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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
Annual Report Pursuant To Section 13 Or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Commission File Number 001-15699
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Concentra Operating Corporation
(Exact name of Registrant as specified in its charter)
Nevada 75-282260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5080 Spectrum Drive, Suite 400 -- West 75001
Tower (Zip code)
Addison, Texas
(Address of principal executive
offices)
(972) 364-8000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
13% Series B Subordinated Notes Due 2009
Guarantees of Senior Subordinated Notes Due 2009
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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 [_] No [X]
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]
As of March 15, 2000, the Registrant had outstanding an aggregate of 1,000
shares of its Common Stock, $.01 par value. The Registrant is a wholly-owned
subsidiary of Concentra Managed Care, Inc., a Delaware corporation, which, as
of March 15, 2000, had outstanding 25,672,748 shares of its Common Stock, $.01
par value.
DOCUMENTS INCORPORATED BY REFERENCE
None
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CONCENTRA OPERATING CORPORATION
FORM 10-K
Fiscal Year Ended December 31, 1999
INDEX
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Page
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PART I
Item 1 Business.......................................................... 1
Item 2 Properties........................................................ 24
Item 3 Legal Proceedings................................................. 24
Item 4 Submission of Matters to a Vote of Security Holders............... 24
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters................................................................. 24
Item 6 Selected Financial Data........................................... 24
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 25
Item 7A Quantitative and Qualitative Disclosures About Market Risk....... 37
Item 8 Financial Statements and Supplementary Data....................... 37
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 37
PART III
Item 10 Directors and Executive Officers of the Registrant............... 38
Item 11 Executive Compensation........................................... 41
Item 12 Security Ownership of Certain Beneficial Owners and Management... 47
Item 13 Certain Relationships and Related Transactions................... 49
PART IV
Item 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K.. 51
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FORWARD LOOKING INFORMATION
This Report includes "forward-looking statements" including, in particular,
the statements about our plans, strategies and prospects under the headings
Item 1. "Business--Risk Factors," Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item 1.
"Business." Although we believe that these forward-looking statements
reasonably reflect our plans, intentions and expectations, we can give no
assurance that we will achieve these plans, intentions or expectations.
Important factors that could cause actual results to differ materially from
the forward-looking statements we make in this Report are in this Report,
including under the headings Item 1. "Business--Risk Factors," Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 1. "Business." These factors include:
. the effects of economic conditions;
. the impact of competitive services and pricing, including through
legislative reform;
. changes in accounting standards and regulations affecting the workers'
compensation, insurance and healthcare industries in general;
. customer demand;
. changes in costs; and
. opportunities that others may present to us or that we may pursue, all
of which are difficult to predict and beyond the control of management.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements
and risk factors contained throughout this Report. In light of these risks,
uncertainties and assumptions, the forward-looking events we discuss in this
Report might not occur.
PART I
ITEM 1. BUSINESS
A. Description of Merger
On August 17, 1999, Concentra Managed Care, Inc. ("CMC") merged with Yankee
Acquisition Corp. ("Yankee"), a corporation formed by Welsh, Carson, Anderson
& Stowe ("WCAS"), a 14.9% stockholder of CMC. As a result of the merger,
41,056,966 shares of CMC common stock were converted to $16.50 per share in
cash. The remaining 6,343,203 shares held by Yankee were not converted. WCAS
acquired approximately 86%, funds managed by Ferrer Freeman Thompson & Co.
("Ferrer Freeman") acquired approximately 7%, and other investors acquired
approximately 7% of the post-merger shares of common stock of CMC, Concentra
Operating Corporation's parent company, for $16.50 per share. Simultaneous
with the right to receive cash for shares, Yankee merged with and into CMC and
CMC contributed all of its operating assets, liabilities and shares in its
subsidiaries, including Concentra Health Services, Inc., Concentra Managed
Care Services, Inc. and Concentra Preferred Systems, Inc., with the exception
of $110.0 million of 14% Senior Discount Debentures due 2010 and $327.7
million of 6.0% and 4.5% Convertible Subordinated Notes, to the Registrant,
Concentra Operating Corporation ("Concentra Operating") or (the "Company"), a
wholly-owned subsidiary of CMC, in exchange for 1,000 shares of Concentra
Operating common stock. The 6.0% and 4.5% Convertible Subordinated Notes were
substantially retired during the third quarter of 1999 as a result of the
merger. The merger was accounted for as a recapitalization transaction, with
no changes to the basis of assets, liabilities or shares in its subsidiaries,
including Concentra Health Services, Inc. and Concentra Managed Care Services,
Inc.
The merger transaction was valued at approximately $1.1 billion, including
the refinancing of $327.7 million of the 6.0% and 4.5% convertible
subordinated notes that were tendered during the third quarter of 1999. To
finance the acquisition of CMC, WCAS, Ferrer Freeman, and the other investors
invested approximately $423.7 million in equity financing, including the value
of shares already owned by WCAS, and $110.0 million of 14%
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Senior Discount Debentures due 2010 with warrants issued by CMC exercisable
for its common shares. Concentra Operating received from various lenders
$375.0 million in term loans, a $100.0 million revolving credit facility to
replace the pre-merger revolving credit facility and $190.0 million of 13%
Series A Senior Subordinated Notes due 2009. Concentra Operating's excess cash
balances funded merger and financing related fees and expenses and related
employee stock option exercises and cancellation payments.
Concentra Operating incurred $18.0 million of deferred financing fees for
the issuance of the merger-related financing and recorded a non-recurring
charge of $54.4 million in the third quarter of 1999 incurred primarily for
fees, expenses and other non-recurring charges associated with the merger.
Through December 31, 1999, Concentra Operating paid approximately $17.9
million for professional fees and services, $14.5 million for employee-related
stock option exercises and cancellations, $10.5 million for a WCAS transaction
fee for advisory and consulting services provided in connection with the
merger and the related financing, of $1.5 million of other personnel-related
costs, and $1.8 million of other non-recurring charges, and used $5.5 million
for non-cash deferred compensation expense related to the accelerated vesting
and issuance of 210,000 shares of restricted stock. At December 31, 1999,
approximately $2.7 million of the non-recurring charge remains for
professional fees and services and other non-recurring items incurred in
connection with the merger.
B. General
We are the largest company dedicated primarily to serving the occupational
healthcare market. We provide initial treatment for approximately 5% of
workplace injuries in the United States and perform non-injury occupational
healthcare services for over 80,000 local employers. We provide specialized
cost containment and field case management services to over 2,000 customers
across the United States and Canada, including most of the major underwriters
of workers' compensation insurance, third-party administrators and self-
insured employers. We are also the largest provider of out-of-network bill
review services to the group health marketplace. We offer a continuum of
healthcare-related services to employers, insurers and third-party
administrators of all sizes and are compensated for our services on a non-
risk-bearing, fee-for-service or percentage-of-savings basis. Less than 0.5%
of our revenues are dependent on Medicare or Medicaid reimbursement.
Our services reduce the customer's healthcare costs by:
. efficiently managing the application of appropriate medical care and the
return-to-work process, thereby reducing the non-medical costs
associated with a claim; and
. using sophisticated cost containment techniques to determine the proper
pricing of care once it has been administered.
We believe that by offering both the provision of care and claims management
services, we are in a unique position to provide comprehensive, integrated
services on a bundled or unbundled basis to national or regional accounts and
local employers. In addition to the occupational healthcare and group health
markets, we also provide cost containment services to the auto insurance
market as well as social security disability advocacy services to the long-
term disability insurance market. In 1999, we generated revenues of $681.4
million.
With healthcare costs rising, we believe that payors will seek to increase
the use of cost saving strategies, such as those we offer, to minimize these
costs. Our comprehensive services are comprised of three distinct categories:
. healthcare services;
. specialized cost containment services; and
. field case management services.
We provide healthcare services through our network of 214 owned and managed
occupational healthcare centers, located in 63 markets in 32 states as of
March 15, 2000. As a primary starting point for the provision of
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care in the workers' compensation market, our occupational healthcare centers
are designed to efficiently provide quality care to patients while also
providing an entry point for our other cost containment services. 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. In 1999, revenues from healthcare
services represented approximately 48% of our total revenues.
Specialized cost containment services consist of first report of injury,
telephonic case management, utilization management, both in- and out-of-
network bill review, preferred provider organization network access,
independent medical exams and peer reviews. These specialized cost containment
services are designed to monitor the timing and appropriateness of medical
care, as well as the proper pricing for that care. These services are
primarily provided to the workers' compensation market, except for out-of-
network bill review which we provide to the group health market. We are
currently expanding our out-of-network bill review services to the workers'
compensation and auto insurance markets. In 1999, revenues from specialized
cost containment services represented approximately 30% of our total revenues.
We provide field case management services to a national customer base using
approximately 1,000 full-time field case managers. Field case management
services involve working on a one-on-one basis with injured employees and
aiding 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. In 1999, revenues from field case management services
represented approximately 22% of our total revenues.
C. Industry Overview
Occupational Healthcare
Occupational healthcare is largely provided by independent physicians, who
have experienced increasing pressures in recent years from growing regulatory
complexity and other factors, as well as hospital emergency departments and
other urgent care providers. We anticipate that competition in the
occupational healthcare market may shift to specialized provider groups, such
as groups we manage. Occupational healthcare services consist of two primary
components:
. workers' compensation injury care and related services; and
. non-injury occupational healthcare services related to employer needs or
statutory requirements.
Workers' Compensation Injury Care
Workers' compensation is a state-mandated, comprehensive insurance program
that requires employers to fund all medical expenses, lost wages and other
costs resulting from work-related injuries and illnesses with no co-payment
from the employee. Since their introduction in the early 1900s, these programs
have been adopted by 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 related lost wages, legal fees and other costs
associated with an occupational injury. 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. The extensive benefits
coverage, for both medical costs and lost wages, is provided
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through the purchase of commercial insurance from private insurance companies,
participation in state-run insurance funds or employer self-insurance.
According to the Workers' Compensation Monitor data published in the 1998
Workers' Compensation Year Book, total workers' compensation costs to
employers in the United States were estimated to be approximately $92.7
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, we believe that we are the only integrated provider offering a full
range of healthcare management and cost containment services on a nationwide
basis.
The dollar amount of workers' compensation claims has increased
significantly in recent years, resulting in escalating costs to employers. We
believe that workers' compensation costs will continue to rise 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;
. the continued requirement that employers pay all of an employee's costs
of medical treatment, without any co-payment or deductible, and related
lost wages and non-medical costs; and
. the under-utilization to date of comprehensive cost containment programs
in the workers' compensation industry.
As workers' compensation costs increase, we expect that employers will
continue to seek and use strategies and programs to reduce workers'
compensation costs and to improve worker productivity, health and safety. We
believe that clients' use of our 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.
Provider reimbursement methods vary on a state-by-state basis. As of March
2000, 40 states have adopted fee schedules under 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. Of the 32 states in which we currently operate
occupational healthcare centers, as of March 15, 2000, 24 have fee schedules.
In states without fee schedules, healthcare providers are reimbursed based on
usual, customary and reasonable fees charged in the particular state in which
the services are provided. (These usual, customary and reasonable fees are
commonly called "UCR").
Limits on an employee's right to choose a specific healthcare provider
depend on the particular state statute. According to the Workers' Compensation
Research Institute, as of March 1998, 25 states limited the employee's initial
choice of provider, 2 states prohibited employee change of provider and 37
states and the District of Columbia placed restrictions on the ability of all
employees to switch providers, including provisions requiring employer
approval for any changes. Generally, the employer will also have the ability
to direct the employee when the employer is self-insured. It has been our
experience that our results of operations and prospects in a particular state
do not materially depend on state statutes regarding direction of care.
Consequently, we believe that employers greatly influence their employees'
choices of physicians even in states in which the employees may select their
providers.
Non-Injury Healthcare Services
Non-injury occupational healthcare services include:
. employment-related physical examinations;
. drug and alcohol testing;
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. 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-mandated physical examinations. Federal laws
governing health issues in the workplace, including the Americans with
Disabilities Act, have increased employers' demand for healthcare
professionals who are experts in the delivery of these regulated services.
Cost Containment Services
Cost containment techniques are intended to control the cost of healthcare
services and to measure the performance of providers of healthcare through
intervention and on-going review of proposed services and services actually
provided. Healthcare and insurance companies originally developed managed care
techniques to stem the rising costs of group healthcare. Historically,
employers were slow to apply managed care techniques to workers' compensation
costs primarily because the total costs are relatively small compared to those
associated with group health benefits and because state-by-state regulations
related to workers' compensation are 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 in an effort to allow employers to
control their workers' compensation costs. Managed care organization laws
generally provide employers an opportunity to channel injured employees into
provider networks. In certain states, managed care organization laws require
licensed managed care organizations to offer certain specified services, such
as utilization management, case management, peer review and provider bill
review. Most of the managed care organization laws adopted to date establish a
framework within which a company such as ours 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 cost containment services include 2 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;
. telephonic case management;
. utilization management;
. precertification and concurrent review;
. both in- and out-of-network bill review services;
. preferred provider organization network access;
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. independent medical examinations; 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
According to the Health Insurance Association of America, private health
insurance claims payments were estimated to be approximately $281.7 billion in
1995. 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 a greater incidence of over-use,
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.
D. Concentra's Business Strategy
Our objective is to capitalize on our national presence by providing an
integrated platform of comprehensive healthcare management and cost
containment services. Our 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 our national organization and local market presence to win new
customers and to increase cross-selling of services to existing accounts. We
will seek to implement this strategy as follows:
Increase Market Penetration of Early Intervention Services
We intend to increase our development and marketing of early intervention
services, such as access to our network of occupational healthcare centers and
other providers in our PPO network, first report of injury, precertification,
and telephonic case management. Early intervention enables us to identify
promptly cases that have the potential to result in significant expense and to
take appropriate measures to control these expenses before they are incurred.
In addition, we believe that providing early intervention services generally
results in our obtaining earlier access to claims files. Such earlier access
improves our opportunity to provide the full range of our 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
We will further expand our reach into the group health marketplace by
offering new and existing customers of Concentra Preferred Systems, Inc.
("CPS") comprehensive retrospective bill review services to assist customers
in containing costs related to out-of-network group health medical charges.
CPS is the market leader
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in this line of business and is expanding its services into the workers'
compensation market and auto insurance market in states that do not have
established fee schedules. We believe that expansion in these areas represents
a significant opportunity for us in the future.
Streamline Patient Care, Outcomes Reporting and Claims Resolution Through
Enhanced Information Technology
Our ongoing development of enhanced information technology will strengthen
our ability to provide a full continuum of integrated services to our
customers. We will continue to develop our information systems to make more
effective use of our 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 us to streamline patient care and outcomes reporting, thus
augmenting our ability to furnish high-quality, efficient healthcare services
in compliance with the regulations governing healthcare services. Further, we
believe we can more efficiently process bill review and field case management
claims through the use of enhanced information technology, and we will
continue to devote resources to improving such systems.
Continue To Acquire And Develop Occupational Healthcare Centers And Expand
Healthcare Network Services
We estimate 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. We will continue to acquire and
develop occupational healthcare centers in new and existing markets and will
continue to organize our 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,
we will develop occupational healthcare centers in new markets and within
existing markets through joint ventures and management agreements. Finally,
through Focus Healthcare Management, Inc. ("Focus") we will continue to expand
our vertically-integrated networks of specialists, hospitals and other
healthcare providers. These networks, and our 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
We believe that national and regional insurance carriers and self-insured
employers will benefit greatly from our ability to provide a full continuum of
healthcare management and cost containment services on a nationwide basis. We
offer 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. Our national organization of local service locations enables us
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.
Our national marketing personnel will continue to target these large payors to
expand our customer base. In addition, we are well-positioned to capitalize on
the relationships developed through our broad-based national and local
marketing efforts by cross-selling our full continuum of healthcare management
and cost containment services to our existing customer base.
E. Services and Operations
The workers' compensation and group health markets represent a significant
opportunity for the full range of healthcare management and cost containment
services we provide. In each of these markets, insurance companies, self-
insured employers and third party administrators have a need for our services
as they continue to try to control their rising healthcare costs.
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Healthcare Services
Occupational Healthcare Centers
Our 214 occupational healthcare centers at March 15, 2000, provide treatment
for:
. work-related injuries and illnesses;
. physical therapy;
. preplacement physical examinations and evaluations;
. certain diagnostic testing;
. drug and alcohol testing; and
. various other employer-requested or government-mandated occupational
health services.
During 1999, approximately 50% of all patient visits to our centers were for
the treatment of injuries or illnesses and 50% were for substance abuse
testing, physical examinations and other non-injury occupational healthcare
services.
Each of our centers is staffed with at least one licensed physician who is
an employee of a physician group and at least one licensed physical therapist.
The licensed physicians are generally experienced in occupational medicine or
have emergency, family practice, internal medicine or general medicine
backgrounds. Most centers use 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 our 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 us and our physician
groups with respect to the 393 affiliated physicians as of January 31, 2000,
have 40-year terms. Pursuant to each management agreement, we provide 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; and
. marketing and information-based services such as process management and
outcome analysis.
As another service to the physician groups, we recruit physicians, nurses,
physical therapists and other healthcare providers. We collect receivables on
behalf of the physician groups and advance funds for payment of each physician
group's expenses, including salaries, shortly after services are rendered to
patients. We receive 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. We provide services to the
physician groups as an independent contractor and are responsible only for the
non-medical aspects of the physician groups' practices. The physician groups
retain sole responsibility for all medical decisions, including the hiring of
medical personnel.
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The physician groups operate in accordance with annual budgets established
in consultation with us. The management agreements between the physician
groups and our company provide that in no event shall we have any obligation
to supply out of our funds working capital for the physician groups or their
operations. Accordingly, we retain sole discretion over the decision to
advance funds to the physician groups and regarding the amount of any such
advances. Because we own and operate the occupational healthcare centers, we
also retain ultimate authority to determine the type of equipment used in the
centers, the number of medical personnel for each center and other fiscal
matters with respect to the operation of the centers.
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 physicians group 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. Under each management agreement, the
physician group indemnifies us from any loss or expense arising from acts or
omissions of the physician group or our professionals or other personnel,
including claims for malpractice.
Joint Ventures and Management Agreements
Our strategy is to continue to develop clusters of occupational healthcare
centers in new and existing geographic markets through the acquisition and
development of occupational healthcare centers. In selected markets in which a
hospital management company, hospital system or other healthcare provider has
a significant presence, we may focus our expansion efforts on strategic joint
ventures or management contracts. In our joint venture relationships, we
typically acquire a majority ownership interest in the venture and agree to
manage the venture for a management fee based on net revenues. We currently
manage 13 joint ventures through which we operate 34 centers. In addition, we
have entered into 3 management agreements through which we operate 6 centers.
Other Ancillary Programs
We offer other ancillary programs as described below. It has been our
experience that, by offering a full range of programs to complement our core
healthcare management services, it strengthens our relationships with existing
clients and increases the likelihood of attracting new clients. We anticipate
expanding our ancillary programs as needed to address occupational legislation
and regulations enacted in the future.
Compliance With the Americans with Disabilities Act. The Americans with
Disabilities Act 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
Americans with Disabilities Act now applies to all employers with 15 or more
employees. Through our "ADApt Program," we assist employers with the Americans
with Disabilities Act compliance issues by addressing the Americans with
Disabilities Act 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 Americans with Disabilities Act guidelines.
Risk Assessment and Injury Prevention Programs. We assist clients in
reducing workplace injuries and illnesses by providing ongoing educational
programs for our clients, as well as through our 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.
For 1999, revenues from healthcare services represented approximately 48% of
our total revenues.
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Specialized Cost Containment Services
We provide 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:
. in and out-of-network bill review services;
. first report of injury;
. telephonic case management;
. utilization management;
. precertification and concurrent review;
. preferred provider organization network access;
. independent medical examinations; and
. peer reviews.
We are able to offer our services separately 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 aggressively
manage the costs associated with a work-related injury. Our 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, we also provide 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.
We believe that the demand for specialized cost containment services will
continue to increase due to a number of factors, including:
. the increasing payor awareness of the availability of these techniques
for cost containment and case management;
. the effectiveness of managed care techniques at reducing costs for group
health insurance plans;
. the verifiable nature of the savings that can be obtained by application
of specialized cost containment techniques applicable to workers'
compensation; and
. the broad applicability of these techniques to all injured employees,
not just severely injured employees likely to be absent from work.
Out-of-Network Bill Review
Through CPS, we continue to expand our market presence in bill review
services. We believe that CPS is the market leader in this line of business in
the group health market and is expanding its services into the workers'
compensation market in states that do not have established fee schedules and
into the auto insurance market where appropriate. CPS uses a variety of
techniques to reduce expenses by repricing hospital and other facilities'
bills. Using its services, 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;
. other specialized audit and bill review processes; and
. access to a nationwide preferred provider organization network.
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CPS provides out-of-network bill review services to healthcare payors in
most risk categories, including:
. indemnity;
. preferred provider organization;
. health maintenance organization;
. Employee Retirement Income Security Act of 1974, or ERISA, self-insured
plans;
. Taft-Hartley Plans;
. reinsurance carriers; and
. intermediaries such as administrative services organizations and third
party administrators.
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-use;
. upcoding;
. cost shifting;
. various forms of revenue enhancement tactics; and
. inflated retail charge practices.
The current technology employed at CPS is designed to:
. review most provider bill types;
. employ four transmission methods to aid the exchange of bill data;
. use 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
our range of cost containment services.
CPS has packaged this process and markets it as the Healthcare Bill
Management System. The system affords large payor clients breadth of service
and capacity, consolidated and uniform cost management capability, rigorous
due diligence and high quality performance.
First Report of Injury
Through First Notice Systems, we provide a computerized first report of
injury/loss reporting service using two centralized national call centers to
which an individual, employer or insurance company claims adjuster
communicates reports of injuries or losses as soon as they occur. First Notice
Systems provides its services primarily to the auto industry for first notice
of loss reporting and to workers' compensation carriers for first report of
injuries, 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, provides us and our customers
with an early intervention tool to maximize control over workers' compensation
and auto claims and also provides us with cross-selling and referral
opportunities.
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Telephonic Case Management
This service provides for short-duration (30 to 90 days) for 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 our field case management offices.
Utilization Management: Precertification and Concurrent Review
Our precertification and concurrent review services are used by clients to
ensure that certain medical procedures are precertified by one of our
registered nurses and/or physicians for medical necessity and appropriateness
of treatment before the medical procedure is performed. Our determinations
represent only recommendations to the customer, the ultimate decision to
approve or disapprove request is made by the claims adjuster. Precertification
calls are made by either the claimant or the provider to one of our national
utilization management reporting units. After a treatment plan has been
precertified, one of our employees performs a follow-up call and concurrent
review, at the end of an approved time period to evaluate compliance and/or
discuss alternative plans.
Bill Review
Through a sophisticated software program, we review and reduce our
customers' medical bills, including hospital bills, to either the various
state-mandated fee schedules for workers' compensation claims or a percentage
of the usual, customary and reasonable (UCR) rates that exist in non-fee
schedule states. Additionally, this automated bill review service enables
clients to access certain preferred provider organization pricing schedules
that represent additional savings below the fee schedules or UCR rates. The
savings to our clients as a result of this service can be significant. Bill
review also creates an important historical database for provider practice
patterns and managed care provider compliance requirements.
Access to Preferred Provider Networks
Through Focus, we provide our clients with access to a national preferred
provider organization network. This network provides injured workers with
access to quality medical care at pre-negotiated volume discounts, thereby
offering our clients the ability to influence, or in certain states to direct,
their employees into the preferred provider organization 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 preferred provider organization arrangements
generate additional savings through the retrospective bill review program
described above. As of March 1, 2000, Focus's national network includes
approximately 221,600 individual providers and over 3,100 hospitals covering
50 states and the District of Columbia.
Independent Medical Exams
Independent medical examinations are provided to assess the extent and
nature of an employee's injury or illness. We provide our clients with access
to independent physicians who perform the independent medical examinations
from 13 of our service locations and, upon completion, prepare reports
describing their findings.
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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.
For 1999, revenues from specialized cost containment services represented
approximately 30% of our total revenues.
Field Case Management Services
We provide 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. Our 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.
Our field case management services consist of one-on-one management of a
work-related injury by approximately 1,000 full-time field case managers in 81
offices in 50 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 our marketer. Our 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 our 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.
We believe that the following factors will contribute to continued growth of
our field case management services:
. increased acceptance of field case management techniques due to greater
exposure to the workers' compensation managed care market;
. earlier identification of individuals in need of field case management
services due to increased utilization of our specialized cost
containment services, particularly early intervention services;
. increased market share at the expense of smaller, undercapitalized
competitors; and
. the ability to access national accounts for use of case management
services.
For 1999, revenues from field case management services represented
approximately 22% of our total revenues.
F. Customers
Our occupational healthcare centers currently serve more than 90,000
employers. We serve more than 2,000 specialized cost containment and field
case management customers across the United States and Canada, including most
of the major underwriters of workers' compensation insurance, third party
administrators and self-insured employers.
We are compensated primarily on a fee-for-service or percentage-of-savings
basis. Our largest customer represented less than 3% of our total revenue in
1999. We have not entered into written agreements with most of our healthcare
services customers. Many of our specialized cost containment and field case
management relationships are based on written agreements. However, either we
or the customer can terminate most of these agreements on short notice. We
have no risk-bearing or capitated arrangements. Less than 0.5% of our revenues
are dependent on Medicare or Medicaid reimbursement.
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G. Sales and Marketing
We actively market our services primarily to workers' compensation insurance
companies, third party administrators, employers and employer groups. We also
market to the group health, automobile insurance and disability insurance
markets. Our marketing organization includes over 360 full-time sales and
marketing personnel, or their part-time equivalent.
We market our services at the local level to insurance company adjusters and
employers. In addition, we market our 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. We have a dedicated staff
of national accounts salespeople responsible for marketing and coordinating
our full range of services to corporate offices.
