------------------------------------------------------------------------
<S> <C>
10.7 CRA Managed Care, Inc. 1994 Non-Qualified Stock Option Plan for Non-Employee Directors (incorporated
by reference to Exhibit 10.3 to CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with
the SEC on March 17, 1995)
10.8 CRA Managed Care, Inc. 1994 Non-Qualified Time Acceleration Restricted Stock Option Plan (incorporated
by reference to Exhibit 10.5 to CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with
the SEC on March 17, 1995)
10.9 OccuSystems, Inc. 1995 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.10 to OccuSys-
tems' Registration Statement on Form S-1 (File No. 33-79734) filed with the SEC on May 8, 1995)
10.10 First Amended and Restated OccuSystems, Inc. and its Subsidiaries and Affiliates Stock Option and
Restricted Stock Purchase Plan dated April 28, 1992 (incorporated by reference to Exhibit 10.11 to Occu-
Systems' Registration Statement on Form S-1 (File No. 33-79734) filed with the SEC on May 8, 1995)
10.11 Employment Agreement dated April 21, 1997, between the Registrant and Joseph F. Pesce (incorporated by
reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-4 (File No. 333-27105) filed
with the SEC on July 31, 1997)
10.12 Employment Agreement dated April 21, 1997, between the Registrant and Richard A. Parr II (incorporated
by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-4 (File No. 333-27105)
filed with the SEC on July 31, 1997)
10.13 Employment Agreement dated April 21, 1997, between the Registrant and W. Tom Fogarty (incorporated
by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-4 (File No. 333-27105)
filed with the SEC on July 31, 1997)
10.14 Employment Agreement dated April 21, 1997, between the Registrant and James M. Greenwood (incorpo-
rated by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form S-4 (File No. 333-
27105) filed with the SEC on July 31, 1997)
10.15 Indemnification Agreement dated September 17, 1997, between the Registrant and Daniel J. Thomas (iden-
tical agreements were executed between the Registrant and each of the following: Joseph F. Pesce, Richard
A. Parr II, James M. Greenwood, W. Tom Fogarty, Kenneth Loffredo, Mitchell T. Rabkin, George H. Con-
rades, Robert A. Ortenzio, Lois E. Silverman, Paul B. Queally, John K. Carlyle) (incorporated by reference
to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K (File No. 000-22751) filed with the SEC
on March 31, 1998)
10.16 Agreement of Acceptance dated as of July 29, 1997, among the Registrant, Donald J. Larson and Lois E.
Silverman (incorporated by reference to Exhibit 10.19 to the Registrant's Registration Statement on Form
S-4 (File No. 333-27105) filed with the SEC on July 31, 1997)
10.17 Software License Agreement dated February 10, 1995 between CRA and CompReview, Inc. (confidential
treatment granted) (incorporated by reference to CRA's Registration Statement on Form S-1 (File No.
33-90426) filed with the SEC on March 17, 1995)
10.18 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 168 U.S. Route 1, Falmouth, ME 04105 (incorporated by reference to Exhibit 10.10 to CRA's
Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.19 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 46 Austin Street, Newtonville, MA 02160 (incorporated by reference to Exhibit 10.11 to CRA's
Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.20 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 312 Union Wharf, Boston, MA 02109 (incorporated by reference to Exhibit 10.17 to CRA's Reg-
istration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.21 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 565 Turnpike Street, North Andover, MA 01845 (incorporated by reference to Exhibit 10.18 to
CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.22 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 15A Riverway Place, Bedford, NH 03110 (incorporated by reference to Exhibit 10.19 to CRA's
Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ---------- -------------------------------------------------------------------------------------------------------------
<S> <C>
10.23 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 509 Stillwells Corner Road, Freehold, NJ 07728 (incorporated by reference to Exhibit 10.20 to
CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.24 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 732 Thimble Shoals Blvd., Newport News, VA 23606 (incorporated by reference to Exhibit 10.21
to CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.25 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 10132 Colvin Run Road, Suite A, Great Falls, VA 22066 (incorporated by reference to Exhibit
10.22 to CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17,
1995)
10.26 Occupational Medicine Center Management and Consulting Agreement dated December 31, 1993, between
Concentra Health Services, Inc. (formerly OccuCenters, Inc.) ("CHS") and Occupational Health Centers of
Southwest, P.A., a Texas professional association (incorporated by reference to Exhibit 10.6 to OccuSys-
tems' Annual Report on Form 10-K (File No. 0-24440) filed with the SEC on March 29, 1996)
10.27 Occupational Medicine Center Management and Consulting Agreement dated December 31, 1993, between
CHS and Occupational Health Centers of Southwest, P.A., a Arizona professional association (incorporated
by reference to Exhibit 10.7 to OccuSystems' Annual Report on Form 10-K (File No. 0-24440) filed with
the SEC on March 29, 1996)
10.28 Occupational Medicine Center Management and Consulting Agreement dated December 31, 1993, between
CHS and Occupational Health Centers of New Jersey, a New Jersey professional association (incorporated
by reference to Exhibit 10.8 to OccuSystems' Registration Statement on Form S-1 (File No. 33-01660) filed
with the SEC on March 28, 1996)
10.29 Warrant Agreement dated January 3, 1995 between OccuSystems and Creditanstalt- Bankverein (incorpora-
tion by reference to Exhibit 10.13 to OccuSystems' Registration Statement on Form S-1 (File No. 33-01660)
filed with the SEC on March 28, 1996)
10.30 Voting Agreement dated May 15, 1997, by and between Lois E. Silverman and Donald J. Larson (incorpo-
rated by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K (File No. 000-22751)
filed with the SEC on March 31, 1998)
10.31 Amendment No. 1 to Rights Agreement dated March 2, 1999 between the Registrant and ChaseMellon
Shareholder Services, L.L.C. (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on
Form 8-K (File No. 000-22751) filed with the SEC on March 31, 1998)++
+10.32 Amendment No. 1 to Employment Agreement dated January 12, 1999 between the Registrant and Joseph F.
Pesce
+10.33 Amendment No. 1 to Employment Agreement dated January 12, 1999 between the Registrant and Richard
A. Parr II
+10.34 Employment Agreement dated January 12, 1999 between the Registrant and Daniel J. Thomas
+10.35 Amendment No. 1 to Employment Agreement dated January 12, 1999 between the Registrant and W. Tom
Fogarty
+10.36 Amendment No. 1 to Employment Agreement dated January 12, 1999 between the Registrant and James
M. Greenwood
10.37 Employment Agreement dated September 17, 1997, between the Registrant and Kenneth Loffredo (incorpo-
rated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-22751)
filed with the SEC on November 13, 1998)
+10.38 Amendment No. 1 to Employment Agreement dated January 12, 1999 between the Registrant and Kenneth
Loffredo
10.39 Employment Agreement dated January 12, 1998 between the Registrant and Richard D. Rehm, M.D.
(incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (File No.
000-22751) filed with the SEC on August 13, 1998)
10.40 Employment Agreement dated February 10, 1998 between the Registrant and Stephen Read (incorporated
by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-22751) filed
with the SEC on August 13, 1998)
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------- ---------------------------------------------------------------------------------------------------------
<S> <C>
10.41 Indemnification Agreement dated May 13, 1998 between the Registrant and Hon. Willis D. Gradison, Jr.
(identical agreements executed between the Registrant and Stephen Read (dated December 16, 1997), Rich-
ard D. Rehm, M.D. (dated May 13, 1998), Eliseo Ruiz III (dated May 11, 1998), Scott Henault (dated Sep-
tember 17, 1997), Darla Walls (dated December 16, 1997), Jeffrey R. Luber (dated December 16, 1997) and
Martha Kuppens (dated December 16, 1997)) (incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q (File No. 000-22751) filed with the SEC on August 13, 1998.
+21.1 List of Subsidiaries
+23.1 Consent of Arthur Andersen LLP
+27.1 Financial Data Schedule
</TABLE>
- --------
+ Filed herewith.
(b) Reports on Form 8-K.
Reports on Form 8-K
During the quarter ended December 31, 1998, the Registrant filed the
following Current Reports on Form 8-K:
(1) On November 20, 1998, the Company filed a Current Report on Form 8-K
dated November 18, 1998, reporting under Item 5 (Other Events) the Company's
board of directors naming Daniel J. Thomas President and Chief Executive
Officer on a permanent basis.
(2) On October 29, 1998, the Company filed a Current Report on Form 8-K
dated October 29, 1998, reporting under Item 5 (Other Events) the earnings for
the quarter ended September 30, 1998 for the Company and the Company's
formation of a special committee to evaluate strategic alternatives in response
to several unsolicited expressions of interest regarding the acquisition of
some or all of the Company's common stock.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 15th day of
July, 1999.
CONCENTRA MANAGED CARE, INC.
By: /s/ Thomas E. Kiraly
-------------------------------------
Thomas E. Kiraly
Executive Vice President, Chief
Financial Officer and Treasurer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- ---------------------------------- ----------------
<S> <C> <C>
/s/ Daniel J. Thomas President, Chief Executive July 15, 1999
- ------------------------------------- Officer and Director (Principal
Daniel J. Thomas Executive Officer)
/s/ Thomas E. Kiraly Executive Vice President, Chief July 15, 1999
- ------------------------------------- Financial Officer and Treasurer
Thomas E. Kiraly (Principal Financial and Account-
ing Officer)
/s/ John K. Carlyle Chairman and Director July 15, 1999
- -------------------------------------
John K. Carlyle
/s/ George H. Conrades Director July 15, 1999
- -------------------------------------
George H. Conrades
/s/ Hon. Willis D. Gradison, Jr. Director July 15, 1999
- -------------------------------------
Hon. Willis D. Gradison, Jr.
/s/ Robert A. Ortenzio Director July 15, 1999
- -------------------------------------
Robert A. Ortenzio
/s/ Mitchell T. Rabkin, M.D. Director July 15, 1999
- -------------------------------------
Mitchell T. Rabkin, M.D.
/s/ Richard D. Rehm, M.D. Director July 15, 1999
- -------------------------------------
Richard D. Rehm, M.D.
/s/ Lois E. Silverman Director July 15, 1999
- -------------------------------------
Lois E. Silverman
</TABLE>
49
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Concentra Managed Care, Inc.:
We have audited the accompanying consolidated balance sheets of Concentra
Managed Care, Inc. (a Delaware corporation) as of December 31, 1997 and 1998,
and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Concentra Managed Care, Inc.
as of December 31, 1997 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 9, 1999
F-1
<PAGE>
CONCENTRA MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1998
ASSETS ---------------- ----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents .......................................................... $ 11,964,000 $ 101,128,000
Marketable securities .............................................................. - 5,000,000
Accounts receivable, net of allowances of $16,723,000 and $17,210,000, respectively. 106,284,000 127,615,000
Prepaid expenses and other current assets .......................................... 14,605,000 19,075,000
Prepaid and deferred income taxes .................................................. 12,096,000 14,019,000
------------- -------------
Total current assets ........................................................... 144,949,000 266,837,000
Land ............................................................................... 2,525,000 2,775,000
Buildings and improvements ......................................................... 5,747,000 6,814,000
Leasehold improvements ............................................................. 21,704,000 31,280,000
Computer hardware and software ..................................................... 39,512,000 56,838,000
Furniture and equipment ............................................................ 33,486,000 40,440,000
------------- -------------
Property and equipment, at cost .................................................... 102,974,000 138,147,000
Accumulated depreciation and amortization .......................................... (38,255,000) (52,220,000)
------------- -------------
Property and equipment, net ....................................................... 64,719,000 85,926,000
Other assets:
Goodwill, net ...................................................................... 256,580,000 275,172,000
Assembled workforce and customer lists, net ........................................ 3,524,000 2,781,000
Marketable securities .............................................................. - 10,583,000
Other assets ....................................................................... 12,761,000 15,495,000
------------- -------------
$ 482,533,000 $ 656,794,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving credit facilities ........................................................ $ 49,000,000 $ -
Current portion of long-term debt .................................................. 7,497,000 55,000
Accounts payable ................................................................... 12,137,000 13,098,000
Accrued expenses ................................................................... 14,950,000 22,276,000
Accrued payroll and related expenses ............................................... 20,022,000 25,973,000
Accrued and deferred income taxes .................................................. 4,589,000 3,565,000
------------- -------------
Total current liabilities ...................................................... 108,195,000 64,967,000
Long-term debt, net of current portion ............................................. 150,103,000 327,870,000
Deferred income taxes .............................................................. 7,713,000 13,575,000
Other liabilities .................................................................. 10,081,000 10,507,000
Commitments and Contingencies (see Note 10) ........................................
Stockholders' Equity:
Preferred stock - $.01 par value; 20,000,000 authorized; none issued and outstanding - -
Common stock - $.01 par value; 100,000,000 authorized; 43,567,686 and 47,104,412
shares issued and outstanding, respectively ....................................... 436,000 471,000
Paid-in capital .................................................................... 257,022,000 270,654,000
Accumulated other comprehensive income - unrealized gain on marketable securities .. - 60,000
Retained deficit ................................................................... (51,017,000) (31,310,000)
------------- -------------
Total stockholders' equity ..................................................... 206,441,000 239,875,000
------------- -------------
$ 482,533,000 $ 656,794,000
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
CONCENTRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUE:
Health Services ........................................................ $ 170,035,000 $ 207,676,000 $ 259,481,000
Managed Care Services: .................................................