Our local marketing has been a critical component of our strategy, primarily
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
us demand that we continue to focus on marketing to national headquarters
offices of insurance companies and self-insured companies. As part of our
coordinated marketing effort, we periodically distribute follow-up
questionnaires to patients, insurers and employers to monitor satisfaction
with our services.
H. Quality Assurance
We routinely use internal audits to test the quality of our delivery of
services. We conduct 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. We conduct 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, we conduct follow-up audits to ensure that recommendations from
the initial audit have been implemented.
I. Competition
Healthcare Services
The market to provide healthcare services within the workers' compensation
system is highly fragmented and competitive. Our competitors typically have
been independent physicians, hospital emergency departments and other urgent
care providers. We believe that, as integrated networks continue to be
developed, our competitors will increasingly consist of specialized provider
groups.
We believe that we compete effectively because of:
. our specialization in the occupational healthcare industry;
. our broad knowledge and expertise in the occupational medicine industry;
. the effectiveness of our services as measured by favorable outcomes;
. our ability to offer services in multiple markets; and
. our information systems.
We believe that we enjoy a competitive advantage by specializing in and
focusing on occupational healthcare at the primary care provider level, which,
as the entry point into the occupational healthcare system, is well-suited to
controlling the total costs of a claim. We do not believe that any other
company offers the full range of services we provide.
The recruiting of physicians, physical therapists, nurses and other
healthcare providers can be competitive. However, our recruiting becomes
easier as we grow and become more widely known by healthcare providers.
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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. We compete with numerous companies, including national managed
care providers, smaller independent providers, and insurance companies. Our
primary competitors are companies that offer one or more workers' compensation
managed care services on a national basis. We also compete with many smaller
companies that generally provide unbundled services on a national basis and 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 us. We believe that this competitive environment will continue into the
foreseeable future.
We believe that we compete effectively because of:
. our specialized knowledge and expertise in the workers' compensation
managed care services industry;
. the effectiveness of our services;
. our ability to offer a full range of services in multiple markets;
. our information systems; and
. the prices at which we offer our services.
J. Information Systems and Technology
We maintain a fundamental commitment to the development and implementation
of advanced information technology, with a considerable focus on web-based
applications. We believe that our information systems enable us to improve
referrals among our full range of services, streamline patient care and
enhance outcomes reporting. Therefore, we believe that this makes our
operations more efficient while improving our ability to demonstrate the cost
savings our services provide to our clients.
We have substantially completed the implementation of a wide area network,
or WAN, in each market in which we provide healthcare services. When the
implementation is complete, all occupational healthcare centers in a market
will use a patient administration system, named "OccuSource," which runs on a
client/server architecture allowing each center to access and share a common
database for that market. The database contains employer protocols, patient
records and other information regarding our 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. We are 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. We believe that our commitment to
continued development of our healthcare information system provides a unique
and sustainable competitive advantage within the occupational healthcare
industry.
We have developed and, in the future, may license to third parties, a new
Internet-based first notice of loss reporting system for all lines of
insurance named FNSNet. The application extends our 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 our First Notice subsidiary to handle calls with greater speed
and efficiency.
Our newly-developed Integrated Case Management Software System aids and
speeds up the daily tasks of our 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 our offices, as well
as among employees in the same office. The Integrated Case Management Software
System is partially integrated and will be fully integrated with the FNSNet
web-based product. The Integrated Case Management Software System application
will enable a clear, precise and immediate transmission of data from First
Notice into the Integrated Case
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Management Software System. This pre-population of data will eliminate
redundant and duplicative data entry for nurse case managers, thus resulting
in greater time efficiency and cost savings. The development and
implementation of the Integrated Case Management Software System will allow
for shared data in situations in which multiple case managers are working on a
case. The Integrated Case Management Software System will also create better
customer access to information and allow us to produce specific, user-friendly
reports to demonstrate the value of our services.
Finally, our subsidiary, CPS, uses our proprietary, technology-based
Healthcare Bill Management System for our out-of-network medical claims review
services. Client bills are accessed and entered into the Healthcare Bill
Management System in a variety of ways, including electronic bill
identification within the client's claim adjudication system with subsequent
electronic data interchange, or EDI, transfer to CPS, entry of appropriate
bills into a customized Data Access Point system, on-site bill entry by a CPS
employee into the Data Access Point 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 the Healthcare Bill Management System, the bill is
evaluated against CPS' 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'
client preference profile that is created at the time of CPS' initial
engagement with the client. The Healthcare Bill Management System 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.
K. Government Regulation
General
As a provider of healthcare management and cost containment services, we are
subject to extensive and increasing regulation by a number of governmental
entities at the federal, state and local levels. We are 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 our operations fall into four general
categories:
. 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 services we
provide;
. laws regarding the provision of healthcare services generally;
. laws regulating the operation of managed care provider networks; and
. other laws and regulations of general applicability.
Workers' Compensation Laws and Regulations
In performing workers' compensation healthcare services and cost containment
services, we 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 the 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
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and where those services will be provided and attempt to contain medical costs
associated with workers' compensation claims. At present, 24 of the states in
which we do business have implemented treatment specific fee schedules that
set maximum reimbursement levels for healthcare services. Of the states in
which we do business, 8 states provide for a "reasonableness" review of
medical costs paid or reimbursed by workers' compensation. When not governed
by a fee schedule, we adjust our charges to the usual, customary and
reasonable levels accepted by the payor.
Many states, including a number of those in which we transact business, have
licensing and other regulatory requirements that apply to our specialized cost
containment and field case management businesses. Approximately half of the
states have enacted laws that require licensing of businesses that provide
medical review services, such as ours. 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 us or to provider networks that we have
organized and may organize in the future. To the extent that we are governed
by these regulations, we 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
ours 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 ours. We attempt to
structure all of our healthcare services operations to comply with applicable
state statutes regarding medical practice, fee-splitting and similar issues.
However, there can be no assurance:
. that courts or governmental officials with the power to interpret or
enforce these laws and regulations will not assert that we are in
violation of such laws and regulations; or
. that future interpretations of such laws and regulations will not
require us to modify the structure and organization of our business.
Fraud and Abuse 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, as of January 1, 1995, certain anti-
referral provisions, the Stark Amendments, prohibit a physician with a
"financial relationship" with 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 us.
At least 7 of the states where we conduct our healthcare services business-
Arizona, California, Florida, Illinois, Maryland, New Jersey, and Texas-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. Even in states
which have not enacted such statutes, we believe that regulatory authorities
and state courts interpreting these statutes may regard federal law under the
Anti-Kickback Statute and the Stark Amendments as persuasive.
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We believe that our arrangements with the physician groups should not
violate the Anti-Kickback Statute, the Stark Amendments and applicable state
laws. However, all of the above laws are subject to modification and
interpretation and have not often been interpreted by appropriate authorities
in a manner applicable to our business. Moreover, these laws are enforced by
authorities vested with broad discretion. We have attempted to structure all
of our operations so that they should not violate any applicable anti-kickback
and anti-referral prohibitions. We also continually monitor developments in
this area. If these laws are interpreted in a manner contrary to our
interpretation or are reinterpreted or amended, or if new legislation is
enacted with respect to healthcare fraud and abuse, illegal remuneration or
similar issues, we will seek to restructure any affected operations to
maintain our compliance with applicable law. We cannot assure you that such
restructuring will be possible, or, if possible, will not adversely affect our
business or results of operations.
Specialized Cost Containment Services
Many of our 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 ours, 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 us, which may have an adverse impact upon our
ability to compete with other available alternatives for healthcare cost
control.
Use of Provider Networks
Our ability to provide comprehensive healthcare management and cost
containment services depends in part on our ability to contract with or create
networks of healthcare providers which share our objectives. For some of our
clients, we offer injured workers access to networks of providers who are
selected by us 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
us or to provider networks that we may develop or acquire. To the extent these
regulations apply to us, we 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, or ERISA. ERISA is a complex set of laws and regulations subject to
periodic interpretation by the Internal Revenue Service and the Department of
Labor. ERISA regulates certain aspects of the relationship between our managed
care contracts and employers that maintain employee benefit plans subject to
ERISA. The Department of Labor is engaged in ongoing ERISA enforcement
activities that may result in additional constraints on how ERISA-governed
benefit plans conduct their activities. We cannot assure you that future
revisions to ERISA or judicial or regulatory interpretations of ERISA will not
have a material adverse effect on our business or results of operations.
Environmental
We are subject to various federal, state and local laws and regulations for
the protection of human health and environment, including the disposal of
infectious medical waste and other waste generated at our occupational
healthcare centers. If an environmental regulatory agency finds any of our
centers to be in violation
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of environmental laws, penalties and fines may be imposed for each day of
violation, and the affected facility could be forced to cease operations.
While we believe that our environmental practices, including waste handling
and discharge practices, are in material compliance with applicable law,
future claims or changes in environmental laws could have an adverse effect on
our business.
L. Seasonality
Our healthcare services business is seasonal in nature. Although our
expansion of services and continuing growth may obscure the effect of
seasonality in our financial results, our 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 our 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 our centers during that
quarter. See Item 7. "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Seasonality."
M. Insurance
We and our physician groups maintain medical malpractice insurance in the
amount of $1.0 million per incident and $3.0 million annual aggregate per
provider, subject to an annual aggregate limit in the amount of $30.0 million.
Pursuant to the management agreements between us and the physician groups,
each physician group has agreed to indemnify us from certain losses, including
medical malpractice. We maintain an errors and omissions liability insurance
policy covering all aspects of our managed care services. This policy has
limits of $1.0 million per claim and $3.0 million annual aggregate.
In addition, we maintain $1.0 million per occurrence and $3.0 million annual
aggregate 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 $30.0 million in the aggregate.
N. Employees
We had approximately 8,800 employees at March 15, 2000. None of our
employees is subject to a collective bargaining agreement. We have experienced
no work stoppages and believe that our employee relations are good. All
physicians, physician assistants and physical therapists providing
professional services in our occupational healthcare centers are either
employed by or under contract with the physician groups.
O. Risk Factors
If we cannot generate cash, then we will not be able to service our
indebtedness.
As of December 31, 1999, our consolidated indebtedness was approximately
$567.7 million. In addition, our business strategy calls for significant
capital expenditures for acquisition and development. Our ability to make
payments on and to refinance our indebtedness and to fund planned capital
expenditures will depend on our ability to generate cash in the future. Over
the next year, we will be required to make debt payments of $3.8 million and
interest payments related to the Company's debt of approximately $68.0
million.
We believe our cash flow from operations, available cash and available
borrowings under our credit facilities will be adequate to carry on our
business strategy. However, our ability to generate cash is subject to general
economic and industry conditions that are beyond our control. Therefore, it is
possible that our business will not generate sufficient cash flow from
operations or that future borrowings will not be available to us under our
senior credit facilities in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs.
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Restrictions imposed by our credit facilities will make it more difficult for
us to take the actions listed below.
Our credit facilities restrict our ability to:
. make investments;
. pay dividends and make distributions;
. repurchase stock;
. incur additional indebtedness;
. create liens;
. merge or consolidate our company or any of our subsidiaries;
. transfer and sell assets;
. enter into transactions with our affiliates;
. enter into sale and leaseback transactions; and
. issue common and preferred stock of our subsidiaries.
In addition, we must maintain minimum debt service and maximum leverage
ratios under our senior credit facilities. We calculate these ratios on a
rolling four-quarter basis. The debt service ratio and leverage ratio
requirements for the quarter ended December 31, 1999 were 1.75 to 1.00 and
5.50 to 1.00, respectively. We were in compliance with these ratios at
December 31, 1999, with a debt service ratio of approximately 2.33 to 1.00 and
a leverage ratio of approximately 5.35 to 1.00. On March 21, 2000, Concentra
Operating amended its $475 million credit agreement with a consortium of banks
(the "Credit Facility"). Under the terms of the amended agreement, the
financial compliance ratios have been modified to allow the Company to satisfy
an increased leverage ratio requirement and a decreased interest coverage
ratio requirement. In order to receive these amended ratios, the amended
agreement provides for an interest rate increase of 0.75% on outstanding
borrowings under the Credit Facility. Company management believes the amended
agreement will enable Concentra to meet the terms of the financial compliance
ratios for the foreseeable future. These ratios become more restrictive in
future quarters. Our ability to be in compliance with these more restrictive
ratios will be dependent upon our ability to increase our cash flow over
current levels.
A failure to comply with these restrictions or maintain these ratios in the
future could lead to an event of default which could result in an acceleration
of the related indebtedness before the terms of that indebtedness otherwise
require us to pay that indebtedness. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
If we cannot make future acquisitions or enter into joint ventures
successfully, that lack of success may impair our planned growth.
Our business strategy requires us to negotiate the purchase of occupational
healthcare centers and enter into joint ventures to operate occupational
healthcare centers. A strategy of growth by acquisition or joint venture also
involves the risk of assuming unknown or contingent liabilities of the
acquired business or joint venture, which could be material, individually or
in the aggregate. Nevertheless, we may not be able to find suitable
acquisition or joint venture candidates, or, if we do finance or consummate
such transactions on favorable terms. In addition, we cannot assure you we can
successfully integrate the operations of any completed acquisitions or joint
ventures into our own.
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Our continued rapid growth could cause our management to lose focus on all
aspects of our business, our response time to customer inquiries to increase,
our customer service to decline in quality and other similar effects.
We have experienced rapid growth. Our recent and continued rapid growth
could place a significant strain on our management and other resources. This
strain could consist of our management not having enough time to focus on
managing all aspects of our business and operations, our response time to
customer inquiries to increase, our customer service to decline in quality and
other similar effects. Our rapid growth should not affect the quality of care
provided by our affiliated physician associations or employees. We anticipate
that any continued growth will require us to 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. We
may be unable to slow our growth without increasing our costs if management
becomes strained. Our ability to compete effectively and to manage current and
any future growth will depend on our ability to continue to implement and
improve operational, financial and management information systems on a timely
basis and to expand, train, motivate and manage our workforce. Should we
continue to experience rapid growth, we cannot assure you that personnel,
systems, procedures and controls will be adequate to support our operations or
that management will adequately anticipate all demands that growth will place
on us. If we are unable to meet increasing demand, we may lose customers and
our revenues may decrease.
If competition increases, our growth and profits may decline.
The market to provide occupational healthcare services is highly fragmented
and competitive. Our primary competitors have typically been independent
physicians, hospital emergency departments and hospital-owned or hospital-
affiliated medical facilities.
We believe that, as managed care techniques continue to gain acceptance in
the occupational healthcare marketplace, our competitors will increasingly
consist of nationally focused workers' compensation managed care service
companies, specialized provider groups, insurance companies, health management
organizations and other significant providers of managed care products. These
organizations may be significantly larger and have greater financial and
marketing resources than we do. Accordingly, competitors may affect our
ability to continue to maintain our existing performance or our success with
any new products or in any new geographic markets we may enter.
If healthcare reform intensifies competition and reduces the costs of workers'
compensation claims, the rates we charge for our services could decrease.
Legislative reforms in some states permit employers to designate health
plans such as health management organizations and preferred provider
organizations to cover workers' compensation claimants. Because many health
plans have the capacity to manage healthcare for workers' compensation
claimants, that legislation may intensify competition in the market we serve.
Within the past few years, several states have experienced decreases in the
number of workers' compensation claims and the total value of claims which
have been reflected in workers' compensation insurance premium rate reductions
in those states. We believe that declines in workers' compensation costs in
these states are due principally to intensified efforts by payors to manage
and control claim costs, to improved risk management by employers and to
legislative reforms. As these costs decrease, we may have to reduce the rates
we charge for our services in order to effectively compete.
If suits against us are successful, we may incur significant liabilities.
Our affiliated physician associations and some of our employees are involved
in the delivery of healthcare services to the public. In each case, the
physician makes all decisions concerning the appropriate medical treatment for
the patient based on his or her prior medical experience and experience in the
treatment of occupational healthcare injuries. We charge our customers for
these services on a fee-for-service basis. We base these fees on either the
state mandated fee or the usual and customary rate for such services, as
appropriate. In
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providing these services, the physicians, our employees and, consequently, our
company are exposed to the risk of professional liability claims. Although we
have not faced any material lawsuits in the past that were not covered by our
insurance, claims of this nature, if successful, could result in substantial
damage awards to the claimants which may exceed the limits of any applicable
insurance coverage. We are indemnified under our management agreements with
our affiliated physician associations from claims against them, maintain
liability insurance for ourselves and negotiate liability insurance for the
physicians in our affiliated physician associations. However, successful
malpractice claims asserted against us or our affiliated physician
associations could result in significant liabilities that are not indemnified
by the physicians or our insurance. Further, plaintiffs have proposed new
types of liabilities against managed care companies as well as against
employers who use managed care in workers' compensation cases which, if
established and successful, may discourage the use of managed care in workers'
compensation cases and could reduce the number of claims referred to us or the
rates we charge for our services.
Through our specialized cost containment and field case management services,
we make recommendations about the appropriateness of providers' proposed
medical treatment plans of patients throughout the country, and as a result we
could be subject to charges arising from any adverse medical consequences. We
do not grant or deny claims for payment of benefits and we do not believe that
we engage in the practice of medicine or the delivery of medical services.
Although plaintiffs have not subjected us to any claims or litigation related
to the grant or denial of claims for payment of benefits or allegations that
we engage in the practice of medicine or the delivery of medical services so
far, we cannot assure you that plaintiffs will not make those types of claims
or litigation. We maintain errors and omissions insurance and such other lines
of coverage as we believe are reasonable in light of our experience to date.
We cannot assure you, however, that our insurance will provide sufficient
coverage or that insurance companies will make insurance available at
reasonable cost to protect us from liability.
If corporate practice of medicine and other laws and regulations increase our
costs, our profits may decline.
State laws relating to our business vary widely from state to state and
courts or regulatory agencies seldom interpret those laws in a way that
provides guidance with respect to our business operations. In addition, many
states have licensing or regulatory programs and we may incur significant
costs due to the 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. In addition, these regulatory
programs may result in increased costs of operation for us, which may have an
adverse impact on our ability to charge competitive rates for our services
while maintaining profitability.
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 like us
and licensed professionals and professional corporations, particularly with
respect to fee-splitting between a physician and another person or entity and
non-physicians exercising control over physicians engaged in the practice of
medicine.
Laws and regulations relating to the practice of medicine, fee-splitting and
similar issues vary widely from state to state, are often vague, and courts or
regulatory agencies seldom interpret those laws in a manner that provides
guidance with respect to business operations such as ours. Although we attempt
to structure all of our operations so that they comply with the relevant state
statutes and applicable medical practice, fee-splitting and similar laws, any
new interpretation of these laws could significantly increase our costs of
operations or result in substantial liabilities.
In addition, state agencies regulate the automobile insurance industry, like
the workers' compensation industry, on a state-by-state basis. Although
regulators do not require approval for us to offer most of our services to the
automobile insurance market, state regulators require approval in order to
offer automobile insurers' products that permit them to direct claimants into
a network of medical providers. Changes in these regulations may increase our
costs.
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If fraud and abuse laws change, we may incur significant liabilities.
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 statutory anti-referral provisions, known as the Stark Amendments,
prohibit a physician with a "financial relationship" with 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
associations affiliated with us.
At least 7 of the states where we conduct our healthcare services business--
Arizona, California, Florida, Illinois, Maryland, New Jersey and Texas--have
enacted statutes similar in scope and purpose to the Anti-Kickback Statute,
which are applicable 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 that have not enacted that kind of statute, we believe that regulatory
authorities and state courts interpreting these statutes may regard federal
law under the Anti-Kickback Statute as persuasive.
We believe that our arrangements with our affiliated physician associations
should not violate the Anti-Kickback Statute, the Stark Amendments and
applicable state laws. However, appropriate authorities subject all of these
laws to modification and interpretation and appropriate authorities seldom
interpret these laws in a manner that provides guidance to our business.
Moreover these laws are enforced by authorities vested with broad discretion.
We have attempted to structure all of our operations so that they should not
violate any applicable anti-kickback and anti-referral prohibitions.
We also continually monitor developments in this area. If appropriate
authorities interpret these laws in a manner contrary to our interpretation,
or reinterpreted or amended, or if new legislation is enacted with respect to
healthcare fraud and abuse or similar issues, we will seek to restructure any
affected operations so as to maintain compliance with applicable law.
If our data processing is interrupted or our licenses to use software are
revoked, that interruption or revocation may impair our ability to effectively
operate our business.
Certain aspects of our business are dependent upon our ability to store,
retrieve, process and manage data and to maintain and upgrade our data
processing capabilities. Interruption of data processing capabilities for any
extended length of time, loss of stored data, programming errors or other
computer problem could impair our ability to provide these services. Certain
of the software that we use in our medical bill review operation is licensed
from an independent third party software company under a nonexclusive license
that may be terminated by either party upon 90 days notice. While we have
historically maintained a good relationship with the licensor, we cannot
assure you that the licensor will not terminate this software license or that
the licensor will continue the license on its existing terms. We are currently
negotiating an extension of this software license. Although we believe that
alternative software would be available if the existing license were
terminated, termination could disrupt and could result in our inability to
operate our business, including our ability to effectively review medical
bills.
If we lose key personnel, the loss of that personnel will impair our ability
to implement our strategy.
Our success depends in large part on the services of our senior management
team. We have employment contracts with all of our key personnel; however we
do not maintain key man life insurance policies. In any case, the loss of any
of our key executives could materially adversely affect us and seriously
impair our ability
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to implement our strategy. Our ability to manage our anticipated growth will
depend on our ability to identify, hire and retain additional qualified
management personnel. We have recently experienced high employee turnover,
which is typical in our industry, but our key personnel have remained with us.
While we are able to offer competitive compensation to prospective employees,
we may still be unsuccessful in attracting and retaining personnel and that
failure could result in our growth declining and materially adversely affect
our results of operations. See Item 10. "Directors and Executive Officers of
the Registrant."
ITEM 2. PROPERTIES
As of March 15, 2000, our principal corporate office is located in Addison,
Texas. We lease 50,726 square feet of space in this site pursuant to a lease
agreement expiring on February 28, 2005. We make annual rental payments under
that lease of $1,222,368. Except for 13 properties owned by us, we lease all
of our offices. Eleven of our offices are leased from Colonial Realty Trust,
of which Lois E. Silverman, a former director of Concentra, is a trustee and
beneficiary. We believe that our facilities are adequate for our current needs
and that suitable additional space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
The Company is aware of 1 consolidated lawsuit that was originally filed in
3 suits by alleged stockholders of CMC relating to CMC's merger with Yankee.
All 3 lawsuits were filed in the Chancery Court for New Castle County,
Delaware. Each lawsuit named CMC, its directors and Yankee as defendants. The
plaintiffs in each lawsuit sought to represent a putative class of all public
holders of CMC common stock. The lawsuits sought among other things,
preliminary and permanent injunctive relief prohibiting consummation of the
merger, unspecified damages, attorneys' fees and other relief. Prior to the
merger, CMC reached an agreement in principle to settle such litigation. In
connection with the settlement, CMC amended the proxy statement mailed to its
stockholders to disclose prior to the merger the relationship between CMC,
WCAS and the individuals affiliated with WCAS. In return, CMC, WCAS and their
respective affiliates, officers, directors and other representatives have been
released from all claims of the class. Under the terms of the settlement, the
defendants agreed to pay up to $325,000 in court-awarded attorney's fees and
expenses. On March 17, 2000, the Delaware court entered a final judgment
dismissing all claims in accordance with the settlement.
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 1999, no matter was submitted to a vote of
security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As a result of the 1999 merger and our recapitalization in August 1999,
neither Concentra Operating nor CMC has publicly held shares outstanding.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data is included in this Form 10-K in Note 13, Selected
Financial Data, to the Company's Consolidated Financial Statements on page F-
23.
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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. These
risks and uncertanties include, but are not limited to, general industry and
economic conditions; shifts in customer demands; the ability to manage
business growth and diversification; the ability to identify suitable
acquisition candidates or joint venture relationships for expansion and
consummating such matters on favorable terms; the ability to attract and
retain qualified professionals and other employees to expand and complement
the Company's services; the effectiveness of the Company's information systems
and controls; the ability to meet the Company's debt, interest and operating
lease payment obligations; possible litigation and legal liability in the
course of operations; fluctuations in interest and tax rates; strategies
pursued by competitors; restrictions imposed by government regulation; and
changes in the industry resulting from changes in workers' compensation laws,
regulations and in the healthcare environment generally. The Company assumes
no obligation to update publicly any forward looking statements, whether as a
result of new information, future events, or otherwise.
Recapitalization Transaction
On August 17, 1999, Concentra Managed Care, Inc. ("CMC") merged with Yankee
Acquisition Corp. ("Yankee"), a corporation formed by Welsh, Carson, Anderson
& Stowe ("WCAS"), a 14.9% stockholder of CMC. As a result of the merger,
41,056,966 shares of CMC common stock were converted to $16.50 per share in
cash. The remaining 6,343,203 shares held by Yankee were not converted. WCAS
acquired approximately 86%, funds managed by Ferrer Freeman Thompson & Co.
("Ferrer Freeman") acquired approximately 7%, and other investors acquired
approximately 7% of the post-merger shares of common stock of CMC, Concentra
Operating's parent company, for $16.50 per share. Simultaneous with the right
to receive cash for shares, Yankee merged with and into CMC and CMC
contributed all of its operating assets, liabilities and shares in its
subsidiaries, including Concentra Health Services, Inc., Concentra Managed
Care Services, Inc. and Concentra Preferred Systems, Inc., with the exception
of $110 million of 14% Senior Discount Debentures due 2010 and $327.7 million
of 6.0% and 4.5% Convertible Subordinated Notes, to Concentra Operating, a
wholly-owned subsidiary of CMC. The 6.0% and 4.5% Convertible Subordinated
Notes were substantially retired during the third quarter of 1999 as a result
of the merger. The merger was accounted for as a recapitalization transaction,
with no changes to the basis of assets, liabilities or shares in its
subsidiaries, including Concentra Health Services, Inc. and Concentra Managed
Care Services, Inc.