Specialized cost containment .......................................... 83,784,000 142,919,000 183,734,000
Field case management ................................................. 118,864,000 138,723,000 167,841,000
------------- ------------- -------------
Total Managed Care Services ......................................... 202,648,000 281,642,000 351,575,000
------------- ------------- -------------
Total revenue ...................................................... 372,683,000 489,318,000 611,056,000
COST OF SERVICES:
Health Services ........................................................ 130,754,000 155,376,000 201,181,000
Managed Care Services .................................................. 159,174,000 217,263,000 268,116,000
------------- ------------- -------------
Total cost of services ............................................... 289,928,000 372,639,000 469,297,000
------------- ------------- -------------
Total gross profit .................................................. 82,755,000 116,679,000 141,759,000
General and administrative expenses ..................................... 33,155,000 39,831,000 45,326,000
Amortization of intangibles ............................................. 3,442,000 5,908,000 8,119,000
Non-recurring charge .................................................... 964,000 38,625,000 33,114,000
------------- ------------- -------------
Operating income .................................................... 45,194,000 32,315,000 55,200,000
Interest expense ........................................................ 3,741,000 12,667,000 18,021,000
Interest income ......................................................... (859,000) (2,297,000) (4,659,000)
Other, net .............................................................. 836,000 883,000 44,000
------------- ------------- -------------
Income before income taxes .......................................... 41,476,000 21,062,000 41,794,000
Provision for income taxes .............................................. 13,437,000 11,062,000 19,308,000
------------- ------------- -------------
Net income .............................................................. $ 28,039,000 $ 10,000,000 $ 22,486,000
============= ============= =============
Basic Earnings Per Share ................................................ $ 0.69 $ 0.23 $ 0.48
============= ============= =============
Weighted average common shares outstanding ............................. 40,411,000 42,774,000 46,451,000
============= ============= =============
Diluted Earnings Per Share .............................................. $ 0.65 $ 0.22 $ 0.47
============= ============= =============
Weighted average common shares and common share equivalents outstanding 43,344,000 46,895,000 47,827,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CONCENTRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1997 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................. $ 28,039,000 $ 10,000,000 $ 22,486,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation of property and equipment ................................ 6,706,000 10,630,000 14,805,000
Amortization and write-off of intangibles ............................. 3,442,000 5,908,000 8,119,000
Amortization of deferred compensation ................................. - 562,000 805,000
Amortization and write-off of start-up costs .......................... 322,000 2,845,000 -
Earnings in unconsolidated subsidiaries, net of distributions ......... - (192,000) (98,000)
Amortization of deferred finance costs and debt discount .............. 58,000 777,000 1,699,000
Write-off of contract intangibles ..................................... - - 7,416,000
Change in assets and liabilities:
Accounts receivable ................................................... (14,967,000) (27,003,000) (19,765,000)
Prepaid expenses and other assets ..................................... (5,330,000) (16,326,000) (1,480,000)
Accounts payable, accrued expenses and income taxes ................... (2,675,000) 12,283,000 962,000
-------------- -------------- -------------
Net cash provided by (used in) operating activities .................. 15,595,000 (487,000) 34,949,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired ..................................... (68,805,000) (103,291,000) (18,070,000)
Purchase of property and equipment ..................................... (24,024,000) (25,535,000) (34,187,000)
Sale (purchase) of investments, net .................................... (12,045,000) 12,045,000 (15,523,000)
Proceeds from sale of property and equipment and other ................. 21,000 626,000 440,000
-------------- -------------- -------------
Net cash used in investing activities ................................ (104,853,000) (116,155,000) (67,340,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under revolving credit facilities, net ........... 1,400,000 43,300,000 (49,000,000)
Proceeds from the issuance of long-term debt ........................... 158,739,000 26,489,000 230,000,000
Payment of deferred financing costs .................................... (1,226,000) (596,000) (6,411,000)
Repayments of long-term debt ........................................... (37,220,000) (5,071,000) (49,581,000)
Net proceeds from the issuance of common stock under employee
stock purchase and option plans ....................................... 57,082,000 10,023,000 14,403,000
Payments to dissenting shareholders .................................... - - (15,047,000)
Dividends and distributions to shareholders ............................ (42,671,000) (3,760,000) (2,809,000)
-------------- -------------- -------------
Net cash provided by financing activities ............................ 136,104,000 70,385,000 121,555,000
-------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ....................................................... 46,846,000 (46,257,000) 89,164,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................ 11,375,000 58,221,000 11,964,000
-------------- -------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR ................................. $ 58,221,000 $ 11,964,000 $ 101,128,000
============== ============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid .......................................................... $ 3,316,000 $ 11,941,000 $ 13,912,000
Income taxes paid ...................................................... $ 8,557,000 $ 12,305,000 $ 15,961,000
Conversion of notes payable into common stock .......................... $ 825,000 $ 691,000 $ 10,094,000
Liabilities and debt assumed in acquisitions ........................... $ 9,030,000 $ 13,242,000 $ 8,386,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CONCENTRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
$0.01 PAR VALUE PAID-IN
COMMON STOCK CAPITAL
--------------------------- ----------------
NUMBER
OF SHARES VALUE
-------------- ------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 .................... 34,772,833 $ 347,000 $ 151,385,000
Sale of Common Stock .......................... 2,143,200 21,000 51,819,000
Common Stock issued in connection
with acquisitions ............................ 715,246 7,000 6,725,000
Common Stock issued under employee
stock purchase and option plans and
related tax benefit .......................... 683,076 7,000 7,735,000
Exercise of Common Stock warrants ............. 151,111 2,000 1,062,000
Conversion of notes payable into
Common Stock ................................. 105,983 1,000 824,000
Conversion of debenture payable into
Common Stock ................................. 1,854,141 19,000 14,766,000
Dividends and shareholder distributions
by pooled companies .......................... - - -
Net income .................................... - - -
---------- --------- -------------
BALANCE, DECEMBER 31, 1996 .................... 40,425,590 404,000 234,316,000
Common Stock issued in connection
with acquisitions ............................ 2,162,995 22,000 11,441,000
Common Stock issued under employee
stock purchase and option plans and
related tax benefit .......................... 897,530 9,000 10,013,000
Amortization of deferred compensation ......... - - 562,000
Conversion of notes payable into
Common Stock ................................. 81,571 1,000 690,000
Dividends and shareholder distributions
by pooled companies .......................... - - -
Net income .................................... - - -
---------- --------- -------------
BALANCE, DECEMBER 31, 1997 .................... 43,567,686 436,000 257,022,000
Comprehensive net income:
Net income .................................... - - -
Unrealized gain on marketable
securities ................................... - - -
Comprehensive net income ...................... - - -
---------- --------- -------------
Common Stock issued in connection
with acquisitions ............................ 430,750 4,000 3,408,000
Common Stock issued under employee
stock purchase and option plans and
related tax benefit .......................... 841,260 9,000 14,394,000
Amortization of deferred compensation ......... - - 805,000
Conversion of notes payable into
Common Stock ................................. 2,735,387 27,000 10,067,000
Dividends and shareholder distributions
by pooled companies .......................... - - -
Payments to dissenting shareholders ........... (470,671) (5,000) (15,042,000)
---------- --------- -------------
BALANCE, DECEMBER 31, 1998 .................... 47,104,412 $ 471,000 $ 270,654,000
========== ========= =============
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE RETAINED STOCKHOLDERS'
INCOME DEFICIT EQUITY
--------------- ------------------ ----------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 .................... $ - ($ 42,349,000) $ 109,383,000
Sale of Common Stock .......................... - - 51,840,000
Common Stock issued in connection
with acquisitions ............................ - 407,000 7,139,000
Common Stock issued under employee
stock purchase and option plans and
related tax benefit .......................... - - 7,742,000
Exercise of Common Stock warrants ............. - - 1,064,000
Conversion of notes payable into
Common Stock ................................. - - 825,000
Conversion of debenture payable into
Common Stock ................................. - - 14,785,000
Dividends and shareholder distributions
by pooled companies .......................... - (42,671,000) (42,671,000)
Net income .................................... - 28,039,000 28,039,000
------- ------------- -------------
BALANCE, DECEMBER 31, 1996 .................... - (56,574,000) 178,146,000
Common Stock issued in connection
with acquisitions ............................ - (969,000) 10,494,000
Common Stock issued under employee
stock purchase and option plans and
related tax benefit .......................... - - 10,022,000
Amortization of deferred compensation ......... - - 562,000
Conversion of notes payable into
Common Stock ................................. - - 691,000
Dividends and shareholder distributions
by pooled companies .......................... - (3,474,000) (3,474,000)
Net income .................................... - 10,000,000 10,000,000
------- ------------- -------------
BALANCE, DECEMBER 31, 1997 .................... - (51,017,000) 206,441,000
Comprehensive net income:
Net income .................................... - 22,486,000 22,486,000
Unrealized gain on marketable
securities ................................... 60,000 - 60,000
Comprehensive net income ...................... 60,000 22,486,000 22,546,000
------- ------------- -------------
Common Stock issued in connection
with acquisitions ............................ - 30,000 3,442,000
Common Stock issued under employee
stock purchase and option plans and
related tax benefit .......................... - - 14,403,000
Amortization of deferred compensation ......... - - 805,000
Conversion of notes payable into
Common Stock ................................. - - 10,094,000
Dividends and shareholder distributions
by pooled companies .......................... - (2,809,000) (2,809,000)
Payments to dissenting shareholders ........... - - (15,047,000)
------- ------------- -------------
BALANCE, DECEMBER 31, 1998 .................... $60,000 ($ 31,310,000) $239,875,000
======= ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CONCENTRA MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
On August 29, 1997, Concentra Managed Care, Inc. ("Concentra" or the
"Company"), a Delaware corporation, was formed by the merger (the "1997
Merger") of CRA Managed Care, Inc. ("CRA") and OccuSystems, Inc.
("OccuSystems"). As a result of the 1997 Merger, CRA changed its name to
Concentra Managed Care Services, Inc. ("Managed Care Services") and
OccuCenters, Inc., the operating subsidiary of OccuSystems, changed its name to
Concentra Health Services, Inc. ("Health Services"). The 1997 Merger was a
tax-free stock for stock exchange accounted for as a pooling of interests. The
Company recorded a non-recurring charge of $38,625,000 in the third quarter of
1997 associated with the 1997 Merger. The utilization of this charge through
December 31, 1998, was approximately $11,569,000 for professional fees and
services, $16,216,000 in costs associated with personnel reductions and the
consolidation of CRA's and OccuSystems' employee benefits, $5,945,000 in
facility consolidations and closings, $2,541,000 for the write-off of start-up
costs and $2,354,000 of other charges. At December 31, 1997, approximately
$7,527,000 of the non-recurring charge remains primarily related to personnel
related charges and facility consolidations and closings.
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 approximately $15,047,000 in cash to dissenting
PPS shareholders and the assumption of approximately $49,000,000 of debt which
was repaid at the time of the merger. This merger was accounted for as a
pooling of interests. In the first quarter of 1998, the Company recorded a
non-recurring charge of $12,600,000 primarily associated with the merger of
PPS. The utilization of this charge through December 31, 1998, was
approximately $5,136,000 for professional fees and services, $2,355,000 in
costs associated with personnel reductions, $746,000 in facility consolidations
and closings, $1,627,000 associated with the write-off of deferred financing
fees on PPS indebtedness retired and $1,264,000 of other non-recurring costs.
At December 31, 1998, approximately $1,472,000 of the non-recurring charge
remains primarily related to remaining facility lease obligations. PPS, founded
in 1990, is a provider of retrospective bill review services for the group
healthcare market.
In the fourth quarter of 1998, the Company recorded a non-recurring charge
of $20,514,000 primarily associated with the reorganization of its Managed Care
Services division to improve efficiency through facility consolidations and
related headcount reductions, to recognize an impairment loss on the intangible
related to an acquired contract and costs associated with settling claims on
other expired contracts. The utilization of this charge through December 31,
1998, was approximately $7,416,000 in charges related to the recognition of an
impairment loss on the intangible related to an acquired contract, $2,490,000
in costs associated with personnel reductions and $1,140,000 in facility
consolidations. At December 31, 1998, approximately $9,468,000 of the non-
recurring charge remains primarily related to remaining facility lease
obligations and costs associated with settling claims on other expired
contracts.
The financial statements as of December 31, 1997 and for the years ended
December 31, 1996 and 1997 have been restated to reflect the merger of PPS in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16").
(2) SIGNIFICANT ACQUISITIONS
Managed Care Services has experienced a significant amount of its growth
by virtue of the acquisitions of FOCUS HealthCare Management, Inc. ("FOCUS"),
Prompt Associates, Inc. ("PROMPT"), First Notice Systems, Inc. ("FNS"), About
Health, Inc. ("ABOUT HEALTH") and several other smaller acquisitions. Health
Services has also experienced a significant amount of its growth from the
acquisition of practices, including the acquisition of 16 occupational medical
centers and contracts to manage four additional medical centers from Vencor,
Inc. ("VMC").
On April 2, 1996, the Company purchased FOCUS for $21,000,000 in cash.
FOCUS, based in Brentwood, Tennessee, has built and maintains one of the
nation's largest workers' compensation preferred provider organization ("PPO")
networks and had annual revenues of approximately $9,900,000 for the year ended
December 31, 1995.
F-6
<PAGE>
On October 29, 1996, the Company purchased PROMPT for $30,000,000 in cash.
PROMPT, which is based in Salt Lake City, Utah, is one of the leading providers
of hospital bill audit services to the group health payor community for claims
that fall outside of an indemnity carrier's, third-party administrator's
("TPA") or health maintenance organization's ("HMO") network of hospital or
outpatient facilities and had annual revenues of approximately $10,000,000 for
the year ended December 31, 1995.
On June 4, 1997, the Company purchased FNS for $40,000,000 in cash. FNS,
based in Boston, Massachusetts, is a leading provider of outsourced call
reporting for first notice of loss/injury to the automobile insurance and
workers' compensation industries and had annual revenues of approximately
$9,000,000 for the year ended December 31, 1996.
PPS acquired ABOUT HEALTH in a two-step transaction on August 1, 1997 and
October 31, 1997 for $25,800,000 in cash and $9,733,000 in equity. ABOUT
HEALTH, based in Rockville, Maryland, is a provider of specialized cost
containment and outsourcing services for healthcare payors and had annual
revenues of approximately $10,000,000 for the year ended December 31, 1996.