The merger transaction was valued at approximately $1.1 billion, including
the refinancing of $327.7 million of the 6.0% and 4.5% convertible
subordinated notes that were tendered during the third quarter. To finance the
acquisition of CMC, WCAS, Ferrer Freeman, and the other investors invested
approximately $423.7 million in equity financing, including the value of
shares already owned by WCAS, and $110.0 million of 14% senior discount
debentures due 2010 with warrants issued by CMC exercisable for its common
shares. Concentra Operating received from various lenders $375.0 million in
term loans, a $100.0 million revolving credit facility to replace the pre-
merger revolving credit facility and $190.0 million of 13% series A senior
subordinated notes due 2009. Concentra Operating excess cash balances funded
merger and financing related fees and expenses and related employee stock
option exercises and cancellation payments.
Concentra Operating incurred $18.0 million of deferred financing fees for
the issuance of the merger-related financing and recorded a non-recurring
charge of $54.4 million in the third quarter of 1999 incurred primarily
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for fees, expenses and other non-recurring charges associated with the merger.
Through December 31, 1999, we paid approximately $17.9 million for
professional fees and services, $14.5 million for employee-related stock
option exercises and cancellations, $10.5 million for a WCAS transaction fee
for advisory and consulting services provided to us in connection with the
merger and the related financing, $1.5 million of other personnel-related
costs and $1.8 million of other non-recurring charges, and used $5.5 million
for non-cash deferred compensation expense related to the accelerated vesting
and issuance of 210,000 shares of restricted stock. At December 31, 1999,
approximately $2.7 million of the non-recurring charge remains for
professional fees and services and other non-recurring items incurred in
connection with the merger.
Overview
CMC was formed on August 29, 1997 through the merger of OccuSystems, Inc.
and CRA Managed Care, Inc. That merger was a tax-free stock for stock exchange
accounted for as a pooling-of-interests. As discussed above, following the
1999 merger with Yankee, CMC contributed all of its assets and shares in its
subsidiaries, including Concentra Health Services, Inc. and Concentra Managed
Care Services, Inc., to Concentra Operating, a wholly-owned subsidiary of CMC.
Throughout this report, we refer to Concentra Health Services, Inc. as
Health Services and Concentra Managed Care Services, Inc. as Managed Care
Services. The following represents a discussion and analysis of the operations
of CMC through August 17, 1999 and of Concentra Operating from August 18, 1999
through December 31, 1999. CMC and Concentra Operating are presented together,
since they represent the same reporting entity for the periods presented.
Through Health Services, we manage occupational healthcare centers at which
we provide support personnel, marketing, information systems, and management
services to our affiliated physicians. Health Services, and the joint ventures
which Health Services controls, own all of the operating assets of our
occupational healthcare centers, including leasehold interests and medical
equipment. At our centers, we generate 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, 1997,
1998 and 1999, Health Services derived 63.5%, 63.1%, and 63.3% of its net
revenues from the treatment of work-related injuries and illnesses,
respectively, and 36.5%, 36.9% and 36.7% of its net revenues from non-injury
related medical services, respectively.
Physician and physical therapy services are provided at our centers under
management agreements with affiliated physician associations. These
associations or groups are organized professional corporations that hire
licensed physicians and physical therapists to provide medical services to our
centers' patients. Health Services has a nominee shareholder relationship with
each group 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 each affiliated physician group are consolidated.
Specifically:
. Health Services can at all times establish or effect change in the
nominee shareholder;
. Health Services can cause a change in the nominee shareholder an
unlimited number of times;
. Health Services has sole discretion without cause to establish or change
the nominee shareholder;
. Health Services and each physician group would incur no more than a
nominal cost to cause a change in the nominee shareholder; and
. neither Health Services nor the physician groups are subject to any
significant adverse impact upon a change in the nominee shareholder.
The management fees we collect from each physician group are calculated as
collected revenue net of compensation, benefits and other expenses incurred by
the groups.
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Through Managed Care Services, we provide specialized cost containment and
field case management services designed to reduce costs associated with
workers' compensation, disability and automobile accident coverage. Managed
Care Services earns most of its revenues on a fee-for-service or percentage-
of-savings basis. The specialized cost containment services we provide include
our:
. out-of-network bill review services;
. first-report-of-injury, utilization management, precertification and
concurrent review;
. retrospective medical bill review;
. telephonic case management;
. preferred provider organizations, or preferred provider organization
network access;
. independent medical examinations; and
. peer reviews.
We have designed each service to reduce the cost of workers' compensation
claims, automobile accident injury claims and group health claims.
On February 24, 1998, we merged CMC with Preferred Payment Systems, Inc. in
a pooling-of-interests transaction. This merger significantly expanded our
presence in the out-of-network group health bill review market. Preferred
Payment Systems, now operating as Concentra Preferred Systems, Inc. ("CPS"),
is a nationwide provider of specialized cost containment and outsourcing
services for healthcare payors. In the first quarter of 1998, we recorded a
non-recurring charge of $12.6 million primarily associated with our merger
with Preferred Payment Systems. Managed Care Services has also experienced
significant growth in its specialized cost containment services by virtue of
the acquisitions of:
. Focus Healthcare Management, Inc. on April 2, 1996;
. Prompt Associates, Inc. on October 29, 1996;
. First Notice Systems, Inc. on June 4, 1997;
. About Health, Inc. by Preferred Payment Systems in a two-step
transaction on August 1, 1997 and October 31, 1997; and
. other smaller acquisitions.
Our field case management services involve working on a one-on-one basis
with injured employees and their various healthcare professionals, employers
and insurance company adjusters to assist in maximizing medical improvement
and, where appropriate, to expedite their return to work. Our field case
management gross profit margins deteriorated in the second half of 1998 and we
reorganized field case management services in the fourth quarter of 1998. The
reorganization was designed to improve efficiency through facility
consolidations and related headcount reductions. In connection with our
reorganization, we recorded a non-recurring charge of $20.5 million related to
the reorganization, settling claims on 6 expired contracts and for the write-
off of assets, including customer lists, the value of the trained workforce
and furniture and fixtures we acquired from an insurance carrier associated
with a contract which we subsequently determined to be unprofitable. We
believe that the current size of our field case management office network is
sufficient to serve the needs of our nationwide customers. As a result, we
anticipate opening only a few new field case management offices per year if
client needs in selected regions require it. We would, however, examine the
possibility of acquiring additional field case management offices or
businesses if an appropriate strategic opportunity were to arise.
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The following table provides certain information concerning our service
locations:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Service locations at the end of the period:
Occupational healthcare centers(1)............... 140 156 209
Cost containment services offices(2)............. 83 85 61
Field case management offices(3)................. 123 89 81
Occupational healthcare centers acquired during
the period(4)................................... 22 12 53
Occupational healthcare centers developed during
the period...................................... 8 4 --
Number of affiliated physicians at the end of the
period.......................................... 252 278 362
Occupational healthcare centers--same market
revenue growth(5)............................... 11.0% 11.4% 8.1%
</TABLE>
- --------
(1) Does not include the assets of the occupational healthcare centers which
were acquired and subsequently divested or consolidated into existing
centers within the same market during the period.
(2) The decline in cost containment services offices in 1999 is primarily due
to a facility consolidation in the fourth quarter of 1999.
(3) The decline in field case management offices in 1998 is primarily due to
the fourth quarter of 1998 reorganization which included facility
consolidations. The 1999 decline is primarily due to a facility
consolidation in the fourth quarter of 1999.
(4) Represents occupational healthcare centers which were acquired during each
period presented and not subsequently divested.
(5) Occupational healthcare centers same market revenue growth sets forth the
aggregate net change in revenue from the prior period for all markets in
which Health Services has operated healthcare centers for longer than one
year (excluding revenue growth due to acquisitons of additional centers).
Results of Operations for the Years Ended December 31, 1999 and 1998
Revenues
Our total revenues increased 11.5% in 1999 to $681.4 million from $611.1
million in 1998. Health Services' revenues increased 27.2% in 1999 to $330.1
million from $259.5 million in 1998. Managed Care Services' revenues decreased
0.1% in 1999 to $351.3 million as specialized cost containment revenues
increased 11.1% in 1999 to $204.1 million from $183.7 million in 1998, and
field case management revenues decreased 12.2% in 1999 to $147.3 million from
$167.8 million in 1998.
Health Services' revenue growth resulted primarily from the acquisition of
practices and an increase of business in existing markets. While the Company
acquired a greater number of practices during 1999 than in previous years,
contributing to higher total revenue growth, the Company experienced same
market revenue growth of 8.1% which was lower than the 11.4% experienced
during 1998. The Company believes that this lower same market revenue growth
is due in part to factors which include:
. indirect effects related to the integration of the Company's newly
acquired centers;
. the training and relative performance of the Company's sales and
marketing group;
. the maturity of the Company's individual centers;
. national injury rates; and
. effects of weather conditions on national injuries.
We anticipate that the same market revenue growth will stabilize at current
levels.
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The increase in specialized cost containment revenue is largely attributable
to growth in:
. our growth in out-of-network bill review services;
. preferred provider organization network access fees;
. first report of injury services; and
. telephonic case management services in existing locations.
The decrease in field case management revenue is primarily attributable to a
reorganization of the division in the fourth quarter of 1998 to improve
efficiency through facility consolidations and related headcount reductions,
to decreases in business volume and, to a lessor extent, to a change in the
way that a portion of the Company's case management services are provided.
Because this reorganization created customer uncertainty as to the eventual
effects of the acquisition of the Company by Yankee and due to related
marketing efforts by competitors, the Company experienced a general decline in
business volume in its case management business during 1999. Additionally,
prior to 1999, the field case management business was generally handled on a
"full" case management approach, where all tasks were bundled as a single
package. In an effort to increase efficiency and better service its customer
base, the field case management business has increasingly provided a portion
of its services under a "task-based" approach, where the customer selects the
specific tasks field case management performs. This new approach has caused a
reduction in the billable hours per case and has thereby decreased field case
management revenue. We anticipate billable hours per case will continue to
decrease with the continued increase in the portion of the Company's services
being provided under a "task-based" approach, although this decrease and its
corresponding decrease in revenue may be somewhat mitigated or overcome by
increases in case volume as demand for this new approach increases.
Our total contractual allowances, related to Health Services and CPS, offset
against revenues during the years ended December 31, 1999 and 1998 were $27.8
million and $16.1 million, respectively.
Cost of Services
Our total cost of services increased 13.9% in 1999 to $534.5 million from
$469.3 million in 1998. Health Services' cost of sales increased 31.8% in 1999
to $265.1 million from $201.2 million in 1998 while Managed Care Services'
cost of services increased 0.5% in 1999 to $269.4 million from $268.1 million
in 1998.
Our total gross profit margin decreased to 21.6% in 1999 compared to 23.2%
in 1998. Health Services' gross profit margin decreased to 19.7% in 1999
compared to 22.5% in 1998 while Managed Care Services' gross profit margin
decreased slightly to 23.3% in 1999 compared to 23.7% in 1998.
Health Services' gross profit margin decreased primarily as a result of:
. the impact of lower margins from practices recently acquired and
developed;
. an increase in the benefits cost for health service employees;
. costs associated with the start-up of a new drug-screening lab facility
in Memphis, Tennessee; and
. an acceleration in the roll-out of patient tracking and billing systems
into the medical centers, which resulted in additional depreciation
expenses related to those systems this year over last year.
In 1999, Health Services acquired 53 clinics in 20 acquisitions.
Historically, as we consolidate certain functions, make other staff-related
changes and increase patient volume, the margins of our acquired or developed
practices have tended to improve. We will continue to pursue acquisitions of
clinics in 2000 that complement our existing centers.
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Managed Care Services' gross profit margins decreased slightly in 1999 due
primarily to a slowdown in field case management revenue and a decrease in
provider bill review and claims review gross profit margins, partially offset
by an increase in specialized cost containment services revenue which has
historically had higher gross profit margins than field case management.
Provider bill review gross profit margins decreased primarily due to:
. reduced productivity associated with implementation of a year 2000
compliant version of this business unit's software;
. an increase in software maintenance fees associated with a third party
software supplier;
. pricing concessions made in the second half of 1998; and
. an increase of approximately $380,000, primarily related to the
provision for billing adjustments as a result of our experience related
to the billing and collection of revenue.
We expect the gross profit margin for provider bill review to continue to be
negatively affected for 2000 due to the impact of certain pricing concessions
and due to an increase in software maintenance fees associated with a third
party software supplier. We continue to review procedures and systems for
provider bill review services to identify and resolve small variances in
customer payments. We also regularly review the status of accounts receivable
and adjust our reserves as necessary. We do not anticipate that these
adjustments will have a material negative impact on future gross profit
margins or liquidity.
General and Administrative Expenses
General and administrative expenses increased 44.2% in 1999 to $65.3 million
from $45.3 million in 1998, or 9.6% and 7.4% as a percentage of revenue for
1999 and 1998, respectively. The increase in general and administrative
expenses in 1999 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 59.3% in 1999 to $12.9 million from
$8.1 million in 1998, or 1.9% and 1.3% as a percentage of revenue for 1999 and
1998, respectively. The increase is primarily the result of a prospective
change in the amortization period of goodwill and the amortization of
additional intangible assets such as goodwill, customer lists and assembled
workforces primarily associated with acquisitions by Health Services.
We have historically amortized goodwill over periods ranging from 30 to 40
years. Effective January 1, 1999, we changed our 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 we
adopted this policy at the beginning of 1998, amortization for the year ended
December 31, 1998 would have increased approximately $3.3 million. As of
December 31, 1999, net intangible assets consisted of the following (amounts
in thousands):
<TABLE>
<S> <C>
Goodwill, amortization period of 25 years......................... $322,699
Customer lists, amortization period of 7 years.................... 1,087
Assembled workforce, amortization period of 5 years............... 1,198
--------
Total intangible assets, weighted average amortization period of
24.9 years....................................................... $324,984
========
</TABLE>
Non-Recurring Charge
In the first quarter of 1998, we recorded a non-recurring charge of $12.6
million primarily associated with the merger of Preferred Payment Systems.
Through December 31, 1999, we had paid approximately $5.6 million
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<PAGE>
for professional fees and services, $2.7 million in costs associated with
personnel reductions, $0.8 million in facility consolidations and closings,
specifically the payment of lease obligations related to these facilities,
$1.5 million associated with the write-off of deferred financing fees on
Preferred Payment Systems indebtedness retired and $1.5 million of other non-
recurring costs. At December 31, 1999, approximately $0.5 million of the non-
recurring charge remains, primarily related to remaining facility lease
obligations with terms expiring through March 2003.
In the fourth quarter of 1998, we recorded a non-recurring charge of $20.5
million primarily associated with the reorganization of our Managed Care
Services division to improve efficiency through facility consolidations and
related headcount reductions. The charge related to the reorganization,
settling claims on six expired contracts and the write-off of assets,
including customer lists, the value of the trained work force and furniture
and fixtures we acquired from an insurance carrier associated with a contract
which we subsequently determined to be unprofitable. Through December 31,
1999, we had incurred approximately $7.4 million in charges for the write-off
of assets related to the acquired contract and paid $3.9 million in costs
associated with personnel reductions, $1.0 million in costs associated with
settling claims on other expired contracts, $4.5 million in facility
consolidations and $0.2 million of other non-recurring costs. At December 31,
1999, approximately $3.5 million of the non-recurring charge remains,
primarily related to remaining facility lease obligations with terms expiring
through November 2003 and costs associated with settling claims on other
expired contracts.
In the third quarter of 1999, we recorded a non-recurring charge of $54.4
million primarily for fees, expenses and other non-recurring charges
associated with the merger. Through December 31, 1999, we had paid
approximately $17.9 million for professional fees and services, including
legal, accounting and regulatory fees, $14.5 million for employee related
stock option exercises and cancellations, $10.5 million for a Welsh Carson
transaction fee for advisory and consulting services provided to us in
connection with the merger and related financing, $1.5 million of other
personnel-related costs, and $1.8 million of other non-recurring charges and
incurred approximately $5.5 million in non-cash charges for deferred
compensation expense related to the accelerated vesting and issuance of
210,000 shares of restricted stock. At December 31, 1999, approximately $2.7
million of the non-recurring charge remains for professional fees and services
and other non-recurring charges. We anticipate that the majority of this
remaining charge will be used over the next 12 months.
Interest Expense
Interest expense increased $17.8 million in 1999 to $35.8 million from $18.0
million in 1998 due primarily to increased outstanding borrowings from the
issuance of $565.0 million in merger-related financing with annual interest
rates ranging from 8.5% to 13.0%. This increase was partially offset by the
retirement of substantially all of the $327.7 million of 6.0% and 4.5%
convertible subordinated notes. We expect interest expense to be approximately
$68 million in 2000 as a result of our increased borrowings being outstanding
for a full year and, to a lesser extent, because of the interest rate increase
under the terms of our recently amended Credit Facility. See "Liquidity and
Capital Resources."
Interest Income
Interest income decreased $1.8 million in 1999 to $2.9 million from $4.7
million in 1998 primarily as a result of excess cash being used to complete
the merger transaction and to pay related fees and expenses. The decline in
interest income was also impacted by the increase in our investment of excess
cash in 1998 as a result of the net proceeds of $223.6 million from the March
and April 1998 issuance of the 4.5% convertible subordinated notes after the
payment of approximately $122.0 million of outstanding borrowings under the
senior credit facility, debt assumed in the merger with Preferred Payment
Systems, and the payment to Preferred Payment Systems' dissenting
shareholders.
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<PAGE>
Other, net
Other income increased $0.4 million in 1999 to $0.4 million in other income
from $44,000 in other expense in 1998. Other income and expense, net primarily
relates to minority interests.
Provision for Income Taxes
We recorded a tax provision of $8.3 million in 1999 versus a tax provision
of $19.3 million in 1998. The effective tax rate was 45.3% and 46.2% in 1999
and 1998, respectively. Excluding the tax effects of the non-recurring
charges, the effective tax rate would have been 46.3% and 41.0% for 1999 and
1998, respectively. The above disparities in the effective tax rates excluding
the tax effects of the non-recurring charges are the result of the impact of
the non-deductibility of certain fees and expenses associated with the merger
in 1999 and the Preferred Payment Systems merger in 1998. We expect to
continue to provide for taxes at an effective tax rate of approximately 46%
for next year as the increase in interest expense and goodwill amortization
from the change in the amortization period to 25 years results in lower pre-
tax earnings while expense items not deductible for tax, such as goodwill and
non-deductible meals and entertainment, result in a higher tax provision.
Results of Operations for the Years Ended December 31, 1998 and 1997
Revenues
Our total revenues increased 24.9% in 1998 to $611.1 million from $489.3
million in 1997. Health Services' revenues increased 24.9% in 1998 to $259.5
million from $207.7 million in 1997. Managed Care Services' revenues increased
24.8% in 1998 to $351.6 million from $281.6 million in 1997, as our
specialized cost containment revenues increased 28.6% in 1998 to $183.7
million from $142.9 million in 1997 and our field case management revenues
increased 21.0% in 1998 to $167.8 million from $138.7 million in 1997.
Health Services' revenue growth was due to:
. our acquisition of 16 occupational healthcare centers;
. our management of an additional 4 occupational healthcare centers
pursuant to a management contract acquired in the fourth quarter of
1997;
. an increase in business in our existing markets;
. development of sites in new markets; and
. an increase in our consulting and other ancillary services.
Managed Care Services' specialized cost containment revenue growth was
largely attributable to:
. the growth of Preferred Payment Systems through its acquisition of About
Health, First Notice Systems and other immaterial entities; and
. the growth in retrospective medical bill review, telephonic case
management and claims reviews services in our existing service
locations.
Managed Care Services' field case management revenue growth was primarily
due to the business we generated from two field case management acquisitions
and the continued growth in revenues from our existing service locations.
Our total contractual allowances offset against revenues during the years
ended December 31, 1998 and 1997 were $16.1 million and $14.7 million,
respectively.
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<PAGE>
Cost of Services
Our total cost of services increased 25.9% in 1998 to $469.3 million from
$372.6 million in 1997. Health Services' cost of services increased 29.5% in
1998 to $201.2 million from $155.4 million in 1997, while Managed Care
Services' cost of services increased 23.4% in 1998 to $268.1 million from
$217.3 million in 1997.
Our 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 principally because of:
. an acceleration in the roll-out of patient tracking and billing systems
into our occupational healthcare centers;
. increased spending on marketing and facility improvements; and
. the impact of lower gross profit margins from practices recently
acquired and developed.
Managed Care Services recognized improvement in gross profit margins
primarily because of a shift in its revenue mix towards specialized cost
containment services, including the services provided by Preferred Payment
Systems, About Health, and First Notice Systems. Revenues from these services
have historically had higher gross profit margins than revenues derived from
field case management. Although 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 uncollectible
accounts receivable charges.
General and Administrative Expenses
Our general and administrative expenses increased 13.8% in 1998 to $45.3
million from $39.8 million 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 were due primarily to the continued investment
in our Information Services and Technology Group and in our accounting and
administrative personnel.
Amortization of Intangibles
Our amortization of intangibles increased 37.4% in 1998 to $8.1 million from
$5.9 million in 1997, or 1.3% and 1.2% as a percentage of revenues for 1998
and 1997, respectively. This increase was the result of amortizing additional
intangible assets such as:
. goodwill;
. customer lists and assembled workforces primarily associated with the
purchases of First Notice Systems and About Health by Preferred Payment
Systems;
. certain occupational healthcare centers from Vencor, Inc.; and
. various smaller acquisitions by Health Services.
Non-recurring Charge
We recorded non-recurring charges for the years ended December 31, 1998 and
1997 of $33.1 million and $38.6 million, respectively.
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<PAGE>
In the first quarter of 1998, we recorded a non-recurring charge of $12.6
million because of our merger of Preferred Payment Systems. The utilization of
this charge through December 31, 1998, was approximately:
. $5.1 million for professional fees and services;
. $2.4 million in costs associated with personnel reductions;
. $0.7 million in facility consolidations and closings;
. $1.6 million associated with the write-off of deferred financing fees on
Preferred Payment; and
. $1.3 million of other non-recurring costs.
In the fourth quarter of 1998, we recorded a non-recurring charge of $20.5
million primarily associated with our reorganization of Managed Care Services.
The utilization of this charge through December 31, 1998 was approximately:
. $7.4 million in charges related to the recognition of an impairment loss
on the intangible related to an acquired contract;
. $2.5 million in costs associated with personnel reductions; and
. $1.1 million in facility consolidations.
Our reorganization plan for Managed Care Services, including headcount
reductions and facility consolidations, was developed between early September
and the end of October 1998. We carried out the reorganization plan in late
October and early November 1998 with the 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 our original estimate since most of the actions were completed or
underway by December 31, 1998.
In the third quarter of 1997, we recorded a non-recurring charge of $38.6
million associated with the merger of CRA and OccuSystems. We finalized our
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 we identified all significant actions to be taken,
including reductions in duplicative personnel. The utilization of this charge
through December 31, 1998, was approximately:
. $11.6 million for professional fees and services;
. $16.2 million in costs associated with personnel reductions and the
consolidation of CRA's and OccuSystems' employee benefits;
. $5.9 million in facility consolidations and closings;
. $2.5 million for the write-off of start-up costs; and
. $2.4 million of other charges.
Interest Expense
Our interest expense increased $5.4 million in 1998 to $18.0 million from
$12.7 million in 1997 due primarily to our higher outstanding borrowings under
our existing credit facilities to finance acquisitions and the issuance of our
4.5% convertible subordinated notes, offset by the repayment of borrowings
under our existing credit facility and debt assumed in our merger with
Preferred Payment Systems.
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<PAGE>
Interest Income
Our interest income increased $2.4 million in 1998 to $4.7 million from $2.3
million in 1997 due principally the increase in our investment of excess cash
as a result of the receipt of $223.6 million in net proceeds from the issuance
of our 4.5% convertible subordinated notes after the payment of:
. approximately $122.0 million of outstanding borrowings under our
existing credit facility;
. debt assumed in the merger of Preferred Payment Systems; and
. the payment to Preferred Payment Systems dissenting shareholders.
Other Expense, Net
Our other expense, net primarily consisted of minority investors earnings in
consolidated affiliates of $0.5 million and amortization of start-up costs of
$0.3 million in 1997, partially offset by earnings in unconsolidated
affiliates.
Provision for Income Taxes
Our provision for income taxes in 1998 and 1997 was $19.3 million and $11.1
million, respectively. On a pro forma basis, giving effect to the Preferred
Payment Systems merger, our provision for income taxes in 1998 and 1997 would
have been $19.3 million and $13.9 million, respectively. This would have
resulted in pro forma effective tax rates of 46.2% and 65.9%, respectively.
Excluding the tax effects of our 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.
Seasonality
Our business is seasonal in nature. Patient visits at our Health Services'
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, weather and holidays. In addition, since employers
generally hire fewer employees in the fourth quarter, the number of pre-
placement physical examinations and drug and alcohol tests conducted at the
medical centers during that quarter is further reduced. Additionally, Managed
Care Services' field case management revenues are usually lower in the fourth
quarter compared to the third quarter due to the impact of vacations and
holidays. In a manner somewhat similar, although less pronounced, the first
and fourth quarters generally reflect lower revenues when compared to our
second and third quarters.
Impact Of The Year 2000
In prior years, we discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of our
systems. As a result of those planning and implementation efforts, we have not
experienced any significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. We are not aware of any
material problems resulting from Year 2000 issues, either with our products,
our internal systems, or the products and services of third parties.
The total cost of implementing our Year 2000 Program was $3.9 million. These
costs were not significantly different from our current planned investment for
information technology, and therefore, did not have a material adverse effect
on our long-term results of operations, liquidity or consolidated financial
position. We made capital and noncapital investments in the Information
Services and Technology Group of approximately $32.0 million in 1998 and
approximately $34.7 million in 1999. Of this investment, our Year 2000 Program
Office incurred expenses of approximately $2.1 million through December 31,
1999, primarily associated with the engagement of outside consultants to
assist in the inventory, assessment and remediation of Year 2000 affected
areas. Any
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remaining expense relating to other remediation efforts will be charged to
expense as incurred. We will continue to monitor our mission critical computer
applications and those of our suppliers and vendors throughout the year 2000
to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
Liquidity and Capital Resources
Cash flows generated from operations were $28.3 million, $34.9 million and a
net use of $0.5 million for the years ended December 31, 1999, 1998 and 1997,
respectively. During 1999, working capital used $2.5 million of cash primarily
due to an increase in accounts receivable of $19.2 million, offset by a
decrease in prepaid expenses and income taxes of $8.7 million and an increase
in accounts payable, accrued expenses and income taxes of $13.0 million.
Accounts receivable increased primarily due to continued revenue growth, while
accounts payable, accrued expenses and income taxes increased due to the
timing of payments. Within the next twelve months, it is anticipated that
approximately $4.5 million in cash payments will be made related to the non-
recurring charges that occurred in the first quarter of 1998, fourth quarter
of 1998 and the third quarter of 1999. These expenditures are anticipated to
consist of $1.8 million of fees and other expenses related to the merger, $0.6
million of employee-related costs, $0.7 million of facility related costs,
$1.3 million of costs associated with settling claims on certain expired
contracts and $0.1 million of other costs.
We used net cash of $55.2 million in connection with acquisitions and $36.0
million of cash to purchase property and equipment during 1999, the majority
of which was spent on new computer hardware and software technology, partially
offset by $15.5 million provided by the sale of marketable securities.
Cash flows used by financing activities of $39.4 million in 1999 was due
primarily to the payment of fees and expenses related to the merger and
deferred finance fees related to the merger financing.
Our capital and non-capital investment in the Information Services and
Technology Group was approximately $34.7 million in 1999. We incur capital
expenditures in the ordinary course of business for the purposes of
information services and technology, improvements to leased facilities and
equipment purchases necessary to support our growth. We currently anticipate
that total capital expenditures over the next 12 months will be consistent
with the past two years. We also do not anticipate any unusual material
capital expenditures.
We were in compliance with our covenants, including our financial covenant
ratio tests, in 1999. On March 21, 2000, Concentra and its lenders amended its
Credit Facility. Under the terms of the amended agreement, the financial
compliance ratios have been modified to allow for increased leverage through
September 2003 and decreased interest coverage through September 2004, as
compared to the original agreement. In order to receive these amended ratios,
the amended agreement provides for an interest rate increase of 0.75% on
outstanding borrowings under the Credit Facility. We believe the amended
agreement will enable Concentra to meet the terms of the financial compliance
ratios for the foreseeable future. As a part of the amendment, the Company was
also required to pay a fee of $1.7 million to lenders approving the amendment.
The amendment fee will be capitalized as deferred financing costs and
amortized over the remaining life of the Credit Facility. A failure to comply
with these and other financial compliance ratios could cause an event of
default under the Credit Facility which could result in an acceleration of the
related indebtedness before the terms of that indebtedness otherwise requires
us to pay that indebtedness. Such an acceleration would also constitute an
event of default under the indenture relating to the 13% Series A Subordinated
Notes and could also result in an acceleration of the 13% Series A
Subordinated Notes before the indenture otherwise requires us to pay the
notes.
We currently believe that our cash balances, the cash flow generated from
operations and our borrowing capacity under our revolving credit facility will
be sufficient to fund our working capital, occupational healthcare center
acquisitions and capital expenditure requirements for at least the next 12
months. Our long-term liquidity needs will consist of working capital and
capital expenditure requirements, the funding of any future acquisitions, and
repayment of borrowings under our revolving credit facility and the repayment
of outstanding indebtedness. We intend to fund these long-term liquidity needs
from the cash generated from operations, available borrowings under our
revolving credit facility and, if necessary, future debt or equity financing.
However, we cannot be
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certain that any future debt or equity financing will be available on terms
favorable to us, or that our long term cash generated from operations will be
sufficient to meet our long term obligations.
Legal Proceedings
The Company is aware of 1 consolidated lawsuit that was originally filed in
3 suits by alleged stockholders of CMC relating to CMC's merger with Yankee.
All 3 lawsuits were filed in the Chancery Court for New Castle County,
Delaware. Each lawsuit named CMC, its directors and Yankee as defendants. The
plaintiffs in each lawsuit sought to represent a putative class of all public
holders of CMC common stock. The lawsuits sought among other things,
preliminary and permanent injunctive relief prohibiting consummation of the
merger, unspecified damages, attorneys' fees and other relief. Prior to the
merger, CMC reached an agreement in principle to settle such litigation. In
connection with the settlement, and prior to the merger, CMC amended the proxy
statement mailed to its stockholders to disclose the relationship between CMC,
WCAS and the individuals affiliated with WCAS. In return, CMC, WCAS and their
respective affiliates, officers, directors and other representatives have been
released from all claims of the class. Under the terms of the settlement, the
defendants agreed to pay up to $325,000 in court-awarded attorney's fees and
expenses. On March 17, 2000, the Delaware court entered a final judgment
dismissing all claims in accordance with the settlement.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have fixed rate and variable rate debt instruments. Our variable rate
debt instruments are subject to market risk from changes in interest rates. In
order to manage this risk under the Credit Facility, we have entered into an
interest rate hedge. We do not hold or issue derivative financial instruments
for trading purposes and are not a party to any leveraged derivative
transactions. Sensitivity analysis is one technique used to measure the impact
of changes in the interest rates on the value of market-risk sensitive
financial instruments. A hypothetical 10% movement in interest rates would not
have a material impact on our future earnings, fair value or cash flows. For
more information on the interest rate hedge, see Note 5 in the audited
consolidated financial statements of the Company on page F-12.
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 and Executive Officers
Concentra Operating
The directors and executive officers of Concentra Operating are identical to
and hold identical positions as the persons identified below as directors and
executive officers of CMC. They have served in these positions with Concentra
Operating since August 17, 1999.
Concentra
Executive officers of Concentra Operating and CMC are elected annually by
the board of directors and serve until successors are duly elected and
qualified. There are no arrangements or understandings between any officer and
any other person under to which the officer was selected, and there are no
family relationships between any of our executive officers or directors. The
names, ages and positions of the executive officers and directors of Concentra
Operating and CMC are listed below along with their business experience during
at least the past 5 years.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Daniel J. Thomas........ 41 Director, President and Chief Executive Officer
Thomas E. Kiraly........ 40 Executive Vice President, Chief Financial Officer and Treasurer
James M. Greenwood...... 39 Executive Vice President Corporate Development
Richard A. Parr II...... 41 Executive Vice President, General Counsel and Secretary
W. Tom Fogarty, M.D..... 52 Senior Vice President and Chief Medical Officer
Bradley T. Harslem...... 48 Senior Vice President and Chief Information Officer
Paul B. Queally......... 35 Chairman and Director
John K. Carlyle......... 44 Director
Carlos Ferrer........... 45 Director
D. Scott Mackesy........ 31 Director
Steven E. Nelson........ 45 Director and President of Concentra Preferred Systems, Inc.
Andrew M. Paul.......... 43 Director
</TABLE>
Daniel J. Thomas has served as a Director of CMC since January 1998 and of
Concentra Operating since August 17, 1999. He has served as President and
Chief Executive Officer of Concentra since September 1998, and he served as
President and Chief Operating Officer of CMC from January 1998 until September
1998. He served as Executive Vice President and President of the Practice
Management Services subsidiary of CMC from August 1997 until January 1998. He
served as a director of OccuSystems, Inc. ("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.
Thomas E. Kiraly has served as Executive Vice President, Chief Financial
Officer and Treasurer of CMC since May 25, 1999. Prior to that time, Mr.
Kiraly served as the principal accounting and financial officer of BRC
Holdings, Inc. from December 1988 to May 1999. BRC Holdings, Inc., based in
Dallas, Texas, was a diversified provider of specialized information systems
and services to healthcare institutions and local governments and was acquired
in February 1999 by Affiliated Computer Services, Inc., another Dallas, Texas
based provider of information services. During his tenure at BRC Holdings,
Inc., Mr. Kiraly held the titles of Executive Vice President and Chief
Financial Officer from March 1994 through May 1999 and Vice President of
Finance from December 1988 through March 1994. Prior to that time, Mr. Kiraly
was a Senior Management
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Consultant with Touche Ross & Co., a predecessor to Deloitte & Touche L.L.P.,
a national accounting firm, from May 1985 until December 1988.
James M. Greenwood has served as Executive Vice President of Corporate
Development of CMC since February 1998 and as Senior Vice President of
Corporate Development of CMC 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.
Richard A. Parr II has served as Executive Vice President, General Counsel
and Secretary of CMC 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.
W. Tom Fogarty, M.D. has served as Senior Vice President and Chief Medical
Officer of CMC 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.
Bradley T. Harslem has served as Senior Vice President and Chief Information
Officer of CMC since December 1999. Prior to joining CMC, Mr. Harslem served
as Chief Information Officer and Chief Outbound Operations Officer for ITI
Marketing Services in Omaha, from December 1996 until its sale to APAC
Customer Services, where he served as Chief Information Officer until November
1999. From December 1993 until November 1996, Mr. Harslem served as Chief
Information Officer for Greyhound Lines in Dallas. Prior to Greyhound, he
worked for 18 years at American Airlines in both the Marketing and Sales
Technology departments. Mr. Harslem's last positions at American Airlines
included Vice President of Operations for the SABRE Travel Information Network
and Vice President of SABRE Computer Services.
Paul B. Queally has served as a director and the Chairman of CMC and
Concentra Operating since August 17, 1999. He has served as a managing member
or general partner of the respective sole general partner of WCAS and other
associated investment partnerships since February 1996. Prior to joining WCAS
in February 1996, Mr. Queally held various positions, including, most
recently, General Partner, at The Sprout Group, a private equity affiliate of
Donaldson, Lufkin & Jenrette, since 1987. He is Chairman of New American
Healthcare Corp and a director of Medcath, Inc. and several private companies.
John K. Carlyle has served as a Director of CMC since August 1997, as a
director of Concentra Operating since August 17, 1999 , and as Chairman of CMC
from September 1998 until August 17, 1999. Mr. Carlyle also served as Chairman
of the Board of Directors of CMC 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 area of neonatology and
perinatology. Mr. Carlyle served as OccuSystems' Chairman and Chief Executive
Officer 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 other private companies.
Carlos Ferrer has served as a director of CMC and Concentra Operating since
August 17, 1999. He has served as a member of the general partner of Ferrer
Freeman Thompson & Co. since 1995. Prior to 1995 he was employed by Credit
Suisse First Boston Corporation, as a Managing Director responsible for the
firm's investment banking activities in the healthcare industry. He is a
director of Sicor, Inc. and several private companies and is Chairman of the
Board of Trustees of the Cancer Research Institute.
39
<PAGE>
D. Scott Mackesy has served as a director of CMC and Concentra Operating
since August 17, 1999. He has served as an employee of WCA Management
Corporation, an affiliate of WCAS since 1998. Prior to joining WCAS in 1998,
Mr. Mackesy was employed from 1992 to 1998 by Morgan Stanley Dean Witter &
Co., most recently as a Vice President in its investment research department.
Steven E. Nelson has served as a director of CMC and Concentra Operating
since August 17, 1999. He has served as President of Concentra Preferred
Systems since August 1997. Prior to August 1997, Mr. Nelson served as
President and Chief Executive Officer of Preferred Payment Systems, Inc. since
1990.
Andrew M. Paul has served as a director of CMC and Concentra Operating since
August 17, 1999. He has served as a managing member or general partner of the
respective sole general partners of WCAS and other associated investment
partnerships since 1984. He is a director of Centennial Healthcare
Corporation, Accredo Health, Incorporated and several private companies.
Section 16(a) Beneficial Ownership Reporting Compliance
Neither Concentra Operating nor CMC has any class of equity securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934 (the
"Exchange Act"). Consequently, Section 16(a) of the Exchange Act no longer
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.
Based on Company records and other information with respect to the period
during which the common stock of CMC was registered pursuant to Section 12 of
the Exchange Act, the Company believes that all applicable Section 16(a)
reporting requirements were complied with for all transactions which occurred
in 1999.
40
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table summarizes the compensation paid to CMC's and Concentra
Operating's Chief Executive Officer, CMC's former Chief Executive Officer, and
the four most highly compensated executive officers of CMC and Concentra
Operating other than the Chief Executive Officer and the former Chief
Executive Officer who were serving as executive officers at the end of fiscal
year 1999 during (a) fiscal year 1999 and 1998 by Concentra, and (b) fiscal
year 1997 by CMC and its predecessors, CRA Managed Care, Inc. or OccuSystems,
Inc. These executive officers are referred to as the named executive officers.
<TABLE>
<CAPTION>
Long-term
Compensation
Awards
Securities
Underlying All Other
Annual Compensation Options/SARS Compensation
------------------------------- ------------ ------------
Name and Principal
Position Year Salary ($)(1) Bonus ($)(2) (#)(3) ($)(4)
- ------------------ ---- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Daniel J. Thomas....... 1999 400,000 200,000 -- 191,918(5)
President and Chief
Executive 1998 294,241 -- 250,000 3,276(6)
Officer, Director 1997 248,807 65,000 130,000 198
James M. Greenwood..... 1999 270,000 80,000 -- 165,341(7)
Executive Vice
President of 1998 247,495 -- 250,000 3,250
Corporate Development 1997 212,974 52,500 85,000 198
Richard A. Parr II..... 1999 250,000 70,000 -- 52,281(8)
Executive Vice
President, 1998 230,000 -- 30,000 5,718
General Counsel and
Secretary 1997 212,879 52,500 50,000 198
Thomas E. Kiraly (12).. 1999 138,462 25,000 89,803 74
Executive Vice
President, Chief 1998 -- -- -- --
Financial Officer and
Treasurer 1997 -- -- -- --
W. Tom Fogarty, M.D.... 1999 260,000 40,000 -- 84,062(9)
Senior Vice President
and Chief 1998 240,000 -- 30,000 3,416
Medical Officer 1997 223,671 55,000 75,000 864
Donald J. Larson....... 1999 575,000 -- -- 187,043(10)
Former Chairman,
President and 1998 434,540 -- -- 5,161(11)
Chief Executive
Officer 1997 320,204 116,500 100,000 3,200
Joseph F. Pesce (12)... 1999 156,587 -- -- 940,159(13)
Former Chief 1998 289,221 -- 230,000 9,243
Financial Officer 1997 245,096 86,500 130,000 12,720
</TABLE>
- --------
(1) Salaries for the currently employed named executives officers effective
January 1, 2000, are $400,000 for Mr. Thomas, $0 for Mr. Pesce, $270,000
for Mr. Greenwood, $260,000 for Dr. Fogarty, $250,000 for Mr. Parr and
$225,000 for Mr. Kiraly.
(2) Bonuses paid during August 1999 were related to activities performed by
the individual in connection with the merger and were paid at the time of
the closing of the merger.
(3) Represents long-term awards of options and restricted stock.
(4) Amounts shown represent, to the extent that the named executive officer
participated in the Employee Stock Purchase and the 401(k) Plans, (a) the
purchase discount on shares of CMC common stock purchased pursuant to
CMC's Employee Stock Purchase Plan, (b) CMC's matching provision under
CMC's 401(k) Plan and (c) premiums paid by Concentra for group term life
insurance that is taxable compensation to the named executive officers.
(5) Amount includes payment of $191,285 for cancellation of 477,000 options at
an option price of $19.50 to $33.8750.
(6) 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.
41
<PAGE>
(7) Amount includes payment of $164,575 for cancellation of 352,000 options at
an option price of $19.50 to $32.6250.
(8) Amount includes payments of $51,260 for cancellation of 115,000 options at
an option price of $23.1250 to $32.6250.
(9) Amount includes payment of $83,975 for cancellation of 112,000 options at
an option price of $19.50 to $32.6250.
(10) Amount includes payment of $5,251 for continuation of medical benefits,
and $160,592 for transfer of cash surrender value of split dollar life
insurance policy.
(11) Excludes payments totaling $1,354,092 paid to Mr. Larson in connection
with his resignation from CMC as its Chairman, President and Chief
Executive Officer in September of 1997 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.
(12) On May 7, 1999, Mr. Kiraly began employment with us. Effective May 25,
1999, Mr. Kiraly replaced Mr. Pesce as our Chief Financial Officer.
(13) Amount includes payment of $58,738 for transfer of cash surrender value
of split dollar life insurance policy and $825,000 severance.
Option and Restricted Stock Grants in 1999
The following tables set forth certain information concerning grants by CMC
of stock options and restricted stock to each of the named executive officers
during 1999. In accordance with the rules of the Securities and Exchange
Commission, the potential realizable values under such options are shown based
on assumed rates of annual compound stock price appreciation of 5% and 10%
over the full option term from the date the option was granted.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Number of % of Total Price
Securities Options Appreciation for
Underlying Granted to Exercise or Option Term
Options Employees in Base Price Expiration ($)(2)
Granted (1) Fiscal Year ($/Share) Date 5% 10%
----------- ------------ ----------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Daniel J. Thomas........ -- -- -- -- -- --
James M. Greenwood...... -- -- -- -- -- --
Richard A. Parr II...... -- -- -- -- -- --
Thomas E. Kiraly........ 89,803 12.85% 16.50 8/17/09 931,864 2,361,527
W. Tom Fogarty, M.D..... -- -- -- -- -- --
Donald J. Larsen........ -- -- -- -- -- --
Joseph F. Pesce......... -- -- -- -- -- --
</TABLE>
- --------
(1) The vesting of each option is cumulative, and no vested portion will
expire until the expiration of the option. For vesting determination
purposes, these options are divided into four classes, with Class I
representing 40% of the grant, Class II representing 40% of the grant,
Class III representing 10% of the grant, and Class IV representing 10% of
the grant. Class I options vest over a five year period, with 20% of the
Class I option vesting and becoming exercisable on January 1 in each of
2000, 2001, 2002, 2003, and 2004. The vesting of Class II, Class III, and
Class IV options is based on the level of attainment of earnings before
interest, taxes, depreciation, and amortization (EBITDA) growth
objectives.
(2) These amounts represent certain assumed rates of appreciation only and are
based on an original fair market value of $16.50 per share. Actual gains,
if any, on stock option exercises will depend upon the future market for
Concentra common stock and a price at which it can be sold.
42
<PAGE>
Long-Term Incentive Plans-Awards in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price
Number of Appreciation for
Securities Underlying Option Term
Awards Granted (#) Performance % of Total Exercise ($)(1)
-------------------------- Period Until Options Granted Price -----------------
Stock Restricted Maturation or to Employees of Options
Options Stock Payout(2) in Fiscal Year ($/Shares) 5% 10%
------------ ------------ ------------- --------------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel J. Thomas........ -- -- -- -- -- -- --
James M. Greenwood...... -- -- -- -- -- -- --
Richard A. Parr II...... -- -- -- -- -- -- --
Thomas E. Kiraly........ 89,803 0 1999-2007 12.85% 16.50 931,864 2,361,527
W. Tom Fogarty, M.D. ... -- -- -- -- -- -- --
Donald J. Larson........ -- -- -- -- -- -- --
Joseph F. Pesce......... -- -- -- -- -- -- --
</TABLE>
- --------
(1) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises will depend upon the future
market for Concentra common stock and a price at which it can be sold.
(2) The vesting of awards will be as described under footnote(1) of Long-Term
Incentive Plans-Awards in Last Fiscal Year.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-end Option and
Restricted Stock Values
The named executive officers and other key employees of the Company have
been granted new options to acquire up to 10.5% of CMC common stock at a price
per share equal to $16.50 under CMC's 1999 Stock Option and Restricted Stock
Purchase Plan. Some of these new options are non-qualified and vest 20% per
year over a five year period; other options vest upon the achievement of
certain performance criteria.
The following table provides information about option exercises by the named
executive officers during 1999 and the value realized by them (whether through
CMC or one of its predecessors). The table also provides information about the
number and value of options held by the named executive officers at
December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options At Fiscal In-The-Money Options
Shares Year End (#) At Fiscal Year End ($)(2)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel J. Thomas........ 225,000 2,262,500 -- -- -- --
James M. Greenwood...... 24,750 408,375 -- -- -- --
Richard A. Parr II...... -- -- -- -- -- --
Thomas E. Kiraly........ -- -- -- 89,803 -- 1,481,750
W. Tom Fogarty, M.D..... 53,300 508,400 -- -- -- --
Donald J. Larson........ -- -- -- -- -- --
Joseph F. Pesce......... 105,547 1,191,785 -- -- -- --
</TABLE>
- --------
(1) Market value of underlying securities based on the closing price of CMC's
common stock on the Nasdaq Stock Market on the date of exercise, August
17, 1999 at $16.50 per share, minus the exercise price.
(2) Market value of securities underlying in-the-money options based on the
closing price of CMC's common stock on August 17, 1999 (the last trading
day of the fiscal year) on the Nasdaq Stock Market of $16.50.
43
<PAGE>
Compensation of Directors
Concentra Operating. None of the directors of Concentra Operating received
any remuneration from Concentra Operating for their attendance at board and
committee meetings during 1999.
Other Compensation Arrangements
Employment Agreements
Each of Daniel J. Thomas, Thomas E. Kiraly, James M. Greenwood, Richard A.
Parr II, W. Tom Fogarty, M.D. and Bradley T. Harslem have entered into
employment agreements between such individuals and CMC. The principal terms of
these employment agreements are as follows:
. each agreement has a term of 2 years, subject to automatic renewal for
additional one-year terms, unless terminated in accordance with the
agreement's terms;
. each agreement provides for compensation consisting of base salary
amounts, bonuses at the discretion of the board of directors of CMC and
participation in any employee benefit plan adopted by us for our
employees;
. each agreement provides for a severance payment in the event of (1)
termination by CMC without cause, or (2) resignation by the employee for
good reason; consisting of two years' base salary for Mr. Thomas and 1
year's base salary for Messrs. Greenwood, Kiraly, Parr, Fogarty and
Harslem; provided, however, if termination by Concentra occurs on or
before August 17, 2000, each agreement provides for a severance payment
consisting of 2 1/2 year's base salary for Mr. Thomas and two years'
base salary for each of Messrs. Greenwood, Kiraly, Parr, Fogarty and
Harslem.
Compensation Plans
1999 Long-Term Incentive Plan
General
CMC's board and stockholders approved its 1999 Stock Option and Restricted
Stock Purchase Plan (the "1999 Stock Plan") in August 1999. The purpose of the
1999 Stock Plan is to promote the interests of CMC and its subsidiaries and
the interests of our stockholders by providing an opportunity to selected
employees and officers of CMC and its subsidiaries and to other persons
providing services to CMC and its subsidiaries to purchase CMC common stock.
By encouraging such stock ownership, we seek to attract, retain and motivate
such employees and other persons and to encourage such employees and other
persons to devote their best efforts to our business and financial success.
Under the 1999 Stock Plan, we may grant incentive stock options and non-
qualified stock options and restricted stock purchase awards to purchase an
aggregate of up to 3,750,000 shares of CMC common stock. The following summary
describes the principal features of the 1999 Stock Plan and is qualified in
its entirety by reference to the specific provisions of the 1999 Stock Plan,
which is filed as an exhibit to this Report.
Description of 1999 Stock Plan
Shares and Options Subject to Plan. The 1999 Stock Plan provides for the
grant of options or awards to purchase an aggregate 3,750,000 shares of common
stock, either in the form of incentive stock options intended to meet the
requirements of Section 422 of the Internal Revenue Code of 1986 (the "Code")
or nonqualified stock options or restricted stock purchase awards. The 1999
Stock Plan includes provisions for adjustment of the number of shares of
common stock available for grant of award thereunder and in the number of
shares of common stock underlying outstanding options in the event of any
stock splits, stock dividends or other relevant changes in the capitalization
of CMC.
44
<PAGE>
Eligibility. Under the 1999 Stock Plan, employees, including officers, are
eligible to receive grants of either incentive stock options structures to
qualify under Section 422 of the Code, or nonqualified stock options and
restricted stock purchase awards, both of which are not intended to meet the
requirements of Code Section 422. Non-employee directors are eligible to be
granted only nonqualified options and awards.
Administration. Administration of the 1999 Stock Plan has been delegated to
the Compensation Committee of CMC's Board of Directors (the "Compensation
Committee"), consisting entirely of "Non-Employee Directors" within the
meaning of the Securities Exchange Act of 1934, and "outside directors" within
the meaning of the Code. The Compensation Committee, within the parameters of
the 1999 Stock Plan, has authority to determine to whom options and awards are
granted. All questions of interpretation or application of the 1999 Stock Plan
are determined by the Compensation Committee, whose decisions are final and
binding upon all participants.
Terms of Options and Awards. Each option or award granted will be evidenced
by a stock option or restricted stock purchase agreement.
The Compensation Committee will fix the term and vesting provisions of all
options granted pursuant to the 1999 Stock Plan.
The exercise price of incentive stock options may not be less than 100% of
the fair market value of the shares of common stock, as determined by the
board or the Compensation Committee, as the case may be, on the date the
option is granted. The exercise price of non-qualified stock options may not
be less than 100% of the fair market value of the shares of common stock on
the date the option is granted. In addition, the aggregate fair market value
of the shares of stock with respect to which incentive stock options are
exercisable for the first time by an optionee during any calendar year shall
not exceed $100,000. In addition, no incentive stock option shall be granted
to an optionee who owns more than 10% of the total combined voting power for
all classes of stock of Concentra, unless the exercise price is at least 110%
of the fair market value of the shares of common stock and the exercise period
does not exceed 5 years.
Restricted stock purchase awards granted under the 1999 Stock Plan will be
in such amounts and at such times as determined by the Compensation Committee.
The purchase price, as well as the vesting provisions, of such awards shall be
determined by the Compensation Committee and the purchase price may be equal
to, less than or more than the fair market value of the shares of common stock
to be awarded.
Term of the 1999 Stock Plan. The 1999 Stock Plan will continue in effect
until August 17, 2009 unless terminated prior to such date by the board.