On September 30, 1997, the Company purchased 16 occupational medical
centers and the management of four additional medical centers from VMC for
approximately $27,000,000 in cash. These medical centers had annual revenues of
approximately $23,000,000 for the year ended December 31, 1996.
The acquisitions of FOCUS, PROMPT, FNS, ABOUT HEALTH and VMC have been
accounted for by the Company as purchases whereby the basis for accounting for
their assets and liabilities are based upon their fair values at the dates of
acquisition. The excess of the purchase price over fair value of net assets
acquired (goodwill and assembled workforce and customer lists, if applicable)
for the FOCUS, PROMPT, FNS, ABOUT HEALTH and VMC acquisitions was $19,900,000,
$29,550,000, $37,001,000, $34,291,000 and $29,585,000, respectively. None of
these acquisitions were significant in relation to the Company's consolidated
financial statements and, therefore pro forma financial information has not
been presented. Goodwill is being amortized over thirty to forty year periods
and assembled workforce and customer lists are being amortized over five and
seven-year periods, respectively.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Investments in certain joint ventures with
less than a 51% ownership interest are accounted for on a equity basis and,
accordingly, consolidated income includes the Company's share of their income.
All significant intercompany accounts and transactions are eliminated in
consolidation.
Physician and physical therapy services are provided at the Health
Services centers under management agreements with affiliated physician
associations (the "Physician Groups"), which are organized professional
corporations that hire licensed physicians and physical therapists to provide
medical services to the centers' patients. Health Services has a nominee
shareholder relationship with the Physician Groups as defined in EITF 97-2,
Application of APB Opinion No. 16 and FASB Statement No. 94 to Physician
Practice Entities, and as a result, the financial statements of the Physician
Groups are consolidated. Specifically:
o Health Services can at all times establish or effect change in the
nominee shareholder;
o Health Services can cause a change in the nominee shareholder an
unlimited number of times;
o Health Services has sole discretion as to the choice of a new nominee
shareholder;
o Health Services has sole discretion without cause to establish or change
the nominee shareholders;
o Health Services and the Physician Groups would incur no more than a
nominal cost to cause a change in the nominee shareholder; and,
o Neither Health Services nor the Physician Groups are subject to any
significant adverse impact upon a change in the nominee shareholder.
The Company's management fees from the Physician Groups are calculated as
collected revenue net of compensation, benefits and other expenses incurred by
the Physician Groups.
(B) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents. The
carrying amount approximates fair value due to the short maturity of those
instruments.
F-7
<PAGE>
(C) REVENUE RECOGNITION
The Company recognizes revenue primarily as services have been rendered
based on time and expenses incurred. A certain portion of the Company's
revenues are derived from fee schedule auditing which is based on the number of
charges reviewed and based on a percentage of savings achieved for the
Company's customers. In these circumstances, the customer is obligated to pay
the Company when the services have been rendered and the savings identified.
During the fee schedule audit process (i.e., medical bill review), each bill
reviewed and audited is returned to the customer accompanied by an Explanation
of Benefit ("EOB"). The EOB details the total savings with respect to the bill
being reviewed as well as the amount owed to the Company as a percentage of
savings identified and the line charge associated with the bill being reviewed.
The Company's Health Services division's services consist of two primary
components : (i) workers' compensation injury care and related services; and
(ii) non-injury healthcare services related to employer needs or statutory
requirements. The workers' compensation injury care and related services'
provider reimbursement methods vary on a state-by-state basis. Of the 25 states
in which the Company currently operates occupational healthcare centers, 21
have fee schedules pursuant to which all healthcare providers are uniformly
reimbursed. The fee schedules are set by each state and generally prescribe the
maximum amounts that may be reimbursed for a designated procedure In the four
states without fee schedules, healthcare providers are reimbursed based on
usual, customary and reasonable ("UCR") fees charged in the particular state in
which the services are provided. Billing for services in states with fee
schedules are included in revenues net of allowance for estimated differences
between list prices and allowable fee schedule rates. Adjustments to the
allowance based on final payment from the states are recorded upon settlement.
The Company records the net revenue amount as accounts receivable.
The Company's total contractual allowances offset against revenues during
the years ended December 31, 1998, 1997,1996 were $16,095,000, $14,718,000 and
$3,680,000, respectively.
Insurance claims are screened by PPS and PROMPT prior to the insurance
company's internal review procedures to determine if the claims should be
further negotiated or are payable by the insurance company. During the
insurance company's review process, some claims have pre-existing PPO or HMO
arrangements, or other pre-existing conditions and disqualifying situations.
When these situations occur, a refund (chargeback) is requested for the amounts
paid (invoiced) on these claims. PPS and PROMPT's policies are to record a
sales allowance as an offset to revenues and accounts receivable based upon the
historical tracking of discounts and chargebacks at the time the claims are
modeled. A portion of the allowance for doubtful accounts attributable to PPS
and PROMPT is based on historical experience of ineligible claims which are
either charged back or given a negotiated discount. PPS and PROMPT utilize
several methods to project unpresented discounts and chargebacks including a
tracking of the actual experience of contractual discounts. Other factors that
affect collectability and bad debts for each service line are also evaluated
and additional allowance amounts are provided as necessary.
Accounts receivable at December 31, 1997 and 1998 include $4,500,000 of
unbilled accounts receivable relating to services rendered during the period
but not invoiced until after the period-end. These unbilled accounts receivable
relate primarily to field case management services, which are billed on an
hourly basis, whereby the Company has not yet provided a sufficient amount of
services to warrant the generation of an invoice. The customers are obligated
to pay for the services once performed. The Company estimates unbilled accounts
receivable by tracking and monitoring its historical experience.
F-8
<PAGE>
(D) DEPRECIATION
The Company provides for depreciation on property and equipment using
straight-line and accelerated methods by charges to operations in amounts that
allocate the cost of depreciable assets over their estimated lives as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- ------------------------------- -----------------------------------------------
<S> <C>
Furniture and fixtures 7 Years
Office and computer equipment 3 - 7 Years
Buildings and improvements 30 - 40 Years
Leasehold improvements The shorter of the life of lease or asset life
</TABLE>
(E) INTANGIBLE ASSETS
The value of goodwill, assembled workforces and customer lists are
recorded at cost at the date of acquisition. Through December 31, 1998
goodwill, including any excess arising from earn-out payments, was being
amortized on a straight-line basis over 30 to 40-year periods in accordance
with Accounting Principles Board Opinion No. 17 ("APB No. 17"), "Intangible
Assets". Effective January 1, 1999, the Company changed its policy, on a
prospective basis, with respect to the amortization of goodwill. All existing
and future goodwill will be amortized over a period not to exceed 25 years, Had
the Company adopted this policy at the beginning of 1998, amortization for 1998
would have increased by approximately $3,300,000 and diluted earnings per share
would have been $0.42. As of December 31, 1998, net intangible assets consisted
of goodwill, customer lists and assembled workforce. The Company believes that
the life of the core businesses acquired and the delivery of occupational
healthcare services is indeterminate and likely to exceed 25 years. The
assembled workforces and customer lists are being amortized over five- and
seven-year periods, respectively. As of December 31, 1997 and 1998, the Company
has recorded accumulated amortization on intangible assets of $29,834,000 and
$37,938,000 respectively.
Subsequent to an acquisition, the Company continually evaluates whether
later events and circumstances have occurred that indicate that the remaining
balance of goodwill may not be recoverable or that the remaining useful life
may warrant revision. When factors indicate that goodwill should be evaluated
for possible impairment, the Company uses an estimate of the related operating
unit's undiscounted cash flows over the remaining life of the goodwill and
compares it to the operating unit's goodwill balance to determine whether the
goodwill is recoverable or if impairment exists, in which case an adjustment is
made to the carrying value of the asset to reduce it to its fair value based
upon the present value of the future cash flows. When an adjustment is required
the Company evaluates the remaining goodwill amortization using the factors
outlined in APB No. 17.
(F) DEFERRED FINANCE COSTS
The Company has capitalized costs associated primarily with the 6% and
4.5% Convertible Subordinated Notes and the PPS indebtedness (written-off at
the time of the merger and retirement of PPS indebtedness) and is amortizing
these as interest expense over the life of the notes. Included in other assets
at December 31, 1997 and 1998 were deferred finance costs, net of accumulated
amortization, of $4,515,000 and $7,592,000, respectively.
(G) NON-RECURRING CHARGES
The following are rollforwards of the non-recurring charges recorded by
the Company in 1997 and 1998. See Note 1, "Basis of Presentation" for a
description of the non-recurring charges and the breakout of the deductions
from revenue by major category:
Third quarter of 1997 $38,625,000 non-recurring charge:
<TABLE>
<CAPTION>
Beginning Charged Ending
of Year to Income Usage of Year
------------ -------------- ----------------- -------------
<S> <C> <C> <C> <C>
1997 $ - $38,625,000 $ (31,098,000) $7,527,000
1998 7,527,000 - (7,527,000) -
</TABLE>
F-9
<PAGE>
First quarter of 1998 $12,600,000 non-recurring charge:
<TABLE>
<CAPTION>
Beginning Charged Ending
of Year to Income Usage of Year
----------- -------------- ----------------- -------------
<S> <C> <C> <C> <C>
1998 $ - $12,600,000 $ (11,128,000) $1,472,000
</TABLE>
Fourth quarter of 1998 $20,514,000 non-recurring charge:
<TABLE>
<CAPTION>
Beginning Charged Ending
of Year to Income Usage of Year
----------- -------------- ----------------- -------------
<S> <C> <C> <C> <C>
1998 $ - $20,514,000 $ (11,046,000) $9,468,000
</TABLE>
The following is a rollforward of all non-recurring charges for the three years
ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Beginning Charged Ending
of Year to Income Usage of Year
------------ ------------- ---------------- -------------
<S> <C> <C> <C> <C>
1996 $ - $ 964,000 $ (964,000) $ -
1997 - 38,625,000 (31,098,000) 7,527,000
1998 7,527,000 33,114,000 (29,701,000) 10,940,000
</TABLE>
(H) INVESTMENTS IN JOINT VENTURES
Investments in the net assets of joint ventures accounted for under the
equity method amounted to $3,937,000 and $ 3,839,000 at December 31, 1997 and
1998, respectively. For the year ending December 31, 1997 and 1998, revenue for
these entities was $4,561,000 and $5,724,000, gross profit was $950,000 and
$919,000 and net income was $287,000 and $338,000, respectively. Total assets
for the joint ventures were $4,277,000 and $4,306,000 as of December 31, 1997
and 1998, respectively.
(I) SELF INSURANCE
Company is partially insured for workers' compensation, physician medical
malpractice, automobile and certain employee health benefits. The Company's
self-insurance retention liability on a per claim basis ranges from $100,000 to
$250,000. Liabilities in excess of these amounts are the responsibility of the
insurer. The Company's policy is to accrue amounts up to the insurance
carriers' reserve requirements on a claim-by-claim basis and an estimate for
claims incurred but not yet reported.
(J) DEFERRED START-UP COSTS
Prior to the 1997 Merger, Health Services capitalized the start-up costs
associated with the internal development of its medical centers until
operational and would amortize these costs over a three-year period. The
American Institute of Certified Public Accountants issued Statement of Opinion
98-5, "Accounting for Start Up Costs" in April 1998, to change the accounting
and reporting treatment of start-up costs to require start-up costs to be
expensed as incurred. As a result of this pending change in accounting
principle, the Company wrote-off deferred start-up costs of approximately
$2,541,000 and included this in the third quarter of 1997 non-recurring charge.
(K) FOREIGN CURRENCY TRANSLATION
All assets and liabilities of the Company's Canadian offices are
translated at the year-end exchange rate, while revenues and expenses are
translated at the average exchange rate for the year. Cumulative translation
adjustments were immaterial for the years ended December 31, 1996, 1997 and
1998.
(L) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-10
<PAGE>
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(M) RECLASSIFICATIONS
Certain amounts previously reported in CRA's and OccuSystems' 1996
consolidated financial statements and PPS' 1996 and 1997 consolidated financial
statements have been reclassified to conform to the presentation in the 1998
consolidated financial statements.
(N) NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). Comprehensive income for the Company includes unrealized
gains on marketable securities in addition to net income as reported in the
Company's Consolidated Statements of Stockholders' Equity and in the
Stockholders' Equity section of the Company's Consolidated Balance Sheets.
In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 requires the reporting of financial
and descriptive information about a company's reportable operating segments.
Operating segments are components of an enterprise's separate financial
information that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance of that
component. The statement requires reporting segment profit or loss, certain
specific revenue and expense items, and segment assets. See Note 13 - Segment
Information for disclosure
(4) PRO FORMA NET INCOME AND PRO FORMA EARNINGS PER SHARE
Pro forma net income and basic and diluted pro forma earnings per share
for the years ended December 31, 1996 and 1997 have been calculated as if the
merger of PPS had been subject to federal and state income taxes for the entire
period, based upon an effective tax rate indicative of the statutory rates in
effect. Prior to its merger, PPS elected to be taxed as an S corporation, and
accordingly, was not subject to federal and state income taxes in certain
jurisdictions.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
supersedes Accounting Principles Board Opinion No. 15. SFAS 128 establishes new
accounting standards for the presentation of earnings per share whereby primary
earnings per share is replaced with "Basic Earnings Per Share" and fully
diluted earnings per share is now called "Diluted Earnings Per Share". In
accordance with SFAS 128, Basic Earnings Per Share has been computed by
dividing reported net income by weighted average common shares outstanding and
Diluted Earnings Per Share has been computed assuming, if dilutive, the
conversion of the Company's convertible notes and the elimination of the
related interest expense and the exercise of stock options, net of their
related income tax effect.