Certain Federal Income Tax Consequences of the 1999 Stock Plan
The tax consequences of incentive stock options, non-qualified stock options
and restricted stock purchase awards are quite complex. Therefore, the
description of tax consequences set forth below is necessarily general in
nature and does not purport to be complete. Moreover, statutory provisions are
subject to change, as are their interpretations, and their application may
vary in individual circumstances. Finally, the tax consequences under
applicable state and local income tax laws may not be the same as under the
federal income tax laws.
Incentive stock options granted pursuant to the 1999 Stock Plan are intended
to qualify as "incentive stock options" within the meaning of Section 422 of
the Code. If an optionee does not dispose of the shares acquired pursuant to
exercise of an incentive stock option within one year after the transfer of
such shares to the optionee and within 2 years from grant of the option such
optionee will recognize no taxable income as a result of the grant or exercise
of such option. However, for alternative minimum tax purposes the optionee
will recognize as an item of tax preference the difference between the fair
market value of the shares received upon exercise and the exercise price. Any
gain or loss that is subsequently recognized upon a sale or exchange of the
shares may be treated by the optionee as long-term capital gain or loss, as
the case may be. Concentra will not be entitled to a deduction for federal
income tax purposes with respect to the issuance of an incentive stock option,
the transfer
45
<PAGE>
of shares upon exercise of the option or the ultimate disposition of such
shares provided the holding period requirements are satisfied.
If shares received upon exercise of an incentive stock option are disposed
of prior to satisfaction of the holding period requirements, the optionee
generally will recognize taxable ordinary income, in the year in which such
disqualifying disposition occurs, in an amount equal to the lesser of (1) the
excess of the fair market value of the shares on the date of exercise over the
exercise price, and (2) the gain recognized on such disposition. Such amount
will ordinarily be deductible by Concentra for federal income tax purposes in
the same year, provided that the company satisfies certain federal income tax
information reporting requirements. In addition, the excess, if any, of the
amount realized by the exercise of the incentive stock option will be treated
as capital gain, long-term or short-term, depending on whether, after exercise
of the option, the shares were held for more than one year.
Non-qualified stock options may be granted under the 1999 Stock Plan. An
optionee generally will not recognize any taxable income upon grant of a non-
qualified stock option. The optionee will recognize taxable ordinary income,
at the time of exercise of such option, in an amount equal to the excess of
the fair market value of the shares on the date of exercise over the exercise
price. Such amount will ordinary be deductible by Concentra in the same year,
provided that Concentra satisfies certain federal income tax information
reporting requirements. Any gain or loss that is subsequently recognized by
the optionee upon a sale or exchange of the shares will be capital gain or
loss, long-term or short-term, depending on whether, after the exercise of the
option, the shares were held for more than one year prior to such sale or
exchange.
Restricted stock purchase awards may also be granted pursuant to the 1999
Stock Plan. A recipient of a restricted stock purchase award generally will
not recognize taxable income upon the purchase of shares of restricted stock,
unless he or she makes a timely election under Section 83(b) of the Code. Such
a recipient, however, would recognize taxable ordinary income and the holding
period for such shares would commence at the time that such shares become
vested, in an amount equal to the excess of the fair market value of the
shares at the time over the purchase price paid for such shares. If, on the
other hand, the recipient makes a timely election under Section 83(b), he or
she would recognize taxable ordinary income and the holding period for such
shares would commence at the time of purchase, in an amount equal to the
excess of the fair market value of the shares at that time, determined without
regard to any transfer restrictions imposed on the shares, vesting provisions
or any restrictions imposed by the securities laws, over the purchase price
paid for such shares. In either case, Concentra should be entitled to a
deduction in an amount equal to the ordinary income recognized by the
recipient in the same year that the recipient recognized such income, provided
that the company satisfies certain federal income tax information reporting
requirements. Any gain or loss that is subsequently recognized by the
recipient upon a sale or exchange of the shares will be capital gain or loss,
long-term or short-term, depending on whether the shares were held for more
than one year prior to such sale or exchange.
401(k) Plan
CMC has a defined contribution retirement plan which complies with Section
401(k) of the Code. Substantially all employees of CMC and its subsidiaries,
including certain officers and directors of Concentra Operating, who have
completed six months of service are eligible to participate in the Concentra
Managed Care, Inc. 401(k) Plan. Generally, employees may contribute amounts up
to a maximum of 15% of the employee's compensation. Under the plan, CMC has
the option of matching up to 50% of the participants' pretax contributions up
to a maximum of 6% of compensation. For each of 1998 and 1999, CMC elected to
match 50% of up to 4% of compensation.
Employee Stock Purchase Plan
Until March 2, 1999, CMC maintained an Employee Stock Purchase Plan that
permitted substantially all employees to acquire CMC common stock at the end
of each specified period at a purchase price of 85% of the lower of the fair
market value of the stock on the first or last business day of the purchase
period. Periods were
46
<PAGE>
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 of CMC administered the
Employee Stock Purchase Plan. On March 2, 1999, CMC terminated the Employee
Stock Purchase Plan. The final period for which participating employees
acquired shares of CMC's common stock began on January 1, 1999 and ended March
2, 1999.
Other Outstanding Options and Warrants
In addition to the options and awards granted under the 1999 Stock Plan, and
warrants to purchase 1,595,407 shares of CMC common stock for $0.01 per
Warrant granted to holders of CMC's 14% Senior Discount Debentures, the
Company had, as of December 31, 1999, issued or assumed from its predecessors
or acquired companies options or warrants to purchase an aggregate of 850,263
shares of common stock pursuant to separate agreements between the Company and
the holders thereof. The 850,263 options that are currently outstanding have
an average exercise price of $6.37 per share, and are subject to various
vesting provisions.
Unexercised options and warrants, and their exercise price, are subject to
adjustment if CMC issues common stock for a price per share less than the
exercise price or if there is a subdivision or consolidation of CMC's common
stock, the payment of a stock dividend or other increase or decrease in the
number of shares of CMC's common stock outstanding, and CMC does not receive
compensation therefor. In addition, the number (and type) of securities
subject to an option or warrant are subject to adjustment if CMC or the
Company is party to a merger or consolidation.
Compensation Committee Interlocks and Insider Participation
John K. Carlyle, who served as CMC's non-employee Chairman until August 17,
1999, has served as a member of the Compensation Committee since December,
1998.
Messrs. Paul and Queally are managing members of the sole general partner of
WCAS. Because of these affiliations, Messrs. Paul and Queally may be deemed to
have a material interest in the matters described under Item 13 "Certain
Relationships and Related Transactions--Equity Investor Agreements."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the issued and outstanding capital stock of Concentra Operating is
owned by CMC. The table below contains information regarding the beneficial
ownership of CMC's common stock as of March 15, 2000, by
. each stockholder who owns beneficially 5% or more of CMC's common stock,
. each director of CMC,
. each executive officer, and
. all directors and officers as a group.
The number of shares beneficially owned by each stockholder, director or
officer is determined according to the rules of the Securities and Exchange
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under current rules, beneficial ownership
includes any shares as to which the individual or entity has sole or shared
voting power or investment power. As a consequence, several persons may be
deemed to be the "beneficial owners" of the same shares. Unless otherwise
noted in the footnotes to this table, each of the stockholders named in this
table has sole voting and investment power with
47
<PAGE>
respect to the CMC common shares shown as beneficially owned. The percentage
ownership of each stockholder is calculated based on 25,672,748 shares
outstanding as of March 15, 2000.
<TABLE>
<CAPTION>
Beneficial Ownership
---------------------
Name Amount Percentage
---- ---------- ----------
<S> <C> <C>
Welsh, Carson, Anderson & Stowe VIII, L.P.(1).......................... 16,889,066 65.79%
320 Park Avenue, Suite 2500
New York, NY 10022
Health Care Capital Partners L.P.(2)................................... 1,854,545 7.22
c/o Ferrer Freeman Thompson & Co.
The Mill
10 Glenville Street
Greenwich, CT 06831
California State Teachers' Retirement System........................... 1,322,473 5.15
c/o Welsh, Carson, Anderson & Stowe
320 Park Avenue, Suite 2500
New York, NY 10022
Paul B. Queally(3)..................................................... 16,394,343 63.86
c/o Welsh, Carson, Anderson & Stowe
320 Park Avenue, Suite 2500
New York, NY 10022
Carlos Ferrer(4)....................................................... 1,854,545 7.22
c/o Ferrer Freeman Thompson & Co.
The Mill
10 Glenville Street
Greenwich, CT 06831
D. Scott Mackesy(5).................................................... 16,384,170 63.82
c/o Welsh, Carson, Anderson & Stowe
320 Park Avenue, Suite 2500
New York, NY 10022
Andrew M. Paul(6)...................................................... 16,440,848 64.04
c/o Welsh, Carson, Anderson & Stowe
320 Park Avenue, Suite 2500
New York, NY 10022
John K. Carlyle........................................................ -- *
Daniel J. Thomas....................................................... 33,000 *
Thomas E. Kiraly....................................................... -- *
James M. Greenwood..................................................... 8,250 *
Richard A. Parr II..................................................... 15,000 *
W. Tom Fogarty, M.D.................................................... 50,000 *
Bradley T. Harslem..................................................... -- *
Steven E. Nelson....................................................... 18,182 *
All directors and executive officers as a group (12 individuals)....... 18,455,164 71.89
</TABLE>
- --------
* Less than one percent.
(1) Certain of the shares reflected as owned by Welsh, Carson, Anderson &
Stowe VIII, L.P. are owned of record by WCAS Healthcare Partners, L.P.
(60,606). An aggregate of 515,604 shares included as owned by Welsh,
Carson, Anderson & Stowe VIII, L.P. are owned beneficially and of record
by (a) the individuals who are members of the limited liability company
that serves as its sole general partner: Bruce K. Anderson, Russell L.
Carson, Priscilla A. Newman, Anthony J. de Nicola, Thomas E. McInerney,
Andrew M. Paul, Paul B. Queally, Jonathan M. Rather, Lawrence B. Sorrell,
Laura M. Van Buren and Patrick J. Welsh, and (b) individuals employed by
its investment adviser, including, Mr. Mackesy. These individuals may be
deemed to share beneficial ownership of the remaining shares owned by
Welsh, Carson, Anderson & Stowe, VIII, L.P. In addition, Russell L. Carson
and Patrick J. Welsh, as general partners of the limited liability
partnership that serves as the sole general partner of WCAS Healthcare
Partners, L.P., may also be deemed to share beneficial ownership of the
shares held by that entity. However, all such individuals disclaim
beneficial ownership of such shares.
48
<PAGE>
(2) Certain of the shares reflected as owned by Health Care Capital Partners,
L.P. are owned beneficially and of record by Health Care Executive
Partners L.P. (73,675). Carlos A. Ferrer, David A. Freeman and Robert T.
Thompson are the only members of the limited liability company that serves
as the sole general partner of Health Capital Partners, L.P. and Health
Care Executive Partners, L.P. These individuals may be deemed to share
beneficial ownership of the shares owned of record by these entities.
However, such individuals disclaim beneficial ownership of any such
shares.
(3) Certain of the shares reflected as owned by Mr. Queally are owned of
record by Welsh, Carson, Anderson & Stowe VIII, L.P. (16,312,856) and WCAS
Healthcare Partners, L.P. (60,606). Mr. Queally disclaims beneficial
ownership of such shares.
(4) The shares reflected as owned by Mr. Ferrer are owned of record by Health
Care Capital Partners, L.P. (1,780,870) and Health Care Executive Partners
L.P. (73,675). Mr. Ferrer disclaims beneficial ownership of such shares.
(5) Certain of the shares reflected as owned by Mr. Mackesy are owned of
record by Welsh, Carson, Anderson & Stowe VIII, L.P. (16,312,856) and WCAS
Healthcare Partners, L.P. (60,606). Mr. Mackesy disclaims beneficial
ownership of such shares.
(6) Certain of the shares reflected as owned by Mr. Paul are owned of record
by Welsh, Carson, Anderson & Stowe VIII, L.P. (16,312,856) and WCAS
Healthcare Partners, L.P. (60,606). Mr. Paul disclaims beneficial
ownership of such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Equity Investor Agreements
Purchase Agreement
In connection with its investment in Yankee, Ferrer Freeman entered into a
subscription agreement to purchase 1,854,545 shares of Yankee's Class A common
stock immediately prior to the merger, representing approximately 7% of
Yankee's outstanding capital stock. The Class A common stock of Yankee is
identical in all respects to Yankee's common stock except that the holders of
Class A common stock are entitled to elect one member to Yankee's board of
directors. In the merger, these shares of Yankee's Class A common stock were
converted into an equal number of shares of Class A common stock of CMC with
the same rights as Yankee's Class A common stock prior to the merger.
In connection with their investment in Yankee, the WCAS investors and the
other investors entered into a subscription agreement to purchase 23,821,953
shares of Yankee's common stock immediately prior to the merger, representing
approximately 93% of Yankee's outstanding capital stock. In the merger, these
shares of Yankee's common stock were converted into an equal number of shares
of CMC common stock with the same rights as Yankee's common stock prior to the
merger.
Stockholders Agreement
The WCAS investors, the other investors, Ferrer Freeman and CMC also entered
into a stockholders agreement. The stockholders agreement does not provide for
any agreements with the WCAS investors, the other investors, and Ferrer
Freeman with respect to voting of shares or management of CMC. The
stockholders agreement provides for:
. limitations on the transfer of shares owned by the investors;
. tag along rights for Ferrer Freeman, the other investors, and the WCAS
investors, other than WCAS, to participate in proposed dispositions of
CMC common stock by WCAS;
. in the event that WCAS receives a third party offer to purchase a
significant portion of the outstanding CMC common stock, WCAS may
require Ferrer Freeman, the WCAS investors and the other investors to
accept the offer and sell their shares of CMC to the third party; and
. preemptive rights to the investors to participate, on a pro rata basis
according to their ownership of CMC capital stock, in equity offerings
of CMC with certain customary exceptions.
49
<PAGE>
Registration Rights Agreement
At the same time they executed the stockholders agreement, the WCAS
investors, the other investors, Ferrer Freeman and CMC entered into a
registration rights agreement. The registration rights agreement gives the
investors rights to require CMC to register their shares of CMC capital stock
under the Securities Act and to include, upon request, their shares in any
other registration of shares by CMC.
The Merger and Discount Debentures
WCAS controlled Yankee prior to the merger. Messrs. Queally and Paul, who
are members of the general partner of Welsh Carson, may be deemed to have
controlled Yankee prior to the merger. For a description of the merger see
Item 1. "Business," and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In addition, WCAS Capital Partners III, L.P., an investment partnership
affiliated with WCAS, bought $83.9 million face amount of 14% senior discount
debentures due 2010 of Concentra and warrants to acquire 619,356 shares of
Concentra common stock for $42.7 million at the time of the merger. Messrs.
Queally and Paul, who are members of the general partner of WCAS Capital
Partners III, L.P., may be deemed to control WCAS Capital Partners III, L.P.
Other Related Party Transactions
Lois E. Silverman, who was a director of CMC until August 17, 1999, is one
of the trustees and beneficiaries of Colonial Realty Trust, which leases 12
offices to CMC and its subsidiaries for an annual aggregate consideration of
$700,000. We believe that the rental rates paid to Colonial Realty Trust are
fair market rental rates.
W. Tom Fogarty, M.D., an executive officer of CMC and Concentra Operating,
is the President, a director and a member of Occupational Health Centers of
the Southwest, P.A., or OHCSW, and several other physician groups. We have
entered into a 40 year management agreement with each of the physician groups.
OHCSW paid approximately $161,347,000 in management fees to the Company in
1999 under its management agreement.
CMC has entered into employment agreements with Daniel J. Thomas, James M.
Greenwood, Thomas E. Kiraly, Richard A. Parr II, W. Tom Fogarty, M.D and
Bradley T. Harslem. See Item 11 "Executive Compensation--Other Compensation
Arrangements" for a discussion of the terms of these agreements.
50
<PAGE>
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, 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, 1998 and 1999................. F-2
Consolidated Statements of Operations-Years Ended December 31, 1997,
1998 and 1999......................................................... F-3
Consolidated Statements of Cash Flows-Years Ended December 31, 1997,
1998 and 1999......................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)-Years Ended
December 31, 1997, 1998 and 1999...................................... 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, is filed with this report and appears on page S-1.
The Report of Independent Public Accountants on 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
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization dated August 29, 1997, among CRA
Managed Care, Inc. and OccuSystems, Inc. and the Registrant
(incorporated by reference as Exhibit 2.1 to CMC's Annual Report on
Form 10-K for the year ended December 31, 1997).
2.2 Agreement and Plan of Merger dated February 24, 1998, among Concentra
Managed Care, Inc. ("CMC") and Preferred Payment Systems, Inc.
(incorporated by reference to Exhibit 2.2 to CMC's Annual Report on
Form 10-K for the year ended December 31, 1997).
2.3 Agreement and Plan of Merger dated March 2, 1999, between Yankee
Acquisition Corp. and CMC (incorporated by reference to Exhibit 2.1
to CMC's Current Report on Form 8-K filed on March 3, 1999).
2.4 Amended and Restated Agreement and Plan of Merger dated March 24,
1999, between Yankee Acquisition Corp. and CMC (incorporated by
reference to Exhibit 2.1 to CMC's Current Report on Form 8-K filed
on July 14, 1999).
*3.1 Articles of Incorporation of Concentra Operating Corporation ("COC").
*3.2 Amended and Restated By-Laws of COC.
*3.3 Articles of Incorporation of Concentra Management Services, Inc.
*3.4 Amended and Restated By-Laws of Concentra Management Services, Inc.
</TABLE>
51
<PAGE>
<TABLE>
<C> <S>
*3.5 Amended and Restated Certificate of Incorporation of Concentra
Preferred Systems, Inc.
*3.6 Amended and Restated By-Laws of Concentra Preferred Systems, Inc.
*3.7 Amended and Restated Certificate of Incorporation of Prompt Associates,
Inc.
*3.8 Amended and Restated By-Laws of Prompt Associates, Inc.
*3.9 Amended and Restated Certificate of Incorporation of First Notice
Systems, Inc.
*3.10 Amended and Restated By-Laws of First Notice Systems, Inc.
*3.11 Amended and Restated Charter of Focus Healthcare Management, Inc.
*3.12 Amended and Restated By-Laws of Focus Healthcare Management, Inc.
*3.13 Amended and Restated Articles of Incorporation of CRA Managed Care of
Washington, Inc.
*3.14 Amended and Restated By-Laws of CRA Managed Care of Washington, Inc.
*3.15 Articles of Incorporation of CRA-MCO, Inc.
*3.16 Amended and Restated By-Laws of CRA-MCO, Inc.
*3.17 Amended and Restated Articles of Incorporation of Drug-Free Consortium,
Inc.
*3.18 Amended and Restated By-Laws of Drug-Free Consortium, Inc.
*3.19 Articles of Organization of Concentra Managed Care Services, Inc.
*3.20 Amended and Restated By-Laws of Concentra Managed Care Services, Inc.
*3.21 Amended and Restated Articles of Incorporation of Concentra Health
Services, Inc.
*3.22 Amended and Restated By-Laws of Concentra Health Services, Inc.
*3.23 Agreement and Declaration of Trust of Concentra Managed Care Business
Trust.
*3.24 Agreement of Limited Partnership of OccuCenters I, L.P.
*3.25 Amended and Restated Articles of Incorporation of OCI Holdings, Inc.
*3.26 Amended and Restated By-Laws of OCI Holdings, Inc.
*3.27 Amended and Restated Articles of Incorporation of Hillman Consulting,
Inc.
*3.28 Amended and Restated By-Laws of Hillman Consulting, Inc.
*4.1 Indenture dated as of August 17, 1999, between COC and United States
Trust Company of New York, as Trustee, relating to the 13% Senior
Subordinated Notes due 2009.
*4.2 Indenture dated as of August 17, 1999, between CMC and United States
Trust Company of New York, as Trustee, relating to the 14% Senior
Discount Debentures due 2010.
4.3 Indenture dated as of December 24, 1996, between OccuSystems, Inc.
("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 filed on January
31, 1997).
4.4 First Supplemental Indenture dated as of August 29, 1997, between
OccuSystems, CMC and United States Trust Company of New York, as
Trustee, relating to the 6% Convertible Subordinated Notes due 2001
(incorporated by reference to Exhibit 4.2 to CMC's Annual Report on
Form 10-K for the year ended December 31, 1997).
*4.5 Second Supplemental Indenture dated as of August 17, 1999, between CMC
and United States Trust Company of New York, as Trustee, relating to
the 6% Convertible Subordinated Notes due 2001.
</TABLE>
52
<PAGE>
<TABLE>
<C> <S>
4.6 Indenture dated as of March 16, 1998, between CMC and ChaseBank of
Texas, N.A., as Trustee, (the "Concentra Indenture") relating to the
4.5% Convertible Subordinated Notes due 2003 (incorporated by
reference to Exhibit 4.1 to CMC's Current Report on Form 8-K filed on
March 30, 1998).
*4.7 First Supplemental Indenture dated as of August 17, 1999, between CMC
and Chase Bank of Texas, N.A., as Trustee, relating to the 4.5%
Convertible Subordinated Notes due 2003.
*4.8 Warrant Agreement dated as of August 17, 1999, by and among CMC and
the several persons named on Schedule I thereto.
4.9 Form of 13% Series B Senior Subordinated Notes due 2009 of COC
(included in Exhibit 4.1).
4.10 Form of 14% Senior Discount Debentures due 2010 of CMC (included in
Exhibit 4.2).
4.11 Form of 6% Convertible Subordinated Notes due 2001 of CMC (included in
Exhibit 4.3).
4.12 Form of 4.5% Convertible Subordinated Notes due 2003 of CMC (included
in Exhibit 4.4).
4.13 Form of Warrant to acquire CMC common stock (included in Exhibit 4.8).
*4.14 Registration Rights Agreement dated as of August 17, 1999 by and among
COC, the Guarantors set forth on the signature pages thereof, and
Donaldson, Lufkin & Jenrette Securities Corporation, Chase
Securities, Inc., Credit Suisse First Boston Corporation, Deutsche
Bank Securities, Inc. and Fleet Securities, Inc., as initial
purchasers.
*4.15 Registration Rights Agreement dated as of August 17, 1999 by and among
CMC, and the persons named in Schedules I and II thereto.
*10.1 Purchase Agreement dated August 17, 1999, by and among COC, the
Guarantors set forth on the signature pages thereof, and Donaldson,
Lufkin & Jenrette Securities Corporation, Chase Securities, Inc.,
Credit Suisse First Boston Corporation, Deutsche Bank Securities,
Inc. and Fleet Securities, Inc., as initial purchasers, relating to
the issuance and sale of $190,000,000 aggregate principal amount of
COC's 13% Senior Subordinated Notes due 2009, Series A.
*10.2 Credit Agreement dated as of August 17, 1999, among CMC, COC, the
Several Lenders from time to time parties thereto, The Chase
Manhattan Bank, as Administrative Agent, Credit Suisse First Boston
and Fleet National Bank, as Co-Documentation Agents, and DLJ Capital
Funding, Inc., as Syndication Agent.
**10.3 Credit Facility Agreement dated as of August 17, 1999, by and among
CMC, COC, the Several Lenders from time to time parties thereto, The
Chase Manhattan Bank, as Administrative Agent, Credit Suisse First
Boston and Fleet National Bank, as co-Documentation Agents and DLJ
Capital Funding, Inc., as Syndication Agent, Amended and Restated as
of March 21, 2000.
*10.4 Purchase Agreement dated August 17, 1999, by and among CMC and the
several persons named on Schedule I thereto, relating to the issuance
and sale of $110,000,000 aggregate face amount of CMC's 14% Senior
Discount Debentures due 2010 and Warrants to acquire CMC common
stock.
++*10.5 Concentra Managed Care, Inc. 1999 Stock Option and Restricted Stock
Purchase Plan.
++10.6 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 CMC's Registration Statement
on Form S-4 filed on July 31, 1997).
++10.7 CRA Managed Care, Inc. ("CRA") 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 filed on March 17, 1995).
</TABLE>
53
<PAGE>
<TABLE>
<C> <S>
++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 filed on March 17,
1995).
++10.9 OccuSystems, Inc. 1995 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.10 to OccuSystems' Registration Statement
on Form S-1 filed 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
OccuSystems' Registration Statement on Form S-1 filed on May 8,
1995).
++*10.11 Employment Agreement dated as of August 17, 1999, between CMC and W.
Tom Fogarty.
++*10.12 Employment Agreement dated as of August 17, 1999, between CMC and
James M. Greenwood.
++*10.13 Employment Agreement dated as of August 17, 1999, between CMC and
Richard A. Parr II.
++*10.14 Employment Agreement dated as of August 17, 1999, between CMC and
Daniel J. Thomas.
++*10.15 Employment Agreement dated as of August 17, 1999, between CMC and
Thomas E. Kiraly.
++**10.16 Employment Agreement dated as of December 7, 1999, between CMC and
Bradley T. Harslem.
10.17 Indemnification Agreement dated as of September 17, 1997, between
CMC and Daniel J. Thomas (identical agreements were executed
between CMC 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. Conrades, Robert A. Ortenzio, Lois E.
Silverman, Paul B. Queally, John K. Carlyle) (incorporated by
reference to Exhibit 10.17 to CMC's Annual Report on Form 10-K for
the year ended December 31, 1997).
10.18 Indemnification Agreement dated as of May 13, 1998, between CMC and
Hon. Willis D. Gradison, Jr. (identical agreements executed between
CMC and Stephen Read (dated December 16, 1997), Richard D. Rehm,
M.D. (dated May 13, 1998), Eliseo Ruiz III (dated May 11, 1998),
Scott Henault (dated September 17, 1997), Darla Walls (dated
December 16, 1997), Jeffrey R. Luber (dated December 16, 1997) and
Martha Kuppens (dated December 16, 1997)) (incorporated by
reference to Exhibit 10.3 to CMC's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998).
**10.19 Amended and Restated Software License Agreement dated as of May 1,
1999, between Concentra Managed Care Services, Inc. and HNC
Insurance Solutions (confidential treatment requested).