F-11
<PAGE>
Basic and diluted earnings per share for the years ended December 31, 1996,
1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net income available to shareholders ............................... $ 28,039,000 $ 10,000,000 $ 22,486,000
============ ============ ============
Pro forma net income available to shareholders (1) ................. $ 25,309,000 $ 7,189,000
============ ============
Weighted average common shares outstanding ......................... 40,411,000 42,774,000 46,451,000
============ ============ ============
Basic earnings per share ........................................... $ 0.69 $ 0.23 $ 0.48
============ ============ ============
Basic pro forma earnings per share (1) ............................. $ 0.63 $ 0.17
============ ============
Diluted Earnings Per Share:
Net income available to shareholders ............................... $ 28,039,000 $ 10,000,000 $ 22,486,000
Interest on dilutive convertible notes, net of tax ................. 290,000 308,000 52,000
============ ============ ============
Diluted net income ................................................. $ 28,329,000 $ 10,308,000 $ 22,538,000
============ ============ ============
Pro forma net income available to shareholders (1) ................. $ 25,309,000 $ 7,189,000
Interest on dilutive convertible notes, net of tax ................. 290,000 308,000
============ ============
Diluted pro forma net income (1) ................................... $ 25,599,000 $ 7,497,000
============ ============
Weighted average common shares outstanding ......................... 40,411,000 42,774,000 46,451,000
Dilutive options, warrants and notes payable ....................... 2,026,000 1,399,000 1,028,000
Dilutive convertible notes (2) ..................................... 907,000 2,722,000 348,000
============ ============ ============
Weighted average common shares and equivalents outstanding ......... 43,344,000 46,895,000 47,827,000
============ ============ ============
Diluted earnings per share ......................................... $ 0.65 $ 0.22 $ 0.47
============ ============ ============
Diluted pro forma earnings per share (1) ........................... $ 0.59 $ 0.16
============ ============
</TABLE>
- --------
(1) Pro forma net income and basic and diluted pro forma earnings per share for
the years ended December 31, 1996 and 1997 have been calculated as if PPS
had been subject to federal and state income taxes for the entire period,
based upon an effective tax rate indicative of the statutory rates in
effect. Prior to its merger with the Company, PPS elected to be taxed as
an S corporation and, accordingly, was not subject to federal and state
income taxes in certain jurisdictions.
(2) Excludes common stock equivalents of 3,291,243 shares of Common Stock
related to the 6% Convertible Subordinated Notes issued in December 1996
and 5,575,758 shares of Common Stock related to the 4.5% Convertible
Subordinated Notes issued in March and April 1998 as they are
anti-dilutive for the applicable years presented.
(5) REVOLVING CREDIT FACILITIES
On September 17, 1997, the Company entered into the $100,000,000 Senior
Credit Facility with a syndicate of five banks ("Senior Credit Facility"),
replacing the $60,000,000 Managed Care Services Credit Facility, ("MCS Credit
Facility") and the $60,000,000 Health Services Credit Facility, ("HS Credit
Facility"). The Senior Credit Facility matures on September 17, 2002. Interest
on borrowings under the Senior Credit Facility is payable, at the Company's
option, at the higher of the bank's prime rate of interest or the federal funds
rate plus an additional percentage of 0.5%, or LIBOR plus an additional
percentage of up to 1.25%, depending on certain financial criteria. The Company
is required to pay a commitment fee of 0.125% to 0.25% per annum, depending on
certain financial criteria, on the unused portion of the Senior Credit
Facility.
On February 23, 1998, the Company signed an amendment to expand the
Company's borrowing capacity under the Senior Credit Facility to $200,000,000
under similar terms and conditions in order to finance the repayment of
$49,000,000 of PPS outstanding indebtedness (the PPS Credit Facility and 10%
Subordinated Notes). On March 11, 1998, the Senior Credit Facility borrowing
capacity was reduced to the original $100,000,000 amount.
The Senior Credit Facility contains customary covenants, including,
without limitation, restrictions on the
F-12
<PAGE>
incurrence of indebtedness, the sale of assets, certain mergers and
acquisitions, the payment of dividends on the Company's capital stock, the
repurchase or redemption of capital stock, transactions with affiliates,
investments, capital expenditures and changes in control of the Company. Under
the Senior Credit Facility, the Company is also required to satisfy certain
financial covenants, such as cash flow, capital expenditures and other
financial ratio tests including fixed charge coverage ratios. The Company's
obligations under the Senior Credit Facility are secured by a pledge of stock
in the Company's subsidiaries.
As a result of the fourth quarter 1998 non-recurring charge, the Company
was not in compliance with certain leverage ratio covenants under the Senior
Credit Facility in the fourth quarter of 1998 and the Company expects it will
not be in compliance with those covenants in the first quarter of 1999. The
Company received a waiver on all financial covenants through the first quarter
of 1999. The Company does not have any borrowings outstanding under the Senior
Credit Facility and does not anticipate the need to borrow under the Senior
Credit Facility for the next twelve months.
At December 31, 1997, the Company had borrowings under the Senior Credit
Facility of $49,000,000, at an average rate of interest of 6.94%. At December
31, 1998, the Company had no borrowings and $3,050,000 of letters of credit
outstanding under the Senior Credit Facility. For the years ended December 31,
1996, 1997 and 1998, the weighted average borrowings under these revolving
credit facilities were $8,184,000, $9,615,000 and $14,205,000, respectively,
and the weighted average interest rates were 6.94%, 7.31% and 7.69%,
respectively.
(6) Long-term Debt
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
--------------- ----------------
<S> <C> <C>
4.5% Convertible Subordinated Notes, interest at 4.5%, due March
2003 .............................................................. $ - $ 230,000,000
6% Convertible Subordinated Notes, interest at 6%, due December
2001 .............................................................. 97,750,000 97,750,000
Notes payable to various holders, interest ranging from 8.8% to 10%,
payable in installments through 2005 .............................. 308,000 119,000
Obligations under capital leases ................................... 542,000 56,000
PPS indebtedness:
PPS Term Loan ..................................................... 42,000,000 -
5% Convertible Subordinated Notes due August 2006 ................. 10,000,000 -
10% Subordinated Notes due August 2003 ............................ 7,000,000 -
------------ -------------
157,600,000 327,925,000
Less: Current maturities ........................................... (7,497,000) (55,000)
------------ -------------
Long-term debt, net of current maturities ......................... $150,103,000 $ 327,870,000
============ =============
</TABLE>
As of December 31, 1998 and 1997, accrued interest was $3,276,000 and
$ 867,000 respectively
On March 11, 1998, the Company issued a new issue of $200,000,000
aggregate principal amount of 4.5% Convertible Subordinated Notes due March 15,
2003 (the "4.5% Convertible Subordinated Notes"). On April 6, 1998, the
underwriters exercised the $30,000,000 overallotment provision. The 4.5%
Convertible Subordinated Notes will be convertible into 5,575,758 shares of
Common Stock, at the option of the holder, at a conversion price of $41.25 per
share, representing a conversion premium of 25% over the previous day's closing
price. The 4.5% Convertible Subordinated Notes are general unsecured
obligations of the Company ranking equal in right of payment with the 6%
Convertible Subordinated Notes and all other unsecured indebtedness of the
Company. In addition, the Company is a holding company that conducts all of its
operations through subsidiaries, and the 4.5% Convertible Subordinated Notes
and the 6% Convertible Subordinated Notes are structurally subordinate to all
obligations of the Company's subsidiaries. The 4.5% Convertible Subordinated
Notes were sold through a private placement under Rule 144A of the Securities
Act of 1933, as amended and have similar terms and conditions as the 6%
Convertible Subordinated Notes.
In December 1996, Health Services issued an aggregate of up to $97,750,000
in principal amount of 6% Convertible Subordinated Notes ("6% Convertible
Subordinated Notes"). The 6% Convertible Subordinated Notes will be convertible
into 3,291,243 shares of Common Stock at the initial conversion price of $29.70
per share (equivalent
F-13
<PAGE>
to a conversion rate of 33.67 shares per $1,000 principal amount of 6%
Convertible Subordinated Notes), subject to adjustment in certain events. The
notes are convertible into Common Stock at the option of the holder on or after
February through December 2001. The 6% Convertible Subordinated Notes will
mature on December 15, 2001 with interest being payable semi-annually on June
15 and December 15 of each year, commencing on June 15, 1997.
On August 31, 1996, PPS completed a series of transactions involving funds
managed by a private equity firm and senior officers of PPS (the "1996
Transaction"). In connection with the 1996 Transaction, the private equity firm
invested $17,000,000 to acquire $10,000,000 in 5% Convertible Subordinated
Notes due August 2006 (the "5% Convertible Subordinated Notes") and $7,000,000
of 10% Subordinated Notes due August 2003 (the "10% Subordinated Notes"). PPS
also entered into a credit facility with a syndicate of two banks, which
provided for $25,000,000 of senior debt, $20,000,000 of which was in the form
of a term loan and $5,000,000 of which was available pursuant to a line of
credit. PPS, in turn, used the net proceeds from these financing transactions
to make distributions to its stockholders in an aggregate amount of
approximately $36,000,000.
On July 31, 1997, in connection with the acquisition of ABOUT HEALTH (see
Note 2), PPS entered into an amended and restated credit facility (as so
amended and restated, the "PPS Term Loan") to increase the term loan portion by
$26.5 million. The Company is obligated to make quarterly principal and
interest payments on the term loan (bearing interest of 8.0% and 7.8% at
December 31, 1996 and 1997, respectively) and quarterly interest payments on
the line of credit (bearing interest at 9.25% and 9.0% at December 31, 1996 and
1997, respectively).
The 10% Subordinated Notes bear interest at 10% per annum, payable
quarterly. Beginning February 2002, the Company is required to make semiannual
principal payments on the 10% Subordinated Notes of $1.7 million. Under the 10%
Subordinated Loan Agreement, the Company is required to prepay the 10%
Subordinated Notes in whole upon a qualifying public offering, sale of the
Company, or other change in control, as defined.
The 5% Convertible Subordinated Notes are convertible at any time by the
holder into 10,000 shares of PPS Redeemable Preferred Stock and 10,000 shares
of PPS Convertible Preferred Stock. The 5% Convertible Subordinated Notes
mature in August 2006, subject to the right of the holders to accelerate the
maturity of the 5% Convertible Subordinated Notes upon a public equity
offering, a qualifying sale of the Company, or a merger resulting in a change
in majority ownership of the Company. The 5% Convertible Subordinated Notes
bear interest at 5%, 2% being payable quarterly and 3% being deferred and
payable upon redemption or maturity.
On February 24, 1998, in connection with the merger of PPS, Concentra
repaid $49,000,000 of PPS indebtedness (the PPS Term Loan and 10% Subordinated
Notes) and the 5% Convertible Subordinated Notes were converted into 2,721,904
shares of Concentra Common Stock.
(7) FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments". This statement requires entities to disclose the fair value of
their financial instruments, both assets and liabilities, and and off- balance
sheet, for which it is practicable to estimate fair value. The following
describes the methods and assumptions that were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
The Company's marketable securities are held as available for sale in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
The following is a summary of marketable securities with a maturity of
greater than 90 days as of December 31, 1998:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
U.S. government securities ................ $ 10,523,000 $ 62,000 ($ 2,000) $ 10,583,000
Corporate debt securities ................. 3,000,000 - - 3,000,000
Other debt securities ..................... 2,000,000 - - 2,000,000
------------ -------- -------- ------------
$ 15,523,000 $ 62,000 ($ 2,000) $ 15,583,000
============ ======== ======== ============
Marketable securities, noncurrent ......... $ 10,523,000 $ 62,000 ($ 2,000) $ 10,583,000
============ ======== ======== ============
</TABLE>
F-14
<PAGE>
The average maturity of the Company's marketable securities as of December
31, 1998 was approximately 20 months.
Financial instruments that potentially subject the Company to
concentrations of credit risk are accounts receivable and marketable
securities. Mitigating factors related to the Company's accounts receivable are
that they are spread over a large customer base and various product lines the
Company offers. Further, the Company does monitor the financial performance and
credit worthiness of its large customers. Mitigating factors related to the
Company's marketable securities are that they are primarily U.S. government
securities and corporate bonds and notes, with strong credit ratings. The
Company limits the amount of its investment exposure as to institution,
maturity and investment type.
The carrying amounts of cash and cash equivalents, accounts receivable,
other current assets, accounts payable, and accrued expenses approximate fair
value because of the short maturity of those instruments. The credit facilities
approximate fair value primarily due to the floating interest rates associated
with those debt instruments.
The fair value of the Company's 6% Convertible Subordinated Notes was
$125,120,000 and $83,088,000 as of December 31, 1997 and 1998 and the Company's
4.5% Convertible Subordinated Notes was $173,650,000 as of December 31, 1998.
The fair market values of the convertible subordinated notes are the average of
the NASDAQ's bid and ask amounts as of the respective year end. As of December
31, 1997, the approximate fair value of the 5% Convertible Subordinated Notes
is $15,700,000. Although the interest rate on the 10% Subordinated Notes is
fixed, the carrying value reasonably approximates the fair value at December
31, 1997.
(8) Income Taxes
The provision for income taxes consists of the following for the years
ended December 31: of the following for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Current:
Federal ......... $ 11,429,000 $ 15,112,000 $ 11,252,000
State ........... 2,473,000 3,968,000 1,369,000
------------ ------------ ------------
13,902,000 19,080,000 12,621,000
Deferred:
Federal ......... (214,000) (6,873,000) 5,961,000
State ........... (251,000) (1,145,000) 726,000
------------ ------------ ------------
(465,000) (8,018,000) 6,687,000
------------ ------------ ------------
Total ............ $ 13,437,000 $ 11,062,000 $ 19,308,000
============ ============ ============
</TABLE>
F-15
<PAGE>
Significant items making up deferred tax liabilities and deferred tax assets
were as follows at December 31:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts .......................................... $ 4,624,000 $ 5,752,000
Accrued vacation ........................................................ 1,760,000 1,117,000
Accrued self insurance .................................................. 580,000 1,220,000
Acquired goodwill ....................................................... 1,678,000 1,310,000
Non-recurring accruals and reserves ..................................... 5,107,000 5,255,000
Net operating losses .................................................... 506,000 -
Other ................................................................... 109,000 1,446,000
----------- -----------
Deferred tax assets .................................................... $14,364,000 $16,100,000
=========== ===========
Deferred tax liabilities: ................................................
Book to tax depreciation ................................................ $ 1,716,000 $ 2,307,000
Joint venture deferred liabilities ...................................... - 1,280,000
Goodwill, principally due to differences in amortization periods ........ 4,400,000 4,758,000
Accounts receivable mark-to-market ...................................... - 1,596,000
Research and development expense ........................................ 1,520,000 4,864,000
Other ................................................................... 77,000 1,331,000
----------- -----------
Deferred tax liabilities ............................................... $ 7,713,000 $16,136,000
=========== ===========
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective tax
rate was as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 %
--------------- ----------
<S> <C> <C>
Tax provision at federal statutory rate .......... $ 14,309,000 34.5%
State taxes, net of federal income tax ...........
benefit .......................................... 1,488,000 3.6
PPS S corporation status ......................... (2,441,000) (5.9)
Non-deductible goodwill .......................... 367,000 0.9
Non-deductible non-recurring charges .............
and acquisition costs ............................ - -
Other items, net ................................. (286,000) (0.7)
------------ ----
$ 13,437,000 32.4%
============ ====
<CAPTION>
1997 % 1998 %
---------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Tax provision at federal statutory rate .......... $ 7,372,000 35.0% $ 14,628,000 35.0%
State taxes, net of federal income tax ...........
benefit .......................................... 925,000 4.4 1,766,000 4.2
PPS S corporation status ......................... (2,582,000) (12.3) - -
Non-deductible goodwill .......................... 1,003,000 4.8 1,149,000 2.8
Non-deductible non-recurring charges .............
and acquisition costs ............................ 4,064,000 19.3 1,815,000 4.3
Other items, net ................................. 280,000 1.3 (50,000) (0.1)
------------ ----- ------------ ----
$ 11,062,000 52.5% $ 19,308,000 46.2%
============ ===== ============ ====
</TABLE>
PPS' shareholders had elected S Corporation taxing status. Thus, PPS'
taxable income was taxed directly to its shareholders. PPS did pay state taxes
in Illinois, Pennsylvania, California and Utah based on its taxable income.
Effective with the merger with Concentra, PPS' taxable income is included in
Concentra's consolidated income tax returns.
(9) STOCKHOLDERS' EQUITY
(A) PREFERRED STOCK
The Board of Directors is authorized to issue shares of Preferred Stock,
in one or more series, and to fix for each such series the number of shares
thereof and voting powers and such preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions as are permitted by the Delaware General Corporation Law. The
Board of Directors could authorize the issuance of shares of Preferred Stock
with terms and conditions that could discourage a takeover or other transaction
that holders of some or a majority of shares of Common Stock might believe to
be in their best interests or in which such holders might receive a premium for
their shares of stock over the then market price of such shares. As of the date
hereof, no shares of Preferred Stock are outstanding and the Board of Directors
has no present intention to issue any shares of Preferred Stock. See Note 14
"Subsequent Events" for related disclosure.
F-16
<PAGE>
(B) STOCKHOLDER RIGHTS PLAN
Shortly after the 1997 Merger, on September 17, 1997, the Board of
Directors declared, pursuant to a rights agreement (the "Rights Agreement"), a
dividend distribution of one common share purchase right ("Right") for each
outstanding share of Common Stock. Each Right will entitle the registered
holder to purchase from Concentra one thousandth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share (the "Junior Preferred
Shares"), of Concentra at a price per share to be determined by the Board of
Directors with the advice of its financial advisor about the long-term
prospects for the Company's value (the "Purchase Price"), subject to
adjustment. Each thousandth of a Junior Preferred Share will be economically
equivalent to one share of Concentra Common Stock. The Purchase Price is
expected to be significantly higher than the trading price of the Common Stock.
Therefore, the dividend will have no initial value and no impact on the
consolidated financial statements of the Company. See Note 14, "Subsequent
Events" for related disclosure.
(C) COMMON STOCK
At December 31, 1998, the Company has reserved approximately 16,839,000
unissued shares of its Common Stock for possible issuance under the Company's
stock option or stock purchase plans and for the issuance upon possible
conversion of the Company's 6% and 4.5% Convertible Subordinated Notes.
(10) COMMITMENTS AND CONTINGENCIES
The Company leases certain corporate office space, operating and medical
facilities, and office and medical equipment under various non-cancelable
operating and capital lease agreements. Certain facility leases require the
Company to pay increases in operating costs and real estate taxes. In addition,
the Company leases certain office facilities from related parties under
operating lease agreements that expire on various dates through December 31,
2003. The Company made rental payments of $726,000 to Colonial Realty Trust, a
real estate company owned by a shareholder and board member of the Company for
each of the years ended December 31, 1996, 1997 and 1998.
The following is a schedule of rent expense by major category for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
.Facilities ................. $13,009,000 $17,179,000 $22,307,000
Office equipment ............ 1,166,000 2,029,000 3,091,000
Automobiles ................. 2,729,000 2,976,000 3,647,000
----------- ----------- -----------
Total rent expense .......... $16,904,000 $22,184,000 $29,045,000
=========== =========== ===========
</TABLE>
The following is a schedule of future minimum lease payments under
non-cancelable operating and capital leases for the years ending December 31:
<TABLE>
<CAPTION>
OPERATING LEASES
------------------------------------------------
CAPITAL RELATED UNRELATED
LEASES PARTIES PARTIES TOTAL
----------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Year Ending December 31,
1999 ................... $ 34,000 $ 700,000 $22,464,324 $23,164,324
2000 ................... 22,000 700,000 18,051,724 18,751,724
2001 ................... - 700,000 14,319,611 15,019,611
2002 ................... - 700,000 12,399,364 13,099,364
2003 ................... - 700,000 9,068,364 9,768,364
Thereafter ............. - - 8,083,018 8,083,018
-------- ----------- ----------- -----------
$ 56,000 $ 3,500,000 $84,386,405 $87,886,405
======== =========== =========== ===========
</TABLE>
A wholly-owned subsidiary of Health Services has committed to guarantee
$21,408,000 in senior discount notes, plus interest, issued by four development
corporations (Concentra Development Corporation, Concentra Development
Corporation II, Concentra/Sherrer Development Corporation and Concentra/RDA,
Inc.). The stated principal amount of the notes total $42,768,000, which will
be their accreted value at their stated maturity (two to five years after the
date of issuance of each note). These corporations have been organized and
capitalized by a third party to develop
F-17
<PAGE>
occupational healthcare centers in selected markets in the United States.
Health Services also has the right to acquire the developed centers at fair
market value in the future. Health Services has entered into a management
agreement with the development corporations to manage the healthcare centers'
daily operations.
The Company is party to certain claims and litigation initiated in the
ordinary course of business. The Company is not involved in any legal
proceeding that it believes will result, individually or in the aggregate, in a
material adverse effect upon its financial condition or results of operations.
See Note 14, "Subsequent Events" for further claims and litigation disclosures.
(11) EMPLOYEE BENEFIT PLANS
(A) CONCENTRA 401(K) PLAN
The Company has a defined contribution plan (the "Concentra 401(k) Plan"),
formerly the Managed Care Services 401(k) Plan (the "MCS Concentra 401(k)
Plan"), pursuant to which employees who are at least 21 years of age and who
have completed at least six months of service are eligible to participate.
Participants in the Concentra 401(k) Plan may not contribute more than the
lesser of a specified statutory amount or 15% of his or her pretax total
compensation. The Concentra 401(k) Plan permits, but does not require,
additional matching contributions of up to 50% of participants' pretax
contributions up to a maximum of 6% of compensation by the Company. Employees
are 100% vested in their own contributions while Company contributions vest 20%
per year with employees being fully vested after five years. For 1998, the
Company is making a matching contribution of 50% of participant's pretax
contributions up to 4% of compensation.
(B) HEALTH SERVICES 401(K) PLAN
Health Services' defined contribution plan (the "HS 401(k) Plan") merged
into the Concentra 401(k) Plan as of July 1, 1998. The HS 401(k) Plan had
similar terms to those of the Concentra 401(k) Plan. There were no matching
contributions under the plan in 1996, 1997 and 1998.
(C) PPS 401(K) PLAN
PPS' defined contribution plan (the "PPS 401(k) Plan") merged into the
Concentra 401(k) Plan as of August 1, 1998. The PPS 401(k) Plan had similar
terms to those of the Concentra 401(k) Plan. For the years ended December 31,
1996 and 1997 and the seven-month period in 1998, PPS elected to match 25% of
employee contributions up to 7% of gross earnings.
The Company has expensed $910,000, $1,053,000 and $1,508,000 for the years
ended December 31, 1996, 1997 and 1998, respectively, for matching
contributions to the Concentra 401(k), the MCS 401(k) and the PPS 401(k) Plans.
(12) STOCK PURCHASE PLAN AND STOCK OPTION PLANS
(A) CONCENTRA 1997 EMPLOYEE STOCK PURCHASE PLAN
The Concentra 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
for employees of the Company authorizes the issuance of up to 500,000 shares of
Common Stock pursuant to the exercise of nontransferable options granted to
participating employees. The 1997 Purchase Plan is administered by the
Compensation Committee of the Board of Directors.
Under the terms of the 1997 Purchase Plan, an employee must authorize the
Company in writing to deduct an amount (not less than 1% nor more than 15% of a
participant's base compensation and in any event not more than $25,000) from
his or her pay during six month periods commencing on January 1 and July 1 of
each year (each a "Purchase Period"). The exercise price for shares purchased
under the 1997 Purchase Plan for each Purchase Period is the lesser of 85% of
the fair market value of the Common Stock on the first or last business day of
the Purchase Period. The fair market value will be the closing selling price of
the Common Stock as quoted.
F-18
<PAGE>
(B) MANAGED CARE SERVICES AND HEALTH SERVICES EMPLOYEE STOCK PURCHASE PLANS
Managed Care Services and Health Services each had employee stock purchase
plans under similar terms and conditions as those under the 1997 Purchase Plan.
The Company issued the following shares of Common Stock under the employee
stock purchase plans for each of the following purchase periods:
<TABLE>
<CAPTION>
Weighted
Average
Number Price
Purchase Periods Ended of Shares Per Share
- --------------------------- ----------- ----------
<S> <C> <C>
December 31, 1995 ......... 32,682 $ 10.49
June 30, 1996 ............. 29,089 $ 10.59
December 31, 1996 ......... 44,606 $ 22.18
June 30, 1997 ............. 50,056 $ 21.38
December 31, 1997 ......... 47,245 $ 24.86
June 30, 1998 ............. 64,587 $ 22.10
December 31, 1998 ......... 160,512 $ 9.08
</TABLE>
(C) CONCENTRA 1997 LONG-TERM INCENTIVE PLAN
Concentra may grant awards with respect to shares under the Company's
Long-term Incentive Plan (the "Concentra Incentive Plan"). The awards under the
Concentra Incentive Plan include: (i) incentive stock options qualified as such
under U.S. federal income tax laws, (ii) stock options that do not qualify as
incentive stock options, (iii) stock appreciation rights ("SARs"), (iv)
restricted stock awards and (v) performance units.
The number of shares of Common Stock that may be subject to outstanding
awards under the Concentra Incentive Plan at any one time is equal to ten
percent of the total number of outstanding shares of Concentra Common Stock
(treating as outstanding all shares of Common Stock issuable within 60 days
upon exercise of stock options or conversion or exchange of outstanding,
publicly- traded convertible or exchangeable securities of Concentra) minus the
total number of shares of Common Stock subject to outstanding awards under the
Concentra Incentive Plan and any future stock-based plan for employees or
directors of Company. At December 31, 1998, the Company was authorized to award
grants of approximately 5,019,000 shares under the Concentra Incentive Plan.
The number of shares authorized under the Concentra Incentive Plan and the
number of shares subject to an award under the Concentra Incentive Plan will be
adjusted for stock splits, stock dividends, recapitalizations, mergers and
other changes affecting the capital stock of Concentra.
During 1997, the Company granted restricted stock for 357,000 shares of
Common Stock under the 1997 Incentive Plan which were valued at approximately
$9,903,000 based upon the market value of the shares at the time of issuance.
As of December 31, 1998, 93,000 shares of the restricted stock granted in 1997,
valued at $2,806,000, have been canceled due to forfeiture. During 1998, the
Company granted restricted stock for 48,000 shares of Common Stock under the
1997 Incentive Plan which were valued at $1,413,000 based upon the market value
of the shares at the time of issuance. The restricted stock grants vest 25% per
year beginning January 1, 2002. If the Company's financial performance exceeds
certain established performance goals, however, the vesting of these shares
could accelerate whereby 33-1/3% of the shares could become vested on January
1, 2000 and each year thereafter. For the years ended December 31, 1997 and
1998, the Company recorded amortization of $562,000 and $805,000, respectively,
in connection with the deferred compensation associated with the restricted
stock grants. During 1997 and 1998, the Company also granted 2,754 and 3,570
shares of restricted stock to outside directors that vest over one year.
After the 1997 Merger, no additional awards were made under the former CRA
and OccuSystems stock option plans and only that number of shares of Common
Stock issuable upon exercise of awards granted under the former CRA and
OccuSystems stock option plans as of the 1997 Merger were reserved for issuance
by the Company.
In connection with the 1996 Transaction, PPS canceled all outstanding
stock options and terminated all existing stock option plans. In return for the
cancellation of outstanding options, PPS made a cash payment to the holders of
these options, which resulted in a compensation charge of approximately
$484,000. Upon the cancellation of the options, PPS adopted the 1996 PPS
Replacement Stock Option Plan and the 1996 PPS Incentive
F-19
<PAGE>
Stock Option Plan for its key employees. The plan provided for the issuance of
up to 325,000 shares of PPS common stock. The exercise price for the incentive
stock options could not be less than the fair market value of the underlying
PPS common stock on the date of grant. After the merger, no additional awards
were made under the former PPS stock option plans and outstanding PPS options
were assumed by the Concentra Incentive Plan totaling approximately 580,000
shares of Concentra common stock.