10.20 Occupational Medicine Center Management and Consulting Agreement
dated as of 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 OccuSystems' Annual
Report on Form 10-K for the year ended December 31, 1995).
10.21 Occupational Medicine Center Management and Consulting Agreement
dated as of December 31, 1993, between CHS and Occupational Health
Centers of Southwest, P.A., an Arizona professional association
(incorporated by reference to Exhibit 10.7 to OccuSystems' Annual
Report on Form 10-K for the year ended December 31, 1995).
10.22 Occupational Medicine Center Management and Consulting Agreement
dated as of 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 filed on March 28, 1996).
*10.23 Stockholders Agreement dated as of August 17, 1999 by and among CMC
and the several persons named in Schedules I and II thereto.
</TABLE>
54
<PAGE>
<TABLE>
<C> <S>
*10.24 Registration Rights Agreement dated as of August 17, 1999 by and among
CMC and the several persons named in Schedules I and II thereto.
12.1 Statements re Computation of Ratios (included in the financial
statements of Concentra Operating).
**21.1 Subsidiaries of COC.
*23.2 Consent of Arthur Andersen LLP.
**27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference to the Registrants' Registration Statement on Form
S-4, initially filed on November 12, 1999.
** Filed herewith.
++ Indicates that Exhibit is a management contract or compensatory plan or
arrangement.
(b)Reports on Form 8-K.
Reports On Form 8-K
During the quarter ended December 31, 1999, the Registrant filed no Current
Reports on Form 8-K.
55
<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 30th day
of March, 2000.
Concentra Operating Corporation
/s/ Thomas E. Kiraly
By: _________________________________
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 March 30, 2000
______________________________________ Officer and Director
Daniel J. Thomas (Principal Executive
Officer)
/s/ Thomas E. Kiraly Executive Vice President, March 30, 2000
______________________________________ Chief Financial Officer
Thomas E. Kiraly and Treasurer (Principal
Financial and Accounting
Officer)
/s/ Paul B. Queally Chairman and Director March 30, 2000
______________________________________
Paul B. Queally
/s/ John K. Carlyle Director March 30, 2000
______________________________________
John K. Carlyle
/s/ Carlos Ferrer Director March 30, 2000
______________________________________
Carlos Ferrer
/s/ D. Scott Mackesy Director March 30, 2000
______________________________________
D. Scott Mackesy
/s/ Steven E. Nelson Director March 30, 2000
______________________________________
Steven E. Nelson
/s/ Andrew M. Paul Director March 30, 2000
______________________________________
Andrew M. Paul
</TABLE>
56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Concentra Operating Corporation:
We have audited the accompanying consolidated balance sheets of Concentra
Operating Corporation, Inc. (a Nevada corporation) as of December 31, 1998 and
1999, and the related consolidated statements of operations, cash flows and
stockholders' equity (deficit) for each of the three years in the period ended
December 31, 1999. 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 auditing standards generally
accepted in the United States. 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 Operating
Corporation, Inc. as of December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 21, 2000
F-1
<PAGE>
CONCENTRA OPERATING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $101,128 $ 14,371
Marketable securities.................................... 5,000 --
Accounts receivable, net................................. 127,615 156,239
Prepaid expenses and other current assets................ 19,075 15,118
Prepaid and deferred income taxes........................ 14,019 13,556
-------- --------
Total current assets................................... 266,837 199,284
Property and equipment, net................................ 85,926 104,068
Goodwill, net.............................................. 275,172 322,699
Assembled workforce and customer lists, net................ 2,781 2,285
Marketable securities...................................... 10,583 --
Other assets............................................... 15,495 25,768
-------- --------
$656,794 $654,104
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Revolving credit facility................................ $ -- $ 4,000
Current portion of long-term debt........................ 55 3,805
Accounts payable......................................... 13,098 20,637
Accrued expenses......................................... 22,276 31,195
Accrued payroll and related expenses..................... 25,973 29,097
Accrued and deferred income taxes........................ 3,565 8,180
-------- --------
Total current liabilities.............................. 64,967 96,914
Long-term debt, net of current portion..................... 327,870 559,942
Deferred income taxes...................................... 13,575 17,439
Other liabilities.......................................... 10,507 19,082
Commitments and Contingencies (see Note 9)
Stockholders' Equity (Deficit):
Common stock--$.01 par value; 100,000,000 and 10,000
authorized, 47,104,412 and 1,000 shares issued and
outstanding, respectively............................... 471 --
Paid-in capital............................................ 270,654 4,525
Accumulated other comprehensive income--unrealized gain on
marketable securities..................................... 60 --
Retained deficit........................................... (31,310) (43,798)
-------- --------
Total stockholders' equity (deficit)................... 239,875 (39,273)
-------- --------
$656,794 $654,104
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CONCENTRA OPERATING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Health Services................................... $207,676 $259,481 $330,064
Managed Care Services:
Specialized cost containment.................... 142,919 183,734 204,084
Field case management........................... 138,723 167,841 147,264
-------- -------- --------
Total Managed Care Services................... 281,642 351,575 351,348
-------- -------- --------
Total revenue................................. 489,318 611,056 681,412
COST OF SERVICES:
Health Services................................... 155,376 201,181 265,083
Managed Care Services:
Specialized cost containment.................... 100,012 123,294 137,293
Field case management........................... 117,251 144,822 132,113
-------- -------- --------
Total Managed Care Services................... 217,263 268,116 269,406
-------- -------- --------
Total cost of services........................ 372,639 469,297 534,489
-------- -------- --------
Total gross profit............................ 116,679 141,759 146,923
General and administrative expenses............... 39,831 45,326 65,291
Amortization of intangibles....................... 5,908 8,119 12,960
Non-recurring charges............................. 38,625 33,114 54,419
-------- -------- --------
Operating income.............................. 32,315 55,200 14,253
Interest expense.................................. 12,667 18,021 35,779
Interest income................................... (2,297) (4,659) (2,900)
Other, net........................................ 883 44 (391)
-------- -------- --------
Income (loss) before income taxes................. 21,062 41,794 (18,235)
Provision for income taxes........................ 11,062 19,308 8,269
-------- -------- --------
Net income (loss)................................. $ 10,000 $ 22,486 ($26,504)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CONCENTRA OPERATING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1998 1999
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 10,000 $ 22,486 $ (26,504)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation of property and equipment...... 10,630 14,805 22,282
Amortization and write-off of intangibles... 5,908 8,119 12,960
Amortization of deferred compensation....... 562 805 --
Amortization and write-off of start-up
costs...................................... 2,845 -- --
Earnings in unconsolidated subsidiaries, net
of distributions........................... (192) (98) (44)
Amortization of deferred finance costs and
debt discount.............................. 777 1,699 2,098
Write-off of fixed assets................... -- -- 402
Merger related stock plan compensation
expense.................................... -- -- 14,555
Write-off of contract intangibles........... -- 7,416 --
Change in assets and liabilities, excluding
effects of acquisitions:
Accounts receivable......................... (27,003) (19,765) (19,171)
Prepaid expenses and other assets........... (16,326) (1,480) 8,662
Accounts payable, accrued expenses and
income taxes............................... 12,312 962 13,033
--------- -------- ---------
Net cash provided by (used in) operating
activities................................ (487) 34,949 28,273
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.......... (103,291) (18,070) (55,234)
Purchase of property and equipment.......... (25,535) (34,187) (35,953)
Purchase of investments..................... -- (15,523) --
Sale of investments......................... 12,045 -- 15,523
Proceeds from sale of property and equipment
and other.................................. 626 440 --
--------- -------- ---------
Net cash used in investing activities...... (116,155) (67,340) (75,664)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under revolving credit
facilities, net............................ 43,300 (49,000) 4,000
Proceeds from the issuance of long-term
debt....................................... 26,489 230,000 565,701
Payment of deferred financing costs......... (596) (6,411) (18,000)
Repayments of long-term debt................ (5,071) (49,581) (2,142)
Repayment of long term debt and other merger
payments................................... -- -- (577,077)
Merger related stock option and warrant
payments................................... -- -- (14,427)
Net proceeds from the issuance of common
stock under employee stock purchase and
option plans............................... 10,023 14,403 2,579
Payments to dissenting shareholders......... -- (15,047) --
Dividends and distributions to
shareholders............................... (3,760) (2,809) --
--------- -------- ---------
Net cash provided by (used in) financing
activities................................ 70,385 121,555 (39,366)
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. (46,257) 89,164 (86,757)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.. 58,221 11,964 101,128
--------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR........ $ 11,964 $101,128 $ 14,371
========= ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid............................... $ 11,941 $ 13,912 $ 26,621
Income taxes paid........................... $ 12,305 $ 15,961 $ 2,700
Conversion of notes payable into common
stock...................................... $ 691 $ 10,094 --
Liabilities and debt assumed in
acquisitions............................... $ 13,242 $ 8,386 $ 19,039
Net asset contribution from parent.......... -- -- $ 590,156
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CONCENTRA OPERATING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
$ 0.01 Par Value
Common Stock
------------------
Number Paid-in Comprehensive Retained Stockholders'
of Shares Value Capital Income Deficit Equity (Deficit)
----------- ----- --------- ------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 40,425,590 $ 404 $ 234,316 $-- $(56,574) $ 178,146
Common stock issued in
connection with
acquisitions........... 2,162,995 22 11,441 -- (969) 10,494
Common stock issued
under employee stock
purchase and option
plans and related tax
benefit................ 897,530 9 10,013 -- -- 10,022
Amortization of deferred
compensation........... -- -- 562 -- -- 562
Conversion of notes
payable into Common
stock.................. 81,571 1 690 -- -- 691
Dividends and
shareholder
distributions by pooled
companies.............. -- -- -- -- (3,474) (3,474)
Net income.............. -- -- -- -- 10,000 10,000
----------- ----- --------- ---- -------- ---------
Balance, December 31,
1997................... 43,567,686 436 257,022 -- (51,017) 206,441
Unrealized gain on
marketable securities.. -- -- -- 60 -- 60
Common stock issued in
connection with
acquisitions........... 430,750 4 3,408 -- 30 3,442
Common stock issued
under employee stock
purchase and option
plans and related tax
benefit................ 841,260 9 14,394 -- -- 14,403
Amortization of deferred
compensation........... -- -- 805 -- -- 805
Conversion of notes
payable into Common
stock.................. 2,735,387 27 10,067 -- -- 10,094
Dividends and
shareholder
distributions by pooled
companies.............. -- -- -- -- (2,809) (2,809)
Payments to dissenting
shareholders........... (470,671) (5) (15,042) -- -- (15,047)
Net income.............. -- -- -- -- 22,486 22,486
----------- ----- --------- ---- -------- ---------
Balance, December 31,
1998................... 47,104,412 471 270,654 60 (31,310) 239,875
Common stock issued
under employee stock
purchase and option
plans and related tax
benefit................ 295,757 3 2,435 -- -- 2,438
Amortization of deferred
compensation........... -- -- 435 -- -- 435
Change in value --
marketable securities.. -- -- -- (87) -- (87)
Elimination of
predecessor balance.... (47,400,169) (474) (273,524) 27 14,016 (259,955)
Net equity contribution
from parent company.... 1,000 -- 590,156 -- -- 590,156
Distribution to parent
company................ -- -- (585,631) -- -- (585,631)
Net loss................ -- -- -- -- (26,504) (26,504)
----------- ----- --------- ---- -------- ---------
Balance, December 31,
1999................... 1,000 $ -- $ 4,525 $-- $(43,798) $(39,273)
=========== ===== ========= ==== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Recapitalization Transaction
On August 17, 1999, Concentra Managed Care, Inc., a Delaware corporation
("CMC") merged (the "1999 Merger") with Yankee Acquisition Corp. ("Yankee"), a
corporation formed by Welsh, Carson, Anderson & Stowe ("WCAS"), a 14.9%
stockholder of CMC. As a result of the 1999 Merger, 41,056,966 outstanding
shares of CMC common stock were converted to $16.50 per share in cash. The
remaining 6,343,203 shares held by Yankee were not converted. WCAS acquired
approximately 86%, funds managed by Ferrer Freeman Thompson & Co., LLC ("FFT")
acquired approximately 7%, and other investors acquired approximately 7% of
the post-merger shares of common stock of CMC, Concentra Operating
Corporation's parent company, for $16.50 per share. Simultaneous with the
right to receive cash for shares, Yankee merged with and into CMC, the
surviving entity, and CMC contributed all of its operating assets,
liabilities, and shares in its subsidiaries, including Concentra Health
Services, Inc., Concentra Managed Care Services, Inc. and Concentra Preferred
Systems, Inc., with the exception of $110.0 million of 14% Senior Discount
Debentures due 2010 and $327.7 million of 6.0% and 4.5% Convertible
Subordinated Notes to Concentra Operating Corporation (the "Company" or
"Concentra Operating"), a wholly-owned subsidiary of CMC in exchange for 1,000
shares of Concentra Operating common stock. The net contribution by CMC
totaled $590.2 million. The 6.0% and 4.5% Convertible Subordinated Notes were
substantially retired during the third quarter of 1999 as a result of the 1999
Merger. The 1999 Merger was accounted for as a recapitalization transaction,
with no changes to the basis of assets or liabilities.
The 1999 Merger was valued at approximately $1.1 billion, including the
refinancing of $327.7 million of the 6.0% and 4.5% Convertible Subordinated
Notes that were tendered during the quarter. To finance the acquisition of
CMC, WCAS, FFT and other investors invested approximately $423.7 in equity
financing, including the value of shares already owned by WCAS, and $110.0
million of 14% Senior Discount Debentures due 2010 with warrants issued by CMC
exercisable into its common shares. This additional debt is not guaranteed by
Concentra Operating. Concentra Operating received from various lenders $375.0
million in term loans, a $100.0 million revolving credit facility to replace
the pre-merger revolving credit facility and $190.0 million of 13% Series A
Senior Subordinated Notes due 2009. Concentra Operating's excess cash balances
funded merger and financing related fees and expenses and related employee
stock option exercises and cancellation payments. Concentra Operating incurred
$18.0 million of deferred financing fees for the issuance of the 1999 Merger
related financing, consisting primarily of underwriting fees.
(2) Basis of Presentation
On August 29, 1997, CMC 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 accompanying consolidated financial statements as of December 31, 1999,
and for each of the 3 years ended December 31, 1999 and related footnotes
reflect the operating results of CMC through August 17, 1999 and of Concentra
Operating from August 18, 1999, through December 31, 1999. CMC and Concentra
Operating are presented together through August 17, 1999 since they represent
the same reporting entity. Earnings per share has not been reported for all
periods presented, as Concentra Operating is a wholly-owned subsidiary of CMC
and has no publicly held shares.
Concentra Operating is a leading provider of healthcare management and cost
containment services to the workers' compensation, auto insurance and
disability insurance markets. Concentra Operating is also a leading
F-6
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
provider of out-of-network medical claims review to the group health
marketplace and performs non-injury healthcare services.
(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 where
the Company owns less than a 51% interest are accounted for on an 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:
. Health Services can at all times establish or effect change in the
nominee shareholder;
. Health Services can cause a change in the nominee shareholder an
unlimited number of times;
. Health Services has sole discretion as to the choice of a new nominee
shareholder;
. Health Services has sole discretion without cause to establish or change
the nominee shareholders;
. Health Services and the Physician Groups would incur no more than a
nominal cost to cause a change in the nominee shareholder; and,
. 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.
(c) Revenue Recognition
The Company recognizes revenue primarily as services have been rendered
based on time and expenses incurred or as task-based projects are completed
and customers are obligated to pay. 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 2 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
F-7
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
methods vary on a state-by-state basis. Of the 32 states in which the Company
currently operates occupational healthcare centers, 23 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 9 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, 1999, 1998 and 1997 were $27.8 million, $16.1
million and $14.7 million, respectively. Allowance for doubtful accounts on
the Company's accounts receivable at December 31, 1998, and 1999 were $17.2
million and $19.4 million, respectively.
Insurance claims are screened by certain Concentra Operating subsidiaries
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. The Company'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 this revenue is based on historical experience of
ineligible claims which are either charged back or given a negotiated
discount. Concentra Operating utilizes 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, 1998 and 1999 include $4.5 million and
$9.4 million, respectively 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, except in the case of task-based projects, as discussed above. The
Company estimates unbilled accounts receivable by tracking and monitoring its
historical experience.
(d) Property And Equipment
Property and equipment were comprised of the following as of December 31,
(in thousands):
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Land...................................................... 2,775 2,775
Buildings and improvements................................ 6,814 6,749
Leasehold improvements.................................... 31,280 37,941
Computer hardware and software............................ 56,838 82,657
Furniture and equipment................................... 40,439 44,087
------- --------
Property and equipment, at cost........................... 138,146 174,209
Accumulated depreciation and amortization................. (52,220) (70,141)
------- --------
$85,926 $104,068
======= ========
</TABLE>
F-8
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, pre-tax amortization expense for 1998
would have increased by approximately $3.3 million. As of December 31, 1999,
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, 1998 and 1999, the Company has recorded accumulated amortization
on intangible assets of $37.9 million and $50.4 million, 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 each related
operating unit's undiscounted cash flows over the remaining life of the
goodwill and compares it to each 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.
As of December 31, 1999, net intangible assets consisted of the following
(in thousands):
<TABLE>
<S> <C>
Goodwill, amortization period of 25 years......................... $322,699
Customer lists, amortization period of 7 years.................... 1,087
Assembled workforce, amortization period of 5 years............... 1,198
--------
Total intangible assets, weighted average amortization period 24.9
years............................................................ $324,984
========
</TABLE>
(f) Deferred Finance Costs
The Company had capitalized costs associated primarily with the 6% and 4.5%
Convertible Subordinated Notes (see Note 5) and indebtedness related to the
PPS acquisition (see Note 4) and was amortizing these as interest expense over
the life of the notes. Included in other assets at December 31, 1998 were
deferred finance costs, net of accumulated amortization, of $7.6 million. The
remaining deferred finance costs, net of accumulated amortization, of $7.2
million were written off by CMC subsequent to the 1999 Merger as an
extraordinary loss upon the retirement of this debt (see Note 5).
F-9
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In conjunction with the issuance of certain 1999 Merger indebtedness, the
Company incurred $18.0 million in deferred finance costs, consisting primarily
of underwriting fees. The Company has capitalized these costs and is
amortizing them over the life of the notes. Deferred finance costs, net of
accumulated amortization, of $17.3 million were included in other assets at
December 31, 1999.
(g) Investments in Joint Ventures
Investments in the net assets of joint ventures accounted for under the
equity method amounted to $3.9 million and $4.0 million at December 31, 1998
and 1999, respectively. For the year ending December 31, 1998 and 1999,
revenue for these entities was $5.7 million and $6.5 million, gross profit was
$0.9 million and $1.2 million, and net income was $0.3 million and $0.2
million, respectively. Total assets for the joint ventures were $4.3 million
and $4.5 million as of December 31, 1998 and 1999, respectively.
(h) Self-Insurance
The 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.
(i) 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
Position 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 $2.5
million and included this in the third quarter of 1997 non-recurring charges.
(j) 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, 1997, 1998, and 1999.
(k) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(l) Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130")
effective in the second quarter of 1998. SFAS 130 establishes standards for
reporting comprehensive income and its components in the consolidated
financial statements. The Company's reported net income for the years ended
December 31, 1998, and 1999 does not differ materially from comprehensive
income as defined in SFAS 130.
F-10
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101, as amended by SAB No. 101(a), is effective for all
periods beginning after March 15, 2000. SAB 101 requires that companies
conform their revenue recognition practices to the requirements therein during
the second quarter of calendar year 2000 through recording a cumulative net of
tax effect of the change in accounting. The Company has not completed the
analysis to determine the effect that SAB 101 will have on its financial
statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." The Statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 is effective for fiscal years beginning after June 15,
1999. In June 1999, FASB issued Statement of Financial Accounting Standards
No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--an
amendment of FASB Statement No. 133." This Statement has delayed the effective
date of SFAS 133 until fiscal years beginning after June 15, 2000. The Company
does not expect the adoption of this statement to have a material impact on
its financial position or results of operations.
(4) Recent Acquisitions and Non-recurring Charges
The Company, through its Health Services division, acquired 53 clinics in 20
acquisitions in 1999. The Company paid approximately $52.5 million, net of
cash acquired, and recorded approximately $59.2 million for goodwill and $0.3
million for assembled workforces and customer lists. No contingent
consideration exists related to these transactions.
As discussed in Note 2, CMC was formed on August 29, 1997 by the merger of
CRA and OccuSystems. The Company recorded a non-recurring charge of $38.6
million in the third quarter of 1997 associated with this 1997 Merger. The
charge was completely utilized as of December 31, 1998 as follows:
approximately $11.6 million for professional fees and services, $16.2 million
in costs associated with personnel reductions and the consolidation of CRA's
and OccuSystems' employee benefits, $5.9 million in facility consolidations
and closings, $2.5 million for the write-off of start-up costs and $2.3
million of other charges.
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 CMC's common stock, the
assumption of PPS options totaling approximately 580,000 shares of CMC's
common stock, the payment of approximately $15.0 million in cash to dissenting
PPS shareholders and the assumption of approximately $49.0 million of debt,
which was repaid at the time of this merger transaction. This merger was
accounted for as a pooling of interests. PPS, founded in 1990, is a provider
of retrospective bill review services for the group healthcare market. In the
first quarter of 1998, the Company recorded a non-recurring charge of $12.6
million primarily associated with the merger of PPS. Through December 31,
1999, the Company paid approximately $5.6 million for professional fees and
services, $2.7 million in costs associated with personnel reductions, $0.8
million in facility consolidations and closings, $1.5 million associated with
the write-off of deferred financing fees on PPS indebtedness retired, and $1.5
million of other non-recurring costs. At December 31, 1998 and 1999,
approximately $1.5 million and $0.5 million, respectively, of the non-
recurring charge remains primarily related to remaining facility lease
obligations. The Company's pro forma net income for the year ended December
31, 1997, was $7.2 million and has 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.
F-11
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the fourth quarter of 1998, the Company recorded a non-recurring charge
of $20.5 million primarily associated with the reorganization of its Managed
Care Services division to improve efficiency through facility consolidations
and related headcount reductions, an impairment loss on the intangible asset
related to an acquired contract, and costs associated with settling claims on
other expired contracts. Through December 31, 1999, the Company utilized
approximately $7.4 million in charges related to an impairment loss on the
intangible asset related to an acquired contract, and paid $3.9 million in
costs associated with personnel reductions, $1.0 million in costs associated
with settling claims on other expired contracts and $4.5 million in facility
consolidations and $0.2 million of other non-recurring costs. At December 31,
1999, approximately $3.5 million of the non-recurring charge remains primarily
related to remaining facility lease obligations and costs associated with
settling claims on certain other expired contracts.
In the third quarter of 1999, the Company recorded a non-recurring charge of
$54.4 million primarily for fees, expenses and other non-recurring charges
associated with the 1999 Merger. Through December 31, 1999, the Company paid
approximately $17.9 million for professional fees and services, including
legal, accounting and regulatory fees, $14.5 million for employee-related
stock option exercises and cancellations, $10.5 million for a WCAS transaction
fee for advisory and consulting services provided to the Company in connection
with the 1999 Merger and the related financing, $1.5 million of other
personnel-related costs, and $1.8 million of other non-recurring charges, and
used $5.5 million for non-cash charges for deferred compensation expense
related to the accelerated vesting and issuance of 210,000 shares of
restricted stock. At December 31, 1999, approximately $2.7 million of the non-
recurring charge remains for professional fees and services and other non-
recurring items incurred in connection with the merger.
The following are rollforwards of the non-recurring charges recorded by the
Company in 1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
Beginning Charged To End
Of Year Income Usage Of Year
--------- ---------- -------- -------
<S> <C> <C> <C> <C>
Third quarter 1997
1997................................ $ -- $38,625 $(31,098) $7,527
1998................................ 7,527 -- (7,527) --
First quarter 1998
1998................................ $ -- $12,600 $(11,128) $1,472
1999................................ 1,472 -- (1,025) 447
Fourth quarter 1998
1998................................ $ -- $20,514 $(11,046) $9,468
1999................................ 9,468 -- (5,956) 3,512
Third quarter 1999
1999................................ $ -- $54,419 $(51,687) $2,732
Total
1997................................ $ -- $38,625 $(31,098) $7,527
1998................................ 7,527 33,114 (29,701) 10,940
1999................................ 10,940 54,419 (58,668) 6,691
</TABLE>
F-12
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Revolving Credit Facilities and Long Term Debt
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
(in thousands)
<S> <C> <C>
Revolving credit borrowings.............................. $ -- $ 4,000
Term Facilities:
Tranche B due 2006..................................... -- 248,750
Tranche C due 2007..................................... -- 124,375
13.0% Series A Senior Subordinated Notes due 2009........ -- 190,000
4.5% Convertible Subordinated Notes...................... 230,000 --
6.0% Convertible Subordinated Notes...................... 97,750 --
Other.................................................... 175 622
-------- --------
327,925 567,747
Less: Current maturities................................. (55) (7,805)
-------- --------
Long-term debt, net of current maturities................ $327,870 $559,942
======== ========
</TABLE>
As of December 31, 1998 and 1999, accrued interest was $3.3 million and
$12.4 million, respectively.
On August 17, 1999, the Company entered into a $475 million credit agreement
(the "Credit Facility") with a consortium of banks, providing for $375 million
in term loans and a $100 million revolving credit facility (the "Revolving
Credit Facility"). The $375 million in term loans were issued as a $250
million term loan (the "Tranche B Term Loan") and a $125 million term loan
(the "Tranche C Term Loan") bearing interest, at the Company's option, at the
Applicable Base Rate ("ABR"), as defined, plus 2.25% and 2.50%, respectively,
or the one, two, three, or six month Eurodollar Rate, as defined, plus 3.25%
and 3.50%, respectively. The Tranche B Term Loan matures on June 30, 2006, and
requires quarterly principal payments of $0.6 million through June 30, 2005,
and $58.8 million for each of the remaining four quarters. The Tranche C Term
Loan matures on June 30, 2007, and requires quarterly principal payments of
$0.3 million through June 30, 2006, and $29.1 million for each of the
remaining four quarters.