A summary of the status for all outstanding options at December 31, 1996,
1997 and 1998 and changes during the years then ended is presented in the table
below:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE PRICE
OF SHARES PER SHARE
--------------- --------------
<S> <C> <C>
Balance December 31, 1995 ......... 2,697,593 $ 8.18
Granted .......................... 1,959,777 18.07
Exercised ........................ (633,143) 4.41
Canceled ......................... (158,485) 13.79
--------- --------
Balance December 31, 1996 ......... 3,865,742 13.59
Granted .......................... 2,925,655 22.51
Exercised ........................ (801,593) 9.02
Canceled ......................... (268,017) 20.71
--------- --------
Balance December 31, 1997 ......... 5,721,787 18.46
Granted .......................... 2,945,570 21.43
Exercised ........................ (696,473) 6.77
Canceled ......................... (1,277,335) 24.53
---------- --------
Balance December 31, 1998 ......... 6,693,549 $ 20.21
========== ========
</TABLE>
The weighted average fair market value of options granted in 1997 and 1998
were $25.89 and $21.95, respectively. A further breakdown of the outstanding
options at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE EXERCISABLE WEIGHTED
RANGE OF NUMBER OF AVERAGE CONTRACTUAL NUMBER OF AVERAGE
EXERCISE PRICES OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
- ------------------------ ----------- ---------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.00 - $12.39......... 2,357,919 $ 6.00 8.06 840,105 $ 5.61
$12.74 - $23.13......... 1,065,591 20.43 7.60 408,339 19.50
$23.17 - $27.88......... 521,789 26.24 8.15 198,800 26.30
$29.44 - $32.63......... 2,479,250 30.88 9.15 153,250 32.63
$32.75 - $33.88......... 269,000 33.75 8.87 81,000 33.46
--------- -------- ---- ------- --------
6,693,549 $ 20.21 8.43 1,681,494 $ 15.23
========= ======== ==== ========= ========
</TABLE>
(D) SFAS 123 DISCLOSURES
The Company accounts for these plans under APB No. 25, under which no
compensation cost has been recognized related to stock option grants. Had
compensation cost for these plans been determined consistent with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), the Company's net income, pro forma net income,
earnings per share and pro forma earnings per share would have been reduced to
the following supplemental pro forma amounts:
F-20
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Income:
As reported ........................ $ 28,039,000 $ 10,000,000 $ 22,486,000
Supplemental pro forma ............. $ 22,555,000 $ 3,612,000 $ 8,864,000
Pro forma as reported (1) .......... $ 25,309,000 $ 7,189,000
Supplemental pro forma (1) ......... $ 19,825,000 $ 801,000
Basic Earnings Per Share:
As reported ........................ $ 0.69 $ 0.23 $ 0.48
Supplemental pro forma ............. $ 0.56 $ 0.08 $ 0.19
Pro forma as reported (1) .......... $ 0.63 $ 0.17
Supplemental pro forma (1) ......... $ 0.49 $ 0.02
Diluted Earnings Per Share:
As reported ........................ $ 0.65 $ 0.22 $ 0.47
Supplemental pro forma ............. $ 0.53 $ 0.08 $ 0.19
Pro forma as reported (1) .......... $ 0.59 $ 0.16
Supplemental pro forma (1) ......... $ 0.46 $ 0.02
</TABLE>
- --------
(1) Pro forma net income and basic and diluted pro forma earnings per share for
the years ended December 31, 1996 and 1997 have been calculated as if PPS
had been subject to federal and state income taxes for the entire period,
based upon an effective tax rate indicative of the statutory rates in
effect. Prior to its merger with the Company, PPS elected to be taxed as
an S corporation, and accordingly, was not subject to federal and state
income taxes in certain jurisdictions.
Because the method of accounting under SFAS 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Additionally, the 1996, 1997 and 1998 pro forma amounts include $229,000,
$396,000 and $509,000, respectively, related to purchase discounts offered on
employee stock purchase plans. The fair value of each option granted is
estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions used for grants in 1996, 1997 and 1998,
respectively:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates .................................... 5.25% 5.50% 5.18%
Expected volatility ......................................... 45.29% 45.29% 78.91%
Expected dividend yield ..................................... - - -
Expected weighted average life of options in years .......... 3.4 3.7 3.0
</TABLE>
(13) SEGMENT INFORMATION
Operating segments represent components of the Company's business that are
evaluated regularly by key management in assessing performance and resource
allocation. The Company has determined that its reportable segments consist of
its Health Services, Specialized Cost Containment and Field Case Management
Groups.
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 the operating
assets of the occupational healthcare centers, including leasehold interests
and medical equipment.
Specialized Cost Containment services include first report of injury,
utilization management (precertification and concurrent review) retrospective
medical bill review, telephonic case management, preferred provider
organization ("PPO") network access, independent medical examinations ("IMEs"),
peer reviews and hospital bill auditing. These services are designed to reduce
the cost of workers' compensation claims, automobile accident injury claims and
group health claims.
F-21
<PAGE>
Field Case Management provides services involving case managers and nurses
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.
The Health Services Group is managed separately and has different economic
characteristics from the Specialized Cost Containment and Field Case Management
groups, and is therefore shown as a separate reportable segment. The Field Case
Management Group and certain operating segments included in the Specialized
Cost Containment Group have similar economic characteristics and may share the
same management and/or locations. However, the Field Case Management Group is
reported as a separate segment for management reporting purposes and it
represents 58.7%, 49.3% and 47.7% of total Managed Care Services revenue for
the years ended December 31, 1996, 1997 and 1998, respectively.
Revenues from individual customers, revenues between business segments and
revenues, operating profit and identifiable assets of foreign operations are
not significant.
The Company's Statements of Operations on a segment basis for the years
ended December 31, 1996, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenue:
Health Services ....................... $ 170,035,000 $ 207,676,000 $ 259,481,000
Managed Care Services: ................
Specialized cost containment ......... 83,784,000 142,919,000 183,734,000
Field case management ................ 118,864,000 138,723,000 167,841,000
------------- ------------- -------------
Total Managed Care Services .......... 202,648,000 281,642,000 351,575,000
------------- ------------- -------------
372,683,000 489,318,000 611,056,000
Gross profit margins: ..................
Health Services ....................... 39,281,000 52,300,000 58,300,000
Managed Care Services:
Specialized cost containment ......... 23,630,000 42,907,000 60,440,000
Field case management ................ 19,844,000 21,472,000 23,019,000
------------- ------------- -------------
Total Managed Care Services .......... 43,474,000 64,379,000 83,459,000
------------- ------------- -------------
82,755,000 116,679,000 141,759,000
Operating income (1):
Health Services ....................... 19,742,000 12,273,000 34,415,000
Managed Care Services ................. 25,452,000 20,042,000 20,785,000
------------- ------------- -------------
45,194,000 32,315,000 55,200,000
Interest expense ....................... 3,741,000 12,667,000 18,021,000
Interest income ........................ (859,000) (2,297,000) (4,659,000)
Other expense, net ..................... 836,000 883,000 44,000
------------- ------------- -------------
Income before income taxes............. 41,476,000 21,062,000 41,794,000
Provision for income taxes ............. 13,437,000 11,062,000 19,308,000
------------- ------------- -------------
Net income ............................ $ 28,039,000 $ 10,000,000 $ 22,486,000
============= ============= =============
</TABLE>
- --------
(1) Corporate-level general and administrative expenses are reported in the
Health Services and Managed Care Services groups based on where general
and administrative activities are budgeted. The Company does not make
allocations of corporate level general and administrative expenses.
F-22
<PAGE>
The Company's segment depreciation and amortization, capital expenditures
and identifiable assets for the years ended December 31, 1996, 1997 and 1998
are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
Depreciation and amortization:
Health Services ............... $ 6,827,000 $ 9,242,000 $ 11,442,000
Managed Care Services ......... 3,321,000 7,376,000 11,552,000
------------ ------------ ------------
$ 10,148,000 $ 16,618,000 $ 22,994,000
============ ============ ============
Capital expenditures:
Health Services ............... $ 19,296,000 $ 16,862,000 $ 19,235,000
Managed Care Services ......... 4,728,000 8,673,000 14,952,000
------------ ------------ ------------
$ 24,024,000 $ 25,535,000 $ 34,187,000
============ ============ ============
Identifiable assets:
Health Services ............... $260,619,000 $261,521,000 $309,419,000
Managed Care Services ......... 107,281,000 221,012,000 347,375,000
------------ ------------ ------------
$367,900,000 $482,533,000 $656,794,000
============ ============ ============
</TABLE>
(14) SUBSEQUENT EVENTS
On March 2, 1999, Concentra entered into a definitive agreement to merge
(the "Merger") with Yankee Acquisition Corp. ("Yankee"), a corporation formed
by Welsh, Carson, Anderson & Stowe ("WCAS"), a 14.9% stockholder of the
Company. Concentra's Board of Directors unanimously approved the transaction
based upon the recommendation of its special committee of the Board of
Directors, which was formed on October 29, 1998 to evaluate strategic
alternatives in response to several unsolicited expressions of interest
regarding the possible acquisition of some or all of the Company's Common
Stock. On March 24, 1999, Concentra entered into an Amended and Restated
Agreement and Plan of Merger with Yankee (the "Amended Merger Agreement").
Pursuant to the Amended Merger Agreement, WCAS will acquire approximately 87%,
funds managed by Ferrer Freeman Thompson & Co. ("FFT") will acquire
approximately 7% and other investors will acquire approximately 6% of the
post-merger shares of common stock of the Company for $16.50 per share. As a
result of the Merger, each outstanding share of Concentra Common Stock will be
converted into the right to receive $16.50 in cash.
In connection with the Merger, effective March 2, 1999, Concentra amended
its Rights Agreement. The amendment provides, among other things, that Yankee
and its affiliates will not be deemed an Acquiring Person (as such term is
defined in the Rights Agreement) and that the Rights Agreement will expire
immediately prior to the effective time of the Merger.
The transaction is valued at approximately $1,100,000,000, including the
refinancing of $327,750,000 of the 6% and 4.5% Convertible Subordinated Notes
which contain change in control provisions in the related indentures. The
transaction is structured to be accounted for as a recapitalization and is
expected to be completed in the third quarter of 1999. The transaction is
conditioned upon, among other things, approval of the shareholders of Concentra,
receipt of financing and certain regulatory approvals.
To finance the acquisition of the Company, WCAS will invest approximately
$369,432,000 in equity financing, including the value of shares and convertible
notes already owned by WCAS, and up to $110,000,000 in subordinated
indebtedness. Additionally, FFT will invest approximately $30,600,000 and other
investors will invest approximately $23,000,000 in equity. WCAS has also
received commitments from various lenders to provide Yankee with $190,000,000
in senior subordinated notes, a $375,000,000 term loan and a $100,000,000
revolving credit facility to replace the Company's existing Senior Credit
Facility. Additionally, Concentra would also utilize excess cash on hand at the
time of the merger to help finance the purchase of the Concentra Common Stock.
Simultaneous with the right to receive cash for shares, Yankee would merge with
Concentra with Concentra surviving.
As of March 26, 1999, Concentra is aware of three lawsuits that have been
filed by alleged stockholders of Concentra relating to the Merger. All three
lawsuits were filed in the Chancery Court for New Castle County, Delaware. Each
of the lawsuits names Concentra, its directors and Yankee as defendants. The
plaintiff in each lawsuit seeks to represent a putative class of all public
holders of Concentra common stock. The lawsuits allege, among other things,
that the directors of Concentra breached their fiduciary duties to Concentra's
stockholders by approving the Merger. The lawsuits seek, among other things,
preliminary and permanent injunctive relief prohibiting consummation of the
Merger, unspecified damages, attorneys' fees and other relief. Concentra
expects that these lawsuits will be consolidated into a single action. The
Company intends to contest these lawsuits vigorously.
F-23
<PAGE>
(15) SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------
1994 1995
---------------- ------------------
<S> <C> <C>
Statement of Operations Data:
Revenue ...................................... $ 223,499,000 $ 305,355,000
Gross profit ................................. 37,093,000 62,435,000
Non-recurring charges ........................ - 898,000
Operating income ............................. 15,928,000 29,446,000
Income before taxes .......................... 10,088,000 24,246,000
Provision for income taxes (1) ............... 6,802,000 7,771,000
Net income before extraordinary
items (1) ................................... $ 3,286,000 16,475,000
Pro forma net income before
extraordinary items (2) ..................... $ 13,845,000
Basic earnings per share before
extraordinary items ......................... $0.48
Basic pro forma earnings per share
before extraordinary items (2) .............. $0.41
Basic weighted average shares out-
standing .................................... 33,810,000
Diluted earnings per share before
extraordinary items ......................... $0.46
Diluted pro forma earnings per share
before extraordinary items (2) .............. $0.39
Diluted weighted average shares
outstanding ................................. 35,939,000
Balance Sheet:
Working capital .............................. $ 19,117,000 $ 21,971,000
Total assets ................................. 113,672,000 188,530,000
Total debt ................................... 83,785,000 34,639,000
Total stockholders' equity (deficit) ......... (5,820,000) 109,383,000
<CAPTION>
For the year ended December 31,
--------------------------------------------------------
1996 1997 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Statement of Operations Data:
Revenue ...................................... $372,683,000 $489,318,000 $611,056,000
Gross profit ................................. 82,755,000 116,679,000 141,759,000
Non-recurring charges ........................ 964,000 38,625,000 33,114,000
Operating income ............................. 45,194,000 32,315,000 55,200,000
Income before taxes .......................... 41,476,000 21,062,000 41,794,000
Provision for income taxes (1) ............... 13,437,000 11,062,000 19,308,000
Net income before extraordinary
items (1) ................................... 28,039,000 10,000,000 $ 22,486,000
Pro forma net income before
extraordinary items (2) ..................... $ 25,309,000 $ 7,189,000
Basic earnings per share before
extraordinary items ......................... $0.69 $0.23 $0.48
Basic pro forma earnings per share
before extraordinary items (2) .............. $0.63 $0.17
Basic weighted average shares out-
standing .................................... 40,411,000 42,774,000 46,451,000
Diluted earnings per share before
extraordinary items ......................... $0.65 $0.22 $0.47
Diluted pro forma earnings per share
before extraordinary items (2) .............. $0.59 $0.16
Diluted weighted average shares
outstanding ................................. 43,344,000 46,895,000 47,827,000
Balance Sheet:
Working capital .............................. $116,439,000 $ 36,754,000 $201,870,000
Total assets ................................. 367,900,000 482,533,000 656,794,000
Total debt ................................... 142,229,000 206,600,000 327,925,000
Total stockholders' equity (deficit) ......... 178,146,000 206,441,000 239,875,000
</TABLE>
- --------
(1) Prior to its recapitalization in March of 1994, CRA had elected to be taxed
as an S corporation. In connection with its recapitalization, CRA was
required to change from an S to a C corporation. This change resulted in
CRA recording an incremental tax provision of $3,772,000 in the first
quarter of 1994. The Company's pro forma net income for 1994 would have
been $3,466,000 higher had CRA had been subject to federal and state
income taxes during the entire period based upon an effective tax rate
indicative of the statutory rate in effect during the period.
(2) Pro forma net income and basic and diluted pro forma earnings per share,
where applicable, for the years ended December 31, 1994, 1995, 1996 and
1997 have been calculated as if PPS had been subject to federal and state
income taxes for the entire period, based upon an effective tax rate
indicative of the statutory rates in effect. Prior to its merger with the
Company, PPS elected to be taxed as an S corporation, and accordingly, was
not subject to federal and state income taxes in certain jurisdictions.
(16) SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters ended December 31, 1998. In
management's opinion, this unaudited information has been prepared on the same
basis as the annual financial statements and includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the quarters presented, when read in
conjunction with the financial statements and notes thereto included elsewhere
in this document. The operating results for any quarter are not necessarily
indicative of results for any subsequent quarter.
F-24
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
------------------ ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
Revenue ................................. $144,282,000 $157,501,000 $157,362,000 $151,911,000
Cost of services ........................ 109,898,000 116,633,000 118,660,000 124,106,000
------------ ------------ ------------ -------------
Gross profit ........................... 34,384,000 40,868,000 38,702,000 27,805,000
General and administrative expenses 10,645,000 11,228,000 11,851,000 11,602,000
Amortization ............................ 2,015,000 2,036,000 2,051,000 2,017,000
Non-recurring charge .................... 12,600,000 - - 20,514,000
------------ ------------ ------------ -------------
Operating income (loss) ................ 9,124,000 27,604,000 24,800,000 (6,328,000)
Other expense, net ...................... 3,710,000 3,207,000 3,355,000 3,134,000
Provision (benefit) for income taxes..... 4,567,000 10,236,000 9,000,000 (4,495,000)
------------ ------------ ------------ -------------
Net income (loss) ....................... $847,000 $ 14,161,000 $ 12,445,000 $ (4,967,000)
============ ============ ============ =============
Basic earnings (loss) per share ......... $0.02 $0.30 $0.26 $(0.11)
Diluted earnings (loss) per share ....... $0.02 $0.30 $0.26 $(0.11)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Revenue ................................... $106,307,000 $19,633,000 $129,890,000 $133,488,000
Cost of services .......................... 82,640,000 90,736,000 96,024,000 103,239,000
------------ ----------- ------------ ------------
Gross profit ............................. 23,667,000 28,897,000 33,866,000 30,249,000
General and administrative expenses 9,025,000 9,948,000 10,251,000 10,607,000
Amortization .............................. 1,235,000 1,160,000 1,560,000 1,953,000
Non-recurring charge ...................... - - 38,625,000 -
------------ ----------- ------------ ------------
Operating income (loss) .................. 13,407,000 17,789,000 (16,570,000) 17,689,000
Other expense, net ........................ 1,598,000 2,272,000 3,200,000 4,183,000
Provision for income taxes ................ 4,106,000 5,395,000 (3,342,000) 4,903,000
------------ ----------- ------------ ------------
Net income (loss) ......................... $ 7,703,000 $10,122,000 $(16,428,000) $ 8,603,000
============ =========== ============ ============
Pro forma net income (loss) (1) ........... $ 7,080,000 $ 9,440,000 $(17,548,000) $ 8,217,000
============ =========== ============ ============
Basic earnings (loss) per share ........... $0.18 $0.24 $(0.38) $0.20
Basic pro forma earnings (loss) per
share (1) ................................ $0.17 $0.22 $(0.41) $0.19
Diluted earnings (loss) per share ......... $0.17 $0.22 $(0.38) $0.18
Diluted pro forma earnings (loss) per
share (1) ................................ $0.15 $0.21 $(0.41) $0.17
</TABLE>
- --------
(1) Pro forma net income (loss) and basic and diluted pro forma earnings (loss)
per share for the four quarters ended December 31, 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.
F-25
<PAGE>
Supplemental Schedule II
CONCENTRA MANAGED CARE, INC.
Valuation and Qualifying Accounts
For the Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
BEGINNING CHARGED NET DEDUCTIONS ENDING
BALANCE TO INCOME ACQUISITIONS FROM RESERVES BALANCE
------------- ------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
1996 $ 6,917,000 $ 5,298,000 $4,289,000 $ 6,526,000 $ 9,978,000
1997 9,978,000 8,890,000 7,797,000 9,942,000 16,723,000
1998 16,723,000 12,869,000 1,968,000 14,350,000 17,210,000
Contractual Allowance
1996 $ 660,000 $ 3,680,000 $ 800,000 $ 3,427,000 $ 1,653,000
1997 1,653,000 14,718,000 - 12,743,000 3,628,000
1998 3,628,000 16,095,000 - 15,073,000 4,650,000
</TABLE>
- --------
Non-recurring Charges(1)
<TABLE>
<CAPTION>
BEGINNING CHARGED ENDING
BALANCE TO INCOME USAGE BALANCE
------------ ------------- ---------------- -------------
<S> <C> <C> <C> <C>
1996 $ - $ 964,000 $ (964,000) $ -
1997 - 38,625,000 (31,098,000) 7,527,000
1998 7,527,000 33,114,000 (29,701,000) 10,940,000
</TABLE>
(1) Non-recurring charge breakout by major category:
<TABLE>
<CAPTION>
PROFESSIONAL FACILITY PERSONNEL
FEES CONSOLIDATION RELATED OTHER TOTAL
---------------- --------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance 12/31/96 ................ $ - $ - $ - $ - $ -
Provision-Q3 97 Charge ......... 11,569,000 5,945,000 16,216,000 4,895,000 38,625,000
Usage-Q3 97 Charge ............. (9,155,000) (5,476,000) (11,803,000) (4,664,000) (31,098,000)
----------- ----------- ------------ ------------ ------------
Balance 12/31/97 ................ $ 2,414,000 $ 469,000 $ 4,413,000 $ 231,000 $ 7,527,000
1988 Provision:
Q3 97 Charge ................... $ - $ - $ - $ - $ -
Q1 98 Charge ................... 5,200,000 2,100,000 2,400,000 2,900,000 12,600,000
Q4 98 Charge ................... - 5,836,000 3,817,000 10,861,000 20,514,000
----------- ----------- ------------ ------------ ------------
Total 1998 Provision ............ $ 5,200,000 $ 7,936,000 $ 6,217,000 $ 13,761,000 $ 33,114,000
1988 Usage:
Q3 97 Charge ................... $(2,414,000) $ (469,000) $ (4,413,000) $ (231,000) $ (7,527,000)
Q1 98 Charge ................... (5,136,000) (746,000) (2,355,000) (2,891,000) (11,128,000)
Q4 98 Charge ................... - (1,140,000) (2,490,000) (7,416,000) (11,016,000)
----------- ----------- ------------ ------------ ------------
Total 1998 Usage ................ $(7,550,000) $(2,355,000) $ (9,258,000) $(10,538,000) $(29,701,000)
----------- ----------- ------------ ------------ ------------
Balance 12/31/98 ................ $ 64,000 $ 6,050,000 $ 1,372,000 $ 3,454,000 $ 10,940,000
=========== =========== ============ ============ ============
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Stockholders and Board of
Directors of Concentra Managed Care, Inc.
We have audited in accordance with generally accepted auditing standards, the
financial statements of Concentra Managed Care, Inc. and have issued our report
thereon dated June 9, 1999. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the index of the financial statement schedules is presented for the purpose
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 9, 1999
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -------------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger dated February 24, 1998 among the Registrant and Preferred Payment Sys-
tems, Inc. (incorporated by reference to Exhibit 2.2 to the Registrant's Annual Report on Form 10-K (File
No. 000-22751) filed with the SEC on March 31, 1998)
2.2 Agreement and Plan of Merger dated March 2, 1999 between Yankee Acquisition Corp. and the Registrant
(incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K (File No. 000-
22751) filed with the SEC on March 3, 1999)
2.3 Amended and Restated Agreement and Plan of Merger dated March 24, 1999 between Yankee Acquisition
Corp. and the Registrant (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on
Form 8-K (File No. 000-22751) filed with the SEC on March 29, 1999)
3.1 Amended and Restated Certificate of Incorporation dated August 27, 1997 (incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K (File No. 000-22751) filed with the SEC on
March 31, 1998)
3.2 Bylaws of Registrant (incorporated by reference to Exhibit 3.3 to the Registrant's Registration Statement on
Form S-4 (File No. 333-27105) filed with the SEC on July 31, 1997)
4.1 Form of Certificate of Common Stock, par value $.01 per share, of the Registrant (incorporated by refer-
ence to Exhibit 4.1 to the Registrant's Registration Statement on Form S-4 (File No. 333-27105) filed with
the SEC on July 31, 1997)
4.2 Indenture dated December 24, 1996 between OccuSystems and United States Trust Company of New York,
as Trustee, (the "OccuSystems Indenture") relating to the 6% Convertible Subordinated Notes due 2001
(incorporated by reference to Exhibit 4.1 to OccuSystems' Registration Statement on Form S-3 (File No.
333-20933) as filed with the SEC on January 31, 1997)
4.3 First Supplemental Indenture dated August 29, 1997 between OccuSystems, the Registrant and United States
Trust Company of New York, as Trust, relating to the 6% Convertible Subordinated Notes due 2001 (incor-
porated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K (File No. 00-22751)
filed with the SEC on March 31, 1998)
4.4 Indenture dated as of March 16, 1998 between the Registrant and Chase Bank of Texas, N.A., as Trustee,
(the "Concentra Indenture") relating to the 4.5% Convertible Subordinated Notes due 2003 (incorporated by
reference to the Registrant's Current Report on Form 8-K (File No. 000-22751) filed with the SEC on
March 30, 1998)
4.5 Form of 6% Convertible Subordinated Note due 2001, establishing the terms of the 6% Convertible Subor-
dinated Notes due 2001 pursuant to the OccuSystems Indenture (incorporated by reference to Exhibit A to
the OccuSystems Indenture which Indenture is incorporated by reference to Exhibit 4.1 to OccuSystems'
Registration Statement on Form S-3 (File No. 333-20933) as filed with the SEC on January 31, 1997)
4.6 Form of 4.5% Convertible Subordinated Notes due 2003, establishing the terms of the 4.5% Convertible
Subordinated Notes due 2003 pursuant to the Concentra Indenture (incorporated by reference to the Regis-
trant's Current Report on Form 8-K (File No. 000-22751) filed with the SEC on March 30, 1998)
4.7 Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference to
Exhibit 4.6 to the Registrant's Annual Report on Form 10-K (File No. 000-22751) filed with the SEC on
March 31, 1998)
4.8 Form of Right Certificate (included as Exhibit B to the Rights Agreement filed as Exhibit 10.2 hereto). Pur-
suant to the Rights Agreement, printed Right Certificates will not be delivered until as soon as practicable
after the Distribution Date (as defined in the Rights Agreement)
4.9 Registration Rights Agreement dated as of March 11, 1998, among the Registrant, BT Alex. Brown Incor-
porated, BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities Corporation and Piper
Jaffray Inc. (incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-22751)
filed with the SEC on March 30, 1998)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------------------------------------------------------------------------------------------------------------
<S> <C>
4.10 Registration Rights Agreement dated as of March 8, 1994, among Comprehensive Rehabilitation Associates,
Inc., J.H. Whitney & Co., Whitney 1990 Equity Fund, L.P., Whitney Subordinated Debt Fund, L.P., First
Union Corporation, Lois E. Silverman and Donald J. Larson (incorporated by reference to Exhibit 10.7 to
CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.1 Amended and Restated Credit Agreement dated as of February 20, 1998, between the Registrant, as Bor-
rower, and First Union National Bank, as Administrative Agent, Fleet National Bank, as Documentation
Agent, and the banks and financial institutions listed as signatories thereto, as amended by that certain letter
agreement dated as of March 9, 1998, and as further amended by that certain letter agreement dated as of
March 12, 1998 (incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K
(File No. 000-22751) filed with the SEC on March 31, 1998)
10.2 Purchase Agreement dated as of March 11, 1998, among the Registrant, BT Alex. Brown Incorporated,
BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities Corporation and Piper Jaffray,
Inc. (incorporated by reference to the Registrant's Current Form on Form 8-K (File No. 000-22751) filed
with the SEC on March 30, 1998)
10.3 Rights Agreement dated September 29, 1997 between the Registrant and ChaseMellon Shareholder Ser-
vices, L.L.C. (incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A
filed with the SEC on October 1, 1998)
10.4 Concentra Managed Care, Inc. 1997 Long-Term Incentive Plan (incorporated by reference to Appendix G
to the Joint Proxy Statement/Prospectus forming a part of the Registrant's Registration Statement on Form
S-4 (File No. 333-27105) filed with the SEC on July 31, 1997)
10.5 Concentra Managed Care, Inc. 1997 Employee Stock Purchase Plan (incorporated by reference to Appendix
H to the Joint Proxy Statement/Prospectus forming a part of the Registrant's Registration Statement on Form
S-4 (File No. 333-27105) filed with the SEC on July 31, 1997)
10.6 CRA Managed Care, Inc. 1995 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.25
to CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.7 CRA Managed Care, Inc. 1994 Non-Qualified Stock Option Plan for Non-Employee Directors (incorporated
by reference to Exhibit 10.3 to CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with
the SEC on March 17, 1995)
10.8 CRA Managed Care, Inc. 1994 Non-Qualified Time Acceleration Restricted Stock Option Plan (incorporated
by reference to Exhibit 10.5 to CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with
the SEC on March 17, 1995)
10.9 OccuSystems, Inc. 1995 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.10 to OccuSys-
tems' Registration Statement on Form S-1 (File No. 33-79734) filed with the SEC on May 8, 1995)
10.10 First Amended and Restated OccuSystems, Inc. and its Subsidiaries and Affiliates Stock Option and
Restricted Stock Purchase Plan dated April 28, 1992 (incorporated by reference to Exhibit 10.11 to Occu-
Systems' Registration Statement on Form S-1 (File No. 33-79734) filed with the SEC on May 8, 1995)
10.11 Employment Agreement dated April 21, 1997, between the Registrant and Joseph F. Pesce (incorporated by
reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-4 (File No. 333-27105) filed
with the SEC on July 31, 1997)
10.12 Employment Agreement dated April 21, 1997, between the Registrant and Richard A. Parr II (incorporated
by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-4 (File No. 333-27105)
filed with the SEC on July 31, 1997)
10.13 Employment Agreement dated April 21, 1997, between the Registrant and W. Tom Fogarty (incorporated
by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-4 (File No. 333-27105)
filed with the SEC on July 31, 1997)
10.14 Employment Agreement dated April 21, 1997, between the Registrant and James M. Greenwood (incorpo-
rated by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form S-4 (File No. 333-
27105) filed with the SEC on July 31, 1997)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ---------- -------------------------------------------------------------------------------------------------------------
<S> <C>
10.15 Indemnification Agreement dated September 17, 1997, between the Registrant and Daniel J. Thomas (iden-
tical agreements were executed between the Registrant and each of the following: Joseph F. Pesce, Richard
A. Parr II, James M. Greenwood, W. Tom Fogarty, Kenneth Loffredo, Mitchell T. Rabkin, George H. Con-
rades, Robert A. Ortenzio, Lois E. Silverman, Paul B. Queally, John K. Carlyle) (incorporated by reference
to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K (File No. 000-22751) filed with the SEC
on March 31, 1998)