The Revolving Credit Facility provides for borrowing up to $100 million and
matures on August 17, 2005. Interest on borrowings under the Revolving Credit
Facility are payable, at the Company's option, at ABR plus 1.75% or the
Eurodollar Rate plus 2.75%. The ABR, as defined, and the Eurodollar Rate, as
defined, were 8.5% and 6.1%, respectively, at December 31, 1999. Commitment
fees on the unused revolver borrowings are at 0.5% per annum. The weighted-
average interest rates for the borrowings under the Revolving Credit Facility
and the Tranche B and C Term Loans were 8.9%, 9.3% and 9.7%, respectively, at
December 31, 1999.
The Credit Facility requires the Company to enter into interest rate swap
agreements for the purpose of reducing the effect of interest rate
fluctuations on a certain portion of the Credit Facility. The Company's
interest rate swap agreement converts $200 million of certain variable rate
debt to fixed rates and expires November 17, 2004 . The interest rate swap is
structured such that the Company generally pays and receives the 3 month LIBOR
rate (the "Swap Rate") to and from the counterparty on the notional amount
subject to the following limitations: the minimum rate the Company pays is
6.1% when the Swap Rate is less than 5.0%; the maximum rate the Company pays
is 6.0%, unless the Swap Rate is greater than 7.15% and less than 8.25%; and,
if the Swap Rate is greater than 8.25%, the maximum rate the Company pays is
8.25%. From November 17, 2002 through the maturity of the interest rate swap
agreement, there is no maximum rate the Company pays if the Swap Rate exceeds
7.15%. The impact of this transaction on our financial position and results of
operations is not material. Further, the carrying amount of the interest rate
swap agreement approximates its fair value, as determined by estimating the
amount the Company would pay or receive to terminate the agreement.
The $190 million 13% Series A Senior Subordinated Notes (the "13%
Subordinated Notes") due August 15, 2009 are general unsecured indebtedness
with semi-annual interest payments due on February 15 and August 15 commencing
on February 15, 2000. The Company can redeem the 13% Subordinated Notes on or
F-13
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
after August 15, 2004 at 106.5% of the principal amount with the redemption
premium decreasing annually to 100.0% of the principal amount on August 15,
2008. The 13% Subordinated Notes are guaranteed by each and every wholly-owned
subsidiary, the results of which are consolidated in the results of the
Company, the guarantees are full and unconditional, and the Company has no
assets or operations separate from the investments in these subsidiaries. As a
result, separate financial statements of the Company's subsidiaries are not
provided.
The Credit Facility and 13% Subordinated Notes contain certain customary
covenants, including, without limitation, restrictions on the incurrence of
indebtedness, the sale of assets, certain mergers and acquisitions, the
payment of dividends on the Company's capital stock, the repurchase or
redemption of capital stock, transactions with affiliates, investments,
capital expenditures and changes in control of the Company. Under the Credit
Facility, the Company is also required to satisfy certain financial covenant
ratio tests including leverage ratios, interest coverage ratios and fixed
charge coverage ratios. The Company was in compliance with its covenants,
including its financial covenant ratio tests, in 1999. The Company's
obligations under the Credit Facility are secured by a pledge of stock in the
Company's subsidiaries.
On March 21, 2000, Concentra and it lenders amended its Credit Facility.
Under the terms of the amended agreement, the financial compliance ratios have
been modified to allow for increased leverage through September 2003 and
decreased interest coverage through September 2004, as compared to the
original agreement. In order to receive these amended ratios, the amended
agreement provides for an interest rate increase of 0.75% on outstanding
borrowings under the Credit Facility. The Company believes the amended
agreement will enable Concentra to meet the terms of the financial compliance
ratios for the foreseeable future. As a part of the amendment, the Company was
also required to pay a fee of $1.7 million to lenders approving the amendment.
The amendment fee will be capitalized as deferred financing costs and
amortized over the remaining life of the Credit Facility. A failure to comply
with these and other financial compliance ratios could cause an event of
default under the Credit Facility which could result in an acceleration of the
related indebtedness before the terms of that indebtedness otherwise requires
the Company to pay that indebtedness. Such an acceleration would also
constitute an event of default under the indenture relating to the 13%
Subordinated Notes and could also result in an acceleration of the 13%
Subordinated Notes before the indenture otherwise requires us to pay the
notes.
In December 1996, the Company issued $97.8 million of 6.0% Convertible
Subordinated Notes due 2001. On September 17, 1997, the Company entered into a
$100 million Senior Credit Facility with a syndicate of 5 banks. On February
23, 1998, the Company signed an amendment to expand the Company's borrowing
capacity under the Senior Credit Facility to $200 million under similar terms
and conditions in order to finance the repayment of debt associated with its
acquisition of PPS. On February 24, 1998, the Company acquired PPS and retired
$49 million of PPS' outstanding indebtedness. PPS' 5.0% Convertible
Subordinated Notes due August 2006 converted into 2,721,904 shares of CMC
common stock. In March and April 1998, the Company issued $230 million 4.5%
Convertible Subordinated Notes due 2003 and the Senior Credit Facility
borrowing capacity was reduced to the original $100 million amount. On August
17, 1999, the Senior Credit Facility was replaced with the Revolving Credit
Facility and substantially all of the 6.0% and 4.5% Convertible Subordinated
Notes were retired through debt tender offers during the year in connection
with the 1999 Merger.
(6) Financial Instruments
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 carrying amounts of cash and cash equivalents, accounts receivable,
other current assets, and accounts payable, approximate fair value because of
the short maturity of those instruments. The fair value of the Company's 6%
Convertible Subordinated Notes was $83.1 million as of December 31, 1998, and
the Company's 4.5% Convertible Subordinated Notes was $173.7 million as of
December 31, 1998. The fair value of the
F-14
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's Convertible Subordinated Notes were determined utilizing the average
of the NASDAQ's bid and ask amounts as of the 1998 year end. The fair value of
the Company's borrowings under the Credit Facility was $343.2 million, as of
December 31, 1999. The fair value of the Company's 13% Subordinated Notes was
$172.9 million at December 31, 1999. Further, the carrying amount of the
interest rate swap agreement approximates its fair value, as determined by
estimating the amount the Company would pay or receive to terminate the
interest swap agreement. The fair values of the financial instruments were
determined utilizing available market information. The use of different market
assumptions or estimation methodologies could have a material effect on the
estimated fair value amounts.
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, and regularly reviews outstanding accounts
receivable balances. 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.
(7) Income Taxes
The provision for income taxes consists of the following for the years ended
December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Current:
Federal........................................ $15,112 $11,252 $ 9,050
State.......................................... 3,968 1,369 1,811
------- ------- -------
19,080 12,621 10,861
-------
Deferred:
Federal........................................ (6,873) 5,961 (2,139)
State.......................................... (1,145) 726 (453)
------- ------- -------
(8,018) 6,687 (2,592)
------- ------- -------
Total............................................ $11,062 $19,308 $ 8,269
======= ======= =======
</TABLE>
Significant items included in deferred tax liabilities and deferred tax
assets were as follows at December 31, (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts............................ $ 5,752 $ 7,523
Accrued vacation........................................... 1,117 651
Accrued self insurance..................................... 1,220 1,666
Acquired goodwill.......................................... 1,310 1,310
Non-recurring accruals and reserves........................ 5,255 2,427
Other...................................................... 1,446 2,098
------- -------
Deferred tax assets...................................... $16,100 $15,677
======= =======
Deferred tax liabilities:
Book to tax depreciation................................... $ 2,307 $ 881
Joint venture deferred liabilities......................... 1,280 --
Goodwill, principally due to differences in amortization
periods................................................... 4,758 8,130
Accounts receivable mark-to-market......................... 1,596 1,064
Software development costs................................. 4,864 7,256
Other...................................................... 1,331 974
------- -------
Deferred tax liabilities................................. $16,136 $18,305
======= =======
</TABLE>
F-15
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the federal statutory rate to the Company's effective
tax rate was as follows for the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1997 % 1998 % 1999 %
------- ----- ------- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Tax provision at federal
statutory rate................ $ 7,372 35.0% $14,628 35.0% (6,382) (35.0)%
State taxes, net of federal
income tax benefit............ 925 4.4 1,766 4.2 (770) (4.2)%
PPS S corporation status....... (2,582) (12.3) -- -- -- --
Non-deductible goodwill........ 1,003 4.8 1,149 2.8 2,121 11.6%
Non-deductible non-recurring
charges and acquisition
costs......................... 4,064 19.3 1,815 4.3 12,893 70.7%
Other items, net............... 280 1.3 (50) (0.1) 407 2.2%
------- ----- ------- ---- ------ -----
$11,062 52.5% $19,308 46.2% $8,269 45.3%
======= ===== ======= ==== ====== =====
</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 the Company, PPS' taxable income is included in
the Company's consolidated income tax returns.
(8) Stockholders' Equity
Stockholder Rights Plan
Shortly after the 1997 Merger, on September 17, 1997, CMC's 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 CMC's common stock. Each Right entitled the registered
holder to purchase from CMC one thousandth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share (the "Junior Preferred
Shares"), of CMC 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 would be economically
equivalent to one share of CMC's common stock. The Purchase Price was expected
to be significantly higher than the trading price of the common stock.
Therefore, the dividend would have no initial value and no impact on the
consolidated financial statements of the Company. Simultaneous with the 1999
Merger, all rights under the Rights Agreement were terminated at no cost to
the Company.
(9) Commitments and Contingencies
The Company leases certain corporate office space, operating and medical
facilities, and office and medical equipment under various non-cancellable
operating and capital lease agreements. Certain facility leases require the
Company to pay increases in operating costs and real estate taxes. The Company
made rental payments of $0.7 million to Colonial Realty Trust, a real estate
company owned by a shareholder and board member of the Company until the 1999
Merger, for each of the years ended December 31, 1997, 1998, and 1999.
F-16
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a schedule of rent expense by major category for the years
ended December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Facilities......................................... $17,179 $22,307 $26,952
Office equipment................................... 2,029 3,091 3,680
Automobiles........................................ 2,976 3,647 2,754
------- ------- -------
Total rent expense................................. $22,184 $29,045 $33,386
======= ======= =======
</TABLE>
The following is a schedule of future minimum lease payments under non-
cancellable operating leases for the years ending December 31, (in thousands):
<TABLE>
<S> <C>
2000.............................................................. $ 31,680
2001.............................................................. 28,691
2002.............................................................. 25,655
2003.............................................................. 21,255
2004.............................................................. 12,957
Thereafter........................................................ 15,481
--------
$135,719
========
</TABLE>
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.
(10) 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 5 years. The Company made
matching contributions of 50% of each participant's pretax contributions up to
4% of compensation in both 1998 and 1999.
(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 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 year
F-17
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ended December 31, 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 $1.1 million, $1.5 million, and $2.7 million for
the years ended December 31, 1997, 1998, and 1999, respectively, for matching
contributions to the Concentra 401(k) and PPS 401(k) Plans.
(11) Stock Purchase Plan and Stock Option Plans
All information presented below relates to CMC stock and stock option
activity.
(a) Employee Stock Purchase Plan
Until March 2, 1999, CMC maintained an Employee Stock Purchase Plan that
permitted substantially all employees to acquire up to 500,000 shares of CMC
common stock at the end of each specified period at a purchase price of 85% of
the lower of the fair market value of the stock on the first or last business
day of the purchase period. Purchase 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, CMC terminated the Employee Stock Purchase Plan. The final
period for which participating employees acquired shares of CMC's common stock
began on January 1, 1999 and ended March 2, 1999.
CMC issued the following shares of common stock under the employee stock
purchase plans for each of the following purchase periods:
<TABLE>
<CAPTION>
Weighted
Number Average Price
Purchase Periods Ended of Shares Per Share
---------------------- --------- -------------
<S> <C> <C>
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
March 2, 1999........................................ 63,358 $ 8.55
</TABLE>
(b) Concentra 1997 Long-Term Incentive Plan
CMC historically has granted awards with respect to shares under CMC's 1997
Long-term Incentive Plan (the "1997 Incentive Plan"). The awards under the
1997 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 CMC common stock that may be subject to outstanding
awards under the 1997 Incentive Plan at any one time is equal to ten percent
of the total number of outstanding shares of CMC common stock (treating as
outstanding all shares of CMC common stock issuable within 60 days upon
exercise of stock options or conversion or exchange of outstanding, publicly-
traded convertible or exchangeable securities of CMC) minus the total number
of shares of Common Stock subject to outstanding awards under the 1997
Incentive Plan and any future stock-based plan for employees or directors of
the Company. At December 31, 1998, CMC was authorized to award grants of
approximately 5,019,000 shares under the 1997 Incentive Plan.
F-18
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1997, the Company granted restricted stock for 357,000 shares of
Common Stock under the 1997 Incentive Plan which were valued at approximately
$9.9 million 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 $2.8 million, 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 $1.4 million 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 $0.6
million and $0.8 million, 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 CMC.
During 1999, the Company granted 10,000 options under the 1997 Incentive
Plan. There were 1,416,289 options exercised and 4,436,997 options canceled
under the 1997 Incentive Plan, primarily in connection with the 1999 Merger.
Simultaneous with the 1999 Merger, no additional awards will be made under the
1997 Incentive Plan. Only that number of shares of CMC stock issuable upon
exercise of awards granted under the 1997 Incentive Plan as of the 1999 Merger
were reserved for issuance by CMC.
(c) Concentra 1999 Long-Term Incentive Plan
Concentra's board and stockholders approved its 1999 Stock Option and
Restricted Stock Purchase Plan ("the 1999 Stock Plan") in August 1999. The
1999 Stock Plan provides for the grant of options or awards to purchase an
aggregate 3,750,000 shares of CMC common stock, either in the form of
incentive stock options qualified as such under the U.S. Federal Income Tax
Laws, nonqualified stock options or restricted stock purchase awards. The 1999
Stock Plan includes provisions for adjustment of the number of shares of
common stock available for grant of award thereunder and in the number of
shares of common stock underlying outstanding options in the event of any
stock splits, stock dividends or other relevant changes in the capitalization
of Concentra. Under the 1999 Stock Plan, employees, including officers, are
eligible to receive grants of either incentive stock options or nonqualified
stock options and restricted stock purchase awards. Non-employee directors are
eligible to be granted only nonqualified options and awards.
The exercise price of incentive stock options may not be less than 100% of
the fair market value of the shares of common stock, as determined by the
Company's board of directors or the Compensation Committee, as the case may
be, on the date the option is granted. The exercise price of non-qualified
stock options may not be less than 100% of the fair market value of the shares
of CMC common stock on the date the option is granted. In addition, the
aggregate fair market value of the shares of stock with respect to which
incentive stock options are exercisable for the first time by an optionee
during any calendar year shall not exceed $100,000. In addition, no incentive
stock option shall be granted to an optionee who owns more than 10% of the
total combined voting power for all classes of stock of CMC, unless the
exercise price is at least 110% of the fair market value of the shares of
CMC's common stock and the exercise period does not exceed 5 years.
The Company granted 698,840 options and canceled 89,961 options under the
1999 Stock Plan in 1999. Restricted stock purchase awards granted under the
1999 Stock Plan will continue in effect until August 17, 2009, unless
terminated prior to such date by the Board.
F-19
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status for all outstanding options at December 31, 1997,
1998, and 1999 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, 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
Granted.......................................... 708,840 16.43
Exercised........................................ (1,416,289) 6.13
Canceled......................................... (4,526,958) 27.11
---------- ------
Balance December 31, 1999.......................... 1,459,142 $10.60
========== ======
</TABLE>
The weighted average fair market value of options granted in 1997, 1998,
1999 were $25.89, $21.95 and $4.31, respectively. There are no exercisable
options outstanding as of December 31, 1999. A further breakdown of the
outstanding options at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Number of Average Contractual
Range of Exercise Prices Options Price Life (Years)
------------------------ --------- -------- ------------
<S> <C> <C> <C>
$0.00-$4.65................................ 188,263 $ 0.32 8.29
$8.06-$11.50............................... 662,000 8.09 8.79
$16.50..................................... 608,879 16.50 9.63
--------- ------ ----
1,459,142 $10.60 9.08
========= ====== ====
</TABLE>
(d) SFAS 123, Accounting for Stock-Based Compensation, 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 and pro forma net income
would have been reduced to the following supplemental pro forma amounts (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net income (loss):
As reported..................................... $10,000 $22,486 $(26,504)
Supplemental pro forma.......................... $ 3,612 $ 8,864 $(28,229)
</TABLE>
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 1997, 1998, and 1999 pro forma amounts include $396,000,
$509,000 and $102,000,
F-20
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1997, 1998 and 1999, respectively:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- ----
<S> <C> <C> <C>
Risk-free interest rates................................. 5.50% 5.18% 6.08%
Expected volatility...................................... 45.29% 78.91% 0.00%
Expected dividend yield.................................. -- -- --
Expected weighted average life of options in years....... 3.7 3.0 5.0
</TABLE>
(12) 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.
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 49.3%, 47.7% and 41.9% of total Managed Care
Services revenue for the years ended December 31, 1997, 1998, and 1999,
respectively.
Revenues from individual customers, revenues between business segments, and
revenues, operating profit and identifiable assets of foreign operations are
not significant.
F-21
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's Statements of Operations on a segment basis for the years
ended December 31, 1997, 1998 and 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Health Services................................ $207,676 $259,481 $330,064
Managed Care Services:
Specialized cost containment................. 142,919 183,734 204,084
Field case management........................ 138,723 167,841 147,264
-------- -------- --------
Total Managed Care Services.................. 281,642 351,575 351,348
-------- -------- --------
489,318 611,056 681,412
Gross profit margins:
Health Services................................ 52,300 58,300 64,981
Managed Care Services:
Specialized cost containment................. 42,907 60,440 66,791
Field case management........................ 21,472 23,019 15,151
-------- -------- --------
Total Managed Care Services.................. 64,379 83,459 81,942
-------- -------- --------
116,679 141,759 146,923
Operating income (1):
Health Services................................ 12,273 34,415 34,405
Managed Care Services:
Specialized cost containment................. -- -- 46,826
Field case management........................ -- -- 5,599
-------- -------- --------
Total Managed Care Services.................. 20,042 20,785 52,425
Corporate general and administrative........... -- -- 18,158
Non-recurring charges.......................... -- -- 54,419
-------- -------- --------
32,315 55,200 14,253
Interest expense................................. 12,667 18,021 35,779
Interest income.................................. (2,297) (4,659) (2,900)
Other expense, net............................... 883 44 (391)
-------- -------- --------
Income before income taxes..................... 21,062 41,794 (18,235)
Provision for income taxes....................... 11,062 19,308 8,269
-------- -------- --------
Net income (loss)................................ $ 10,000 $ 22,486 $(26,504)
======== ======== ========
</TABLE>
- --------
(1) Prior to 1999, corporate-level general and administrative expenses were
reported in the Health Services and Managed Care Services groups based on
where general and administrative activities were incurred. In addition,
general and administrative expenses for the Managed Care Groups were not
separately reported prior to 1999. Therefore, the Company did not make
allocations of corporate level and managed care level general and
administrative expenses in 1997 and 1998. Beginning in 1999, the corporate
function has been separately reported.
F-22
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's segment depreciation and amortization, capital expenditures
and identifiable assets for the years ended December 31, 1997, 1998, and 1999
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Depreciation and amortization:
Health Services................................ $ 9,162 $ 11,372 $ 18,965
Managed Care Services(2)....................... 7,376 11,552 16,277
-------- -------- --------
$ 16,538 $ 22,924 $ 35,242
======== ======== ========
Capital expenditures:
Health Services................................ $ 16,862 $ 19,235 $ 20,274
Managed Care Services(2)....................... 8,673 14,952 15,679
-------- -------- --------
$ 25,535 $ 34,187 $ 35,953
======== ======== ========
Identifiable assets:
Health Services................................ $261,521 $309,419 $386,885
Managed Care Services(2)....................... 221,012 347,375 267,219
-------- -------- --------
$482,533 $656,794 $654,104
======== ======== ========
</TABLE>
- --------
(2) Depreciation and amortization, capital expenditures and identifiable
assets is not separately reported within the Managed Care groups.
(13) Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues........................... $305,355 $372,683 $489,318 $611,056 $681,412
Gross profit....................... 62,435 82,755 116,679 141,759 146,923
Non-recurring charges(1).............. 898 964 38,625 33,114 54,419
Operating income................... 29,446 45,194 32,315 55,200 14,253
Income (loss) before taxes......... 24,246 41,476 21,062 41,794 (18,235)
Provision for income taxes......... 7,771 13,437 11,062 19,308 8,269
Net income (loss).................. $ 16,475 $ 28,039 $ 10,000 $ 22,486 $(26,504)
Balance Sheet Data:
Working capital.................... $ 21,971 $116,439 $ 36,754 $201,870 $102,370
Total assets....................... 188,530 367,900 482,533 656,794 654,104
Total debt......................... 34,639 142,229 206,600 327,925 567,747
Total stockholders' equity
(deficit)......................... 109,383 178,146 206,441 239,875 (39,273)
</TABLE>
- --------
(1) See Note 4, Recent Acquisitions and Non-recurring Charges.
F-23
<PAGE>
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(14) Selected Quarterly Operating Results (Unaudited)
The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters in the period ended December 31,
1999. 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. Amounts are stated in
thousands.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------
March
31, June 30, September 30, December 31,
1999 1999 1999 1999
-------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue.......................... $155,411 $174,088 $176,658 $175,255
Cost of services................. 123,737 130,204 138,988 141,560
-------- -------- -------- --------
Gross profit................... 31,674 43,884 37,670 33,695
General and administrative
expenses........................ 14,420 16,841 15,957 18,073
Amortization..................... 3,038 3,115 3,342 3,465
Non-recurring charge............. -- -- 54,419 --
-------- -------- -------- --------
Operating income (loss)........ 14,216 23,928 (36,048) 12,157
Other expense, net............... 3,663 3,882 9,198 15,745
Provision (benefit) for income
taxes........................... 4,485 8,520 (3,176) (1,560)
-------- -------- -------- --------
Net income (loss)................ $ 6,068 $ 11,526 $(42,070) $ (2,028)
======== ======== ======== ========
<CAPTION>
Quarter Ended
--------------------------------------------
March
31, June 30, September 30, December 31,
1998 1998 1998 1998
-------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue.......................... $144,282 $157,501 $157,362 $151,911
Cost of services................. 109,898 116,633 118,660 124,106
-------- -------- -------- --------
Gross profit................... 34,384 40,868 38,702 27,805
General and administrative
expenses........................ 10,645 11,228 11,851 11,602
Amortization..................... 2,015 2,036 2,051 2,017
Non-recurring charge............. 12,600 -- -- 20,514
-------- -------- -------- --------
Operating income (loss)........ 9,124 27,604 24,800 (6,328)
Other expense, net............... 3,710 3,207 3,355 3,134
Provision (benefit) for income
taxes........................... 4,567 10,236 9,000 (4,495)
-------- -------- -------- --------
Net income (loss)................ $ 847 $ 14,161 $ 12,445 $ (4,967)
======== ======== ======== ========
</TABLE>
F-24
<PAGE>
Supplemental Schedule II
CONCENTRA MANAGED CARE, INC.
Valuation and Qualifying Accounts
For the Years Ended December 31, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Beginning Charged Net Deductions Ending
Balance To Income Acquisitions From Reserves Balance
--------- --------- ------------ -------------- -------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
1997.................. $ 9,978 $ 8,890 $7,797 $ 9,942 $16,723
1998.................. 16,723 12,869 1,968 14,350 17,210
1999.................. 17,210 16,101 3,129 16,997 19,443
Contractual Allowances
1997.................. $ 1,653 $14,718 $ -- $12,743 $ 3,628
1998.................. 3,628 16,095 -- 15,073 4,650
1999.................. 4,650 27,757 472 23,799 9,080
</TABLE>
Non-recurring charge breakout by major category was as follows (in
thousands):
<TABLE>
<CAPTION>
Professional Facility Personnel
Fees Consolidations Related Other Total
------------ -------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance December 31,
1996................... $ -- $ -- $ -- $ -- $ --
Provision--Q3 97
Charge............... 11,569 5,945 16,216 4,895 38,625
Usage--Q3 97 Charge... (9,155) (5,476) (11,803) (4,664) (31,098)
-------- ------- -------- -------- --------
Balance December 31,
1997................... 2,414 469 4,413 231 7,527
1998 Provision:
Q1 98 Charge.......... 5,200 2,100 2,400 2,900 12,600
Q4 98 Charge.......... -- 5,836 3,817 10,861 20,514
-------- ------- -------- -------- --------
Total 1998 Provision.... 5,200 7,936 6,217 13,761 33,114
-------- ------- -------- -------- --------
1998 Usage:
Q3 97 Charge.......... (2,414) (469) (4,413) (231) (7,527)
Q1 98 Charge.......... (5,136) (746) (2,355) (2,891) (11,128)
Q4 98 Charge.......... -- (1,140) (2,490) (7,416) (11,046)
-------- ------- -------- -------- --------
Total 1998 Usage........ (7,550) (2,355) (9,258) (10,538) (29,701)
-------- ------- -------- -------- --------
Balance December 31,
1998................... 64 6,050 1,372 3,454 10,940
1999 Provision:
Q3 1999 Charge........ 29,334 1,795 21,574 1,716 54,419
1999 Usage:
Q1 98 Charge.......... (473) (39) (326) (187) (1,025)
Q1 98 Charge - Change
in Estimates......... 434 (966) 281 251 --
Q4 98 Charge.......... -- (3,285) (1,225) (1,446) (5,956)
Q3 99 Charge.......... (28,405) -- (21,524) (1,758) (51,687)
-------- ------- -------- -------- --------
Total 1999 Usage........ (26,790) (4,290) (22,794) (3,140) (58,668)
-------- ------- -------- -------- --------
Balance December 31,
1999................... $ 954 $ 3,555 $ 152 $ 2,030 $ 6,691
======== ======= ======== ======== ========
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Concentra Operating Corporation:
We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements of Concentra Operating Corporation
and have issued our report thereon dated March 21, 2000. 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
March 21, 2000
S-2
<PAGE>
INDEX TO EXHIBITS
INCORPORATION BY REFERENCE
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization dated August 29, 1997, among CRA
Managed Care, Inc. and OccuSystems, Inc. and the Registrant
(incorporated by reference as Exhibit 2.1 to CMC's Annual Report on
Form 10-K for the year ended December 31, 1997).
2.2 Agreement and Plan of Merger dated February 24, 1998, among Concentra
Managed Care, Inc. ("CMC") and Preferred Payment Systems, Inc.
(incorporated by reference to Exhibit 2.2 to CMC's Annual Report on
Form 10-K for the year ended December 31, 1997).
2.3 Agreement and Plan of Merger dated March 2, 1999, between Yankee
Acquisition Corp. and CMC (incorporated by reference to Exhibit 2.1
to CMC's Current Report on Form 8-K filed on March 3, 1999).
2.4 Amended and Restated Agreement and Plan of Merger dated March 24,
1999, between Yankee Acquisition Corp. and CMC (incorporated by
reference to Exhibit 2.1 to CMC's Current Report on Form 8-K filed
on July 14, 1999).
*3.1 Articles of Incorporation of Concentra Operating Corporation ("COC").
*3.2 Amended and Restated By-Laws of COC.
*3.3 Articles of Incorporation of Concentra Management Services, Inc.
*3.4 Amended and Restated By-Laws of Concentra Management Services, Inc.
*3.5 Amended and Restated Certificate of Incorporation of Concentra
Preferred Systems, Inc.
*3.6 Amended and Restated By-Laws of Concentra Preferred Systems, Inc.
*3.7 Amended and Restated Certificate of Incorporation of Prompt
Associates, Inc.
*3.8 Amended and Restated By-Laws of Prompt Associates, Inc.
*3.9 Amended and Restated Certificate of Incorporation of First Notice
Systems, Inc.
*3.10 Amended and Restated By-Laws of First Notice Systems, Inc.
*3.11 Amended and Restated Charter of Focus Healthcare Management, Inc.
*3.12 Amended and Restated By-Laws of Focus Healthcare Management, Inc.
*3.13 Amended and Restated Articles of Incorporation of CRA Managed Care of
Washington, Inc.
*3.14 Amended and Restated By-Laws of CRA Managed Care of Washington, Inc.
*3.15 Articles of Incorporation of CRA-MCO, Inc.
*3.16 Amended and Restated By-Laws of CRA-MCO, Inc.
*3.17 Amended and Restated Articles of Incorporation of Drug-Free
Consortium, Inc.
*3.18 Amended and Restated By-Laws of Drug-Free Consortium, Inc.
*3.19 Articles of Organization of Concentra Managed Care Services, Inc.
*3.20 Amended and Restated By-Laws of Concentra Managed Care Services, Inc.
*3.21 Amended and Restated Articles of Incorporation of Concentra Health
Services, Inc.
*3.22 Amended and Restated By-Laws of Concentra Health Services, Inc.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
*3.23 Agreement and Declaration of Trust of Concentra Managed Care Business
Trust.
*3.24 Agreement of Limited Partnership of OccuCenters I, L.P.
*3.25 Amended and Restated Articles of Incorporation of OCI Holdings, Inc.
*3.26 Amended and Restated By-Laws of OCI Holdings, Inc.
*3.27 Amended and Restated Articles of Incorporation of Hillman Consulting,
Inc.
*3.28 Amended and Restated By-Laws of Hillman Consulting, Inc.
*4.1 Indenture dated as of August 17, 1999, between COC and United States
Trust Company of New York, as Trustee, relating to the 13% Senior
Subordinated Notes due 2009.
*4.2 Indenture dated as of August 17, 1999, between CMC and United States
Trust Company of New York, as Trustee, relating to the 14% Senior
Discount Debentures due 2010.
4.3 Indenture dated as of December 24, 1996, between OccuSystems, Inc.
("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 filed on January
31, 1997).
4.4 First Supplemental Indenture dated as of August 29, 1997, between
OccuSystems, CMC and United States Trust Company of New York, as
Trustee, relating to the 6% Convertible Subordinated Notes due 2001
(incorporated by reference to Exhibit 4.2 to CMC's Annual Report on
Form 10-K for the year ended December 31, 1997).
*4.5 Second Supplemental Indenture dated as of August 17, 1999, between CMC
and United States Trust Company of New York, as Trustee, relating to
the 6% Convertible Subordinated Notes due 2001.
4.6 Indenture dated as of March 16, 1998, between CMC and ChaseBank of
Texas, N.A., as Trustee, (the "Concentra Indenture") relating to the
4.5% Convertible Subordinated Notes due 2003 (incorporated by
reference to Exhibit 4.1 to CMC's Current Report on Form 8-K filed on
March 30, 1998).
*4.7 First Supplemental Indenture dated as of August 17, 1999, between CMC
and Chase Bank of Texas, N.A., as Trustee, relating to the 4.5%
Convertible Subordinated Notes due 2003.
*4.8 Warrant Agreement dated as of August 17, 1999, by and among CMC and the
several persons named on Schedule I thereto.
4.9 Form of 13% Series B Senior Subordinated Notes due 2009 of COC
(included in Exhibit 4.1).
4.10 Form of 14% Senior Discount Debentures due 2010 of CMC (included in
Exhibit 4.2).
4.11 Form of 6% Convertible Subordinated Notes due 2001 of CMC (included in
Exhibit 4.3).
4.12 Form of 4.5% Convertible Subordinated Notes due 2003 of CMC (included
in Exhibit 4.4).
4.13 Form of Warrant to acquire CMC common stock (included in Exhibit 4.8).
*4.14 Registration Rights Agreement dated as of August 17, 1999 by and among
COC, the Guarantors set forth on the signature pages thereof, and
Donaldson, Lufkin & Jenrette Securities Corporation, Chase Securities,
Inc., Credit Suisse First Boston Corporation, Deutsche Bank
Securities, Inc. and Fleet Securities, Inc., as initial purchasers.
*4.15 Registration Rights Agreement dated as of August 17, 1999 by and among
CMC, and the persons named in Schedules I and II thereto.
*10.1 Purchase Agreement dated August 17, 1999, by and among COC, the
Guarantors set forth on the signature pages thereof, and Donaldson,
Lufkin & Jenrette Securities Corporation, Chase Securities, Inc.,
Credit Suisse First Boston Corporation, Deutsche Bank Securities, Inc.
and Fleet Securities, Inc., as initial purchasers, relating to the
issuance and sale of $190,000,000 aggregate principal amount of COC's
13% Senior Subordinated Notes due 2009, Series A.
</TABLE>
2
<PAGE>
<TABLE>
<C> <S>
*10.2 Credit Agreement dated as of August 17, 1999, among CMC, COC, the
Several Lenders from time to time parties thereto, The Chase
Manhattan Bank, as Administrative Agent, Credit Suisse First Boston
and Fleet National Bank, as Co-Documentation Agents, and DLJ
Capital Funding, Inc., as Syndication Agent.
**10.3 Credit Facility Agreement dated as of August 17, 1999, by and among
CMC, COC, the Several Lenders from time to time parties thereto,
The Chase Manhattan Bank, as Administrative Agent, Credit Suisse
First Boston and Fleet National Bank, as co-Documentation Agents
and DLJ Capital Funding, Inc., as Syndication Agent, Amended and
Restated as of March 21, 2000.
*10.4 Purchase Agreement dated August 17, 1999, by and among CMC and the
several persons named on Schedule I thereto, relating to the
issuance and sale of $110,000,000 aggregate face amount of CMC's
14% Senior Discount Debentures due 2010 and Warrants to acquire CMC
common stock.
++*10.5 Concentra Managed Care, Inc. 1999 Stock Option and Restricted Stock
Purchase Plan.
++10.6 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 CMC's Registration Statement
on Form S-4 filed on July 31, 1997).
++10.7 CRA Managed Care, Inc. ("CRA") 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 filed 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 filed on March 17,
1995).
++10.9 OccuSystems, Inc. 1995 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.10 to OccuSystems' Registration Statement
on Form S-1 filed 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
OccuSystems' Registration Statement on Form S-1 filed on May 8,
1995).
++*10.11 Employment Agreement dated as of August 17, 1999, between CMC and W.
Tom Fogarty.
++*10.12 Employment Agreement dated as of August 17, 1999, between CMC and
James M. Greenwood.
++*10.13 Employment Agreement dated as of August 17, 1999, between CMC and
Richard A. Parr II.
++*10.14 Employment Agreement dated as of August 17, 1999, between CMC and
Daniel J. Thomas.
++*10.15 Employment Agreement dated as of August 17, 1999, between CMC and
Thomas E. Kiraly.
++**10.16 Employment Agreement dated as of December 7, 1999, between CMC and
Bradley T. Harslem.
10.17 Indemnification Agreement dated as of September 17, 1997, between
CMC and Daniel J. Thomas (identical agreements were executed
between CMC 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. Conrades, Robert A. Ortenzio, Lois E.
Silverman, Paul B. Queally, John K. Carlyle) (incorporated by
reference to Exhibit 10.17 to CMC's Annual Report on Form 10-K for
the year ended December 31, 1997).
10.18 Indemnification Agreement dated as of May 13, 1998, between CMC and
Hon. Willis D. Gradison, Jr. (identical agreements executed between
CMC and Stephen Read (dated December 16, 1997), Richard D. Rehm,
M.D. (dated May 13, 1998), Eliseo Ruiz III (dated May 11, 1998),
Scott Henault (dated September 17, 1997), Darla Walls (dated
December 16, 1997), Jeffrey R. Luber (dated December 16, 1997) and
Martha Kuppens (dated December 16, 1997)) (incorporated by
reference to Exhibit 10.3 to CMC's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998).
</TABLE>
3
<PAGE>
<TABLE>
<C> <S>
**10.19 Software License Agreement dated as of February 10, 1995, between CRA
and CompReview, Inc. (confidential treatment granted).
10.20 Occupational Medicine Center Management and Consulting Agreement dated
as of 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 OccuSystems' Annual Report on Form 10-K
for the year ended December 31, 1995).
10.21 Occupational Medicine Center Management and Consulting Agreement dated
as of December 31, 1993, between CHS and Occupational Health Centers
of Southwest, P.A., an Arizona professional association (incorporated
by reference to Exhibit 10.7 to OccuSystems' Annual Report on Form
10-K for the year ended December 31, 1995).
10.22 Occupational Medicine Center Management and Consulting Agreement dated
as of 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 filed on March 28, 1996).
*10.23 Stockholders Agreement dated as of August 17, 1999 by and among CMC
and the several persons named in Schedules I and II thereto.
*10.24 Registration Rights Agreement dated as of August 17, 1999 by and among
CMC and the several persons named in Schedules I and II thereto.
**12.1 Statements re Computation of Ratios (included in the financial
statements of COC).
**21.1 Subsidiaries of COC.
**27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference to the Registrants' Registration Statement on Form
S-4, initially filed on November 12, 1999.
** Filed herewith.
++ Indicates that Exhibit is a management contract or compensatory plan or
arrangement.
4
<PAGE>
EXHIBIT 10.3
$475,000,000
AMENDED AND RESTATED CREDIT AGREEMENT
among
CONCENTRA MANAGED CARE, INC.
as Holdings,
CONCENTRA OPERATING CORPORATION,
as Borrower,
The Several Lenders
from Time to Time Parties Hereto,
THE CHASE MANHATTAN BANK,
as Administrative Agent,
CREDIT SUISSE FIRST BOSTON
and
FLEET NATIONAL BANK,
as Co-Documentation Agents,
and
DLJ CAPITAL FUNDING, INC.,
as Syndication Agent,
Dated as of March 21, 2000
CHASE SECURITIES INC.
and
DLJ CAPITAL FUNDING, INC.,
as Co-Lead Arrangers and Joint Book Managers
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT, dated as of March 21, 2000
(this "Amendment"), to the Credit Agreement, dated as of August 17, 1999 (the
---------
"Credit Agreement"), among CONCENTRA MANAGED CARE, INC., a Delaware corporation
- -----------------
("Holdings"), CONCENTRA OPERATING CORPORATION, a Nevada corporation (the
--------
"Borrower"), the several banks and other financial institutions or entities from
--------
time to time parties to the Credit Agreement (the "Lenders"), THE CHASE
-------
MANHATTAN BANK, as administrative agent (the "Administrative Agent"), CREDIT
--------------------
SUISSE FIRST BOSTON and FLEET NATIONAL BANK, as co-documentation agents (the
"Co-Documentation Agents"), and DLJ CAPITAL FUNDING, INC., as syndication agent
- ------------------------
(the "Syndication Agent").
-----------------
W I T N E S S E T H:
-------------------
WHEREAS, the Borrower, the Lenders, the Administrative Agent, the
Co-Documentation Agents and the Syndication Agent are parties to the Credit
Agreement;
WHEREAS, the Borrower has requested that the Lenders amend and restate
certain provisions contained in the Credit Agreement as set forth herein; and
WHEREAS, the Required Lenders have consented to the requested
amendments to, and restatements of, the Credit Agreement on and subject to the
terms and conditions as set forth herein.
NOW THEREFORE, in consideration of the foregoing premises and for
other good and valuable consideration the receipt and sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as follows:
I. Definitions. Unless otherwise defined herein, terms defined in the Credit
-----------
Agreement are used herein as therein defined.
II. Amendment and Restatement. The parties hereto agree that the Credit
-------------------------
Agreement shall be amended and restated by incorporating the Credit Agreement by
reference herein and amending and restating it as expressly set forth below:
A. Amendments to Section 1 (Definitions).
-------------------------------------
1. Section 1.1 of the Credit Agreement is hereby amended by adding in their
proper alphabetical order the following definitions:
"Amendment Effective Date": the date on which each of the conditions
-------------------------
precedent set forth in the Amendment shall have been satisfied or waived.
<PAGE>
"Amendment": the Amended and Restated Credit Agreement, dated as of
---------
March 21, 2000, among Holdings, the Borrower, the Required Lenders, the
Administrative Agent, the Co-Documentation Agents and the Syndication Agent, to
amend and restate certain provisions contained in the Credit Agreement, dated as
of August 17, 1999, among Holdings, the Borrower, the Lenders, the
Administrative Agent, the Co-Documentation Agents and the Syndication Agent.
1. Section 1.1 of the Credit Agreement is hereby amended by deleting in its
entirety the definitions of "Applicable Margin", "Permitted Acquisition",
"Pricing Grid" and substituting in lieu thereof, respectively, the following
definitions in the proper alphabetical order:
"Applicable Margin": (a) Prior to the Amendment Effective Date, for
-----------------
each Type of Loan, the rate per annum set forth under the relevant column
heading below:
ABR Loans Eurodollar Loans
--------- ----------------
Revolving Loans 1.75% 2.75%
Tranche B Term Loans 2.25% 3.25%
Tranche C Term Loans 2.50% 3.50%
; provided, that on and after the first Adjustment Date occurring after the
completion of four full fiscal quarters of the Borrower after the Closing Date,
the Applicable Margin with respect to Revolving Loans will be determined
pursuant to the Pricing Grid.
(b) On and after the Amendment Effective Date, for each Type of Loan,
the rate per annum set forth under the relevant column heading below:
ABR Loans Eurodollar Loans
--------- ----------------
Revolving Loans 2.50% 3.50%
Tranche B Term Loans 3.00% 4.00%
Tranche C Term Loans 3.25% 4.25%
; provided, that on and after the first Adjustment Date occurring after the
completion of four full fiscal quarters of the Borrower after the Closing Date,
the Applicable Margin with respect to Revolving Loans will be determined
pursuant to the Pricing Grid.
"Permitted Acquisition": any acquisition by the Borrower or a
---------------------
Subsidiary of all or substantially all of the assets of, or all the Capital
Stock of, a Person or division or line of business of a Person if, immediately
after giving effect thereto, (a) no Default or Event of Default has occurred
and is continuing or would result therefrom, (b) all transactions related
thereto are consummated in accordance with applicable laws, except where any
non-compliance could not, singly or in the aggregate, reasonably be expected to
have a Material Adverse Effect, (c) all of the Capital Stock in each Subsidiary
formed for the purpose of or resulting from such acquisition shall be owned
directly by the Borrower or a Subsidiary of the Borrower and all actions
required to be taken with respect to such acquired or newly created Subsidiary
under Section 6.10 have been taken, (d) the Borrower and its Subsidiaries are in
compliance, on a pro forma basis as at the end of the last fiscal quarter of the
Borrower for which financial statements are available after giving effect to
such acquisition, with the covenants contained in Section 7.1 calculated as at
the last day of the most recently ended fiscal quarter of the Borrower for which
financial statements are available, as if such acquisition (and any related
incurrence or repayment of Indebtedness,
<PAGE>
with any new Indebtedness being deemed amortized over the applicable testing
period in accordance with its terms, and with any Revolving Loans borrowed in
connection with such acquisition being deemed to be repaid with excess cash
balances as available) had occurred on the first day of each relevant period for
testing such compliance (provided, that, with respect to determining the
--------
compliance by the Borrower and its Subsidiaries with the covenant for
Consolidated Leverage Ratio set forth in Section 7.1(a), each such ratio for the
respective fiscal quarter set forth therein shall be deemed to have been
decreased by 0.25, provided, further, that such decrease shall not apply in the
-------- -------
event the Consolidated Leverage Ratio is at or less than 3.00 to 1.00) and (e)
the Borrower has delivered to the Administrative Agent an officers' certificate
to the effect set forth in clauses (a), (b), (c) and (d) above, together with
all relevant financial information for the Person or assets to be acquired.
"Pricing Grid": the pricing grid attached to Amendment as Annex A.
B. Amendment to Section 4 (Representations and Warranties). Section 4.2 of the
Credit Agreement is hereby amended by adding immediately before the period at
the end of such section the following phrase:", except as disclosed to the
Administrative Agent and the Lenders on or prior to March 1, 2000".
C. Amendment to Section 6 (Affirmative Covenants). Section 6.1 of the Credit
Agreement is hereby amended by (i) deleting the word "and" at the end of clause
(ii) of paragraph (a) of said Section, (ii) deleting the period at the end of
clause (ii) of paragraph (b) of said Section and substituting in lieu thereof";
and" and (iii) adding the following paragraph immediately after the word "and"
at the end of clause (ii) of paragraph (b) of said Section:
"(c) prior to an IPO, as soon as available, but in any event not
later than 50 days after the end of each month occurring during each
fiscal year (other than the third, sixth, ninth and twelfth such month)
beginning as of April 1, 2000:
(i) of the Borrower, a copy of (A) the unaudited consolidated
balance sheets of the Borrower and its consolidated Subsidiaries as
at the end of such month and the related unaudited consolidated
statements of income and of cash flows for such month and the portion
of the fiscal year through the end of such month, and (B) the
unaudited consolidating statements of income of the Borrower for such
month and the portion of the fiscal year through the end of such
month (calculated on a business unit basis), setting forth in each
case in comparative form the figures for the previous year, certified
by a Responsible Officer as being fairly stated in all material
respects (subject to normal year-end audit adjustments and the
absence of notes thereto); and
(ii) of Holdings, a copy of the unaudited consolidated balance sheets
of Holdings and its consolidated Subsidiaries as at the end of such
month and the related unaudited consolidated statements of income and
of cash flows for such month and the portion of the fiscal year
through the end of such month, setting forth in comparative form the
figures for the previous year, certified by a Responsible
<PAGE>
Officer as being fairly stated in all material respects (s ubject to
normal year-end audit adjustments and the absence of notes thereto)."
D. Amendments to Section 7 (Negative Covenants).
--------------------------------------------
1. Section 7.1(a) of the Credit Agreement is hereby amended by deleting the
table set forth therein in its entirety and substituting in lieu thereof the
following table:
Consolidated
Fiscal Quarter Leverage Ratio
-------------- --------------
March 31, 2000 5.85 to 1.00
June 30, 2000 5.80 to 1.00
September 30, 2000 5.70 to 1.00
December 31, 2000 5.30 to 1.00
March 31, 2001 5.30 to 1.00
June 30, 2001 5.00 to 1.00
September 30, 2001 5.00 to 1.00
December 31, 2001 4.75 to 1.00
March 31, 2002 4.50 to 1.00
June 30, 2002 4.25 to 1.00
September 30, 2002 4.00 to 1.00
December 31, 2002 3.75 to 1.00
March 31, 2003 3.75 to 1.00
June 30, 2003 3.50 to 1.00
September 30, 2003 3.25 to 1.00
December 31, 2003 3.00 to 1.00
Each Quarter thereafter
2004-2008 3:00 to 1:00
2. Section 7.1(b) of the Credit Agreement is hereby amended by deleting the
table set forth therein in its entirety and substituting in lieu thereof the
following table:
Consolidated Interest
Fiscal Quarter Coverage Ratio
-------------- --------------
March 31, 2000 1.50 to 1.00
June 30, 2000 1.50 to 1.00
September 30, 2000 1.50 to 1.00
December 31, 2000 1.50 to 1.00
March 31, 2001 1.50 to 1.00
June 30, 2001 1.50 to 1.00
September 30, 2001 1.75 to 1.00
December 31, 2001 1.75 to 1.00
March 31, 2002 1.75 to 1.00
June 30, 2002 2.00 to 1.00
September 30, 2002 2.00 to 1.00
<PAGE>
December 31, 2002 2.25 to 1.00
March 31, 2003 2.25 to 1.00
June 30, 2003 2.50 to 1.00
September 30, 2003 2.75 to 1.00
December 31, 2003 3.00 to 1.00
March 31, 2004 3.00 to 1.00
June 30, 2004 3.25 to 1.00
September 30, 2004 3.50 to 1.00
December 31, 2004 4.00 to 1.00
Each Quarter thereafter 4.00 to 1.00
2005-2008
3. Section 7.7 of the Credit Agreement is hereby amended by deleting said
Section in its entirety and substituting in lieu thereof the following:
7.7 Capital Expenditures. Make or commit to make any Capital Expenditure
--------------------
Expenditure, except (a) Maintenance Capital Expenditures of the Borrower and its
Subsidiaries not exceeding the amount set forth opposite each of the fiscal
years set forth below:
Maintenance
Fiscal Year Capital Expenditures
----------- --------------------
2000 $32,500,000
2001 $37,500,000
2002 $42,500,000
2003 $50,000,000
2004 $55,000,000
2005 $60,000,000
2006 $65,000,000
2007 $70,000,000
2008 $75,000,000
; provided, that in the event Consolidated Leverage Ratios for the Borrower and
--------
its Subsidiaries shall not exceed the respective Consolidated Leverage Ratios as
originally set forth in Section 7.1(a) of this Agreement prior to the
effectiveness of the Amendment for four consecutive fiscal quarters, which
ratios are as set forth below for each relevant fiscal quarter:
Consolidated
Fiscal Quarter Leverage Ratio
-------------- --------------
March 31, 2000 5.25 to 1.00
June 30, 2000 5.00 to 1.00
September 30, 2000 4.75 to 1.00
December 31, 2000 4.50 to 1.00
March 31, 2001 4.25 to 1.00
June 30, 2001 4.25 to 1.00
<PAGE>
September 30, 2001 4.00 to 1.00
December 31, 2001 3.75 to 1.00
March 31, 2002 3.50 to 1.00
June 30, 2002 3.50 to 1.00
September 30, 2002 3.25 to 1.00
December 31, 2002 3.25 to 1.00
Each Quarter thereafter
2003-2008 3.00 to 1.00
, then the Maintenance Capital Expenditures of the Borrower and its Subsidiaries
shall be permitted to be of amounts up to but not exceeding the Maintenance
Capital Expenditures as originally set forth in Section 7.7 of this Agreement
prior to the effectiveness of the Amendment, each of which amounts is as set
forth below for each relevant fiscal year:
Maintenance
Fiscal Year Capital Expenditures
----------- --------------------
2000 $50,000,000
2001 $55,000,000
2002 $55,000,000
2003 $60,000,000
2004 $60,000,000
2005 $70,000,000
2006 $70,000,000
2007 $80,000,000
2008 $90,000,000
; provided, further, in any event, that up to 50% of each such applicable amount
-------- -------
set forth above in this Section 7.7, if not expended in the fiscal year for
which it is permitted, may be carried over for expenditure in the next
succeeding fiscal year, and (b) Acquisition Capital Expenditures of the Borrower
and its Subsidiaries as permitted pursuant to Section 7.8A.
4. Section 7.8A of the Credit Agreement is hereby amended by deleting
said Section in its entirety and substituting in lieu thereof the following:
7.8A Acquisitions. Make or commit to make any Acquisition Capital
------------
Expenditures or purchase any assets constituting a business unit of, or the
Capital Stock of, any Person, or make any investment in or loan or advance to
any Permitted Joint Venture except for Acquisition Capital Expenditures,
Permitted Acquisitions and investments in Permitted Joint Ventures involving the
expenditure (including the principal amount of any Indebtedness incurred or
assumed in connection with the same, the continuing Indebtedness of any acquired
Person outstanding at any time of its Permitted Acquisition and the fair market
value of any other non-cash consideration, but excluding common stock issued by
Holdings as well as the proceeds received from the issuance of common stock of
Holdings to the existing stockholders of Holdings or to the Sponsor in
connection with the financing of Permitted Acquisitions, which proceeds may be
used by the Borrower or its Subsidiaries for Permitted Acquisitions independent
of the limits set forth in this Section 7.8A) in an aggregate amount not to
exceed $20,000,000 in the fiscal year ending 2000, $22,500,000 in the fiscal
year ending 2001, $25,000,000 in the fiscal year ending 2002, and $30,000,000 in
each fiscal year thereafter, (which amount shall include a maximum of up to
$10,000,000 in each fiscal year which may be used for investments in new
<PAGE>
Permitted Joint Ventures formed or acquired after the Closing Date or the
contribution of cash to existing Permitted