10.16 Agreement of Acceptance dated as of July 29, 1997, among the Registrant, Donald J. Larson and Lois E.
Silverman (incorporated by reference to Exhibit 10.19 to the Registrant's Registration Statement on Form
S-4 (File No. 333-27105) filed with the SEC on July 31, 1997)
10.17 Software License Agreement dated February 10, 1995 between CRA and CompReview, Inc. (confidential
treatment granted) (incorporated by reference to CRA's Registration Statement on Form S-1 (File No.
33-90426) filed with the SEC on March 17, 1995)
10.18 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 168 U.S. Route 1, Falmouth, ME 04105 (incorporated by reference to Exhibit 10.10 to CRA's
Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.19 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 46 Austin Street, Newtonville, MA 02160 (incorporated by reference to Exhibit 10.11 to CRA's
Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.20 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 312 Union Wharf, Boston, MA 02109 (incorporated by reference to Exhibit 10.17 to CRA's Reg-
istration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.21 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 565 Turnpike Street, North Andover, MA 01845 (incorporated by reference to Exhibit 10.18 to
CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.22 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 15A Riverway Place, Bedford, NH 03110 (incorporated by reference to Exhibit 10.19 to CRA's
Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.23 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 509 Stillwells Corner Road, Freehold, NJ 07728 (incorporated by reference to Exhibit 10.20 to
CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.24 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 732 Thimble Shoals Blvd., Newport News, VA 23606 (incorporated by reference to Exhibit 10.21
to CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17, 1995)
10.25 Lease Agreement dated January 1, 1994 between the Registrant and Colonial Realty Trust for office space
located at 10132 Colvin Run Road, Suite A, Great Falls, VA 22066 (incorporated by reference to Exhibit
10.22 to CRA's Registration Statement on Form S-1 (File No. 33-90426) filed with the SEC on March 17,
1995)
10.26 Occupational Medicine Center Management and Consulting Agreement dated December 31, 1993, between
Concentra Health Services, Inc. (formerly OccuCenters, Inc.) ("CHS") and Occupational Health Centers of
Southwest, P.A., a Texas professional association (incorporated by reference to Exhibit 10.6 to OccuSys-
tems' Annual Report on Form 10-K (File No. 0-24440) filed with the SEC on March 29, 1996)
10.27 Occupational Medicine Center Management and Consulting Agreement dated December 31, 1993, between
CHS and Occupational Health Centers of Southwest, P.A., a Arizona professional association (incorporated
by reference to Exhibit 10.7 to OccuSystems' Annual Report on Form 10-K (File No. 0-24440) filed with
the SEC on March 29, 1996)
10.28 Occupational Medicine Center Management and Consulting Agreement dated December 31, 1993, between
CHS and Occupational Health Centers of New Jersey, a New Jersey professional association (incorporated
by reference to Exhibit 10.8 to OccuSystems' Registration Statement on Form S-1 (File No. 33-01660) filed
with the SEC on March 28, 1996)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ---------- -------------------------------------------------------------------------------------------------------------
<S> <C>
10.29 Warrant Agreement dated January 3, 1995 between OccuSystems and Creditanstalt- Bankverein (incorpora-
tion by reference to Exhibit 10.13 to OccuSystems' Registration Statement on Form S-1 (File No. 33-01660)
filed with the SEC on March 28, 1996)
10.30 Voting Agreement dated May 15, 1997, by and between Lois E. Silverman and Donald J. Larson (incorpo-
rated by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K (File No. 000-22751)
filed with the SEC on March 31, 1998)
10.31 Amendment No. 1 to Rights Agreement dated March 2, 1999 between the Registrant and ChaseMellon
Shareholder Services, L.L.C. (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on
Form 8-K (File No. 000-22751) filed with the SEC on March 31, 1998)
+10.32 Amendment No. 1 to Employment Agreement dated January 12, 1999 between the Registrant and Joseph F.
Pesce
+10.33 Amendment No. 1 to Employment Agreement dated January 12, 1999 between the Registrant and Richard
A. Parr II
+10.34 Employment Agreement dated January 12, 1999 between the Registrant and Daniel J. Thomas
+10.35 Amendment No. 1 to Employment Agreement dated January 12, 1999 between the Registrant and W. Tho-
mas Fogarty
+10.36 Amendment No. 1 to Employment Agreement dated January 12, 1999 between the Registrant and James
M. Greenwood
10.37 Employment Agreement dated September 17, 1997, between the Registrant and Kenneth Loffredo (incorpo-
rated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-22751)
filed with the SEC on November 13, 1998)
+10.38 Amendment No. 1 to Employment Agreement dated January 12, 1999 between the Registrant and Kenneth
Loffredo
10.39 Employment Agreement dated January 12, 1998 between the Registrant and Richard D. Rehm, M.D.
(incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (File No.
000-22751) filed with the SEC on August 13, 1998)
10.40 Employment Agreement dated February 10, 1998 between the Registrant and Stephen Read (incorporated
by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-22751) filed
with the SEC on August 13, 1998)
10.41 Indemnification Agreement dated May 13, 1998 between the Registrant and Hon. Willis D. Gradison, Jr.
(identical agreements executed between the Registrant and Stephen Read (dated December 16, 1997), Rich-
ard D. Rehm, M.D. (dated May 13, 1998), Eliseo Ruiz III (dated May 11, 1998), Scott Henault (dated Sep-
tember 17, 1997), Darla Walls (dated December 16, 1997), Jeffrey R. Luber (dated December 16, 1997) and
Martha Kuppens (dated December 16, 1997)) (incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q (File No. 000-22751) filed with the SEC on August 13, 1998
+21.1 List of Subsidiaries
+23.1 Consent of Arthur Andersen LLP
+27.1 Financial Data Schedule for the year ended December 31, 1998
+27.2 Financial Data Schedule for the year ended December 31, 1997
</TABLE>
- --------
+ Filed herewith.
Exhibit 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Name State of Incorporation
- --------------------------------------------------------- -----------------------
<S> <C>
Concentra Management Services, Inc. Nevada
Concentra Managed Care Services, Inc. Massachusetts
Concentra Health Services, Inc. Nevada
Concentra Prepared Systems, Inc. Delaware
Prompt Associates, Inc. Delaware
First Notice Systems, Inc. Delaware
Focus Healthcare Management, Inc. Tennessee
Hillman Consulting, Inc. Nevada
OCI Holdings, Inc. Nevada
QMC3, Inc. Colorado
CRA of Washington, Inc. Washington
Drug Free Consortium, Inc. Texas
Occucenters I, L.P. Texas
Concentra Managed Care Business Trust Massachusetts
CRA-MCO, Inc. Nevada
California Occupational Medical Group, Inc. California
Greaney Medical Group, A Professional California
Medical Corporation
The Exam Center, Inc. Utah
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this Form 10-K/A of our report (and to all references to our
Firm) dated June 9, 1999 into the Company's previously filed Registration
Statements (File No. 333-92290-99, 333-36361, 333-36427, 333-47401, 333-47267,
333-47849, 333-52585, 333-34883, 333-43399). It should be noted that we have
not audited any financial statements of the Company subsequent to December 31,
1998, nor performed any audit procedures subsequent to the date of our reports.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 9, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.1
CONCENTRA MANAGED CARE, INC.
FINANCIAL DATA SCHEDULE
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998 DEC-31-1998
<CASH> 93,919,000 120,195,000 103,816,000 101,128,000
<SECURITIES> 0 0 1,966,000 5,000,000
<RECEIVABLES> 110,309,000 119,377,000 126,598,000 127,615,000
<ALLOWANCES> 16,800,000 17,000,000 17,000,000 17,210,000
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 233,341,000 269,929,000 265,801,000 266,837,000
<PP&E> 114,252,000 123,352,000 130,848,000 138,147,000
<DEPRECIATION> 42,033,000 44,852,000 48,533,000 52,220,000
<TOTAL-ASSETS> 581,976,000 635,407,000 658,772,000 656,794,000
<CURRENT-LIABILITIES> 61,541,000 64,031,000 71,753,000 64,967,000
<BONDS> 297,922,000 327,769,000 327,769,000 327,870,000
0 0 0 0
0 0 0 0
<COMMON> 465,000 469,000 471,000 471,000
<OTHER-SE> 204,603,000 226,815,000 242,710,000 239,404,000
<TOTAL-LIABILITY-AND-EQUITY> 581,976,000 635,407,000 658,772,000 656,794,000
<SALES> 0 0 0 0
<TOTAL-REVENUES> 144,282,000 301,783,000 459,145,000 611,056,000
<CGS> 0 0 0 0
<TOTAL-COSTS> 109,898,000 226,531,000 345,191,000 469,297,000
<OTHER-EXPENSES> 25,260,000 38,525,000 52,427,000 86,559,000
<LOSS-PROVISION> 0 0 0 28,964,000
<INTEREST-EXPENSE> 3,882,000 8,470,000 13,123,000 18,021,000
<INCOME-PRETAX> 5,414,000 29,811,000 51,256,000 41,794,000
<INCOME-TAX> 4,567,000 14,803,000 23,803,000 19,308,000
<INCOME-CONTINUING> 847,000 15,008,000 27,453,000 22,486,000
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 847,000 15,008,000 27,453,000 22,486,000
<EPS-BASIC> 0.02 0.33 0.59 0.48
<EPS-DILUTED> 0.02 0.32 0.58 0.47
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.2
CONCENTRA MANAGED CARE, INC.
FINANCIAL DATA SCHEDULE
</LEGEND>
<S> <C> <C>
<C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 0 0 0 11,964,000
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 0 0 106,284,000
<ALLOWANCES> 0 0 0 16,723,000
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 0 0 0 144,949,000
<PP&E> 0 0 0 102,974,000
<DEPRECIATION> 0 0 0 38,255,000
<TOTAL-ASSETS> 0 0 0 482,533,000
<CURRENT-LIABILITIES> 0 0 0 108,195,000
<BONDS> 0 0 0 150,103,000
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 436,000
<OTHER-SE> 0 0 0 206,005,000
<TOTAL-LIABILITY-AND-EQUITY> 0 0 0 482,533,000
<SALES> 0 0 0 0
<TOTAL-REVENUES> 106,307,000 225,940,000 355,830,000 489,318,000
<CGS> 0 0 0 0
<TOTAL-COSTS> 82,640,000 173,376,000 269,399,000 372,639,000
<OTHER-EXPENSES> 10,260,000 21,368,000 71,804,000 84,364,000
<LOSS-PROVISION> 0 0 0 23,608,000
<INTEREST-EXPENSE> 2,427,000 5,192,000 8,894,000 12,667,000
<INCOME-PRETAX> 11,809,000 27,326,000 7,557,000 21,062,000
<INCOME-TAX> 4,106,000 9,501,000 6,159,000 11,062,000
<INCOME-CONTINUING> 7,703,000 17,825,000 1,398,000 10,000,000
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 7,703,000 17,825,000 1,398,000 10,000,000
<EPS-BASIC> 0.18 0.42 0.03 0.23
<EPS-DILUTED> 0.17 0.39 0.03 0.22
</TABLE>
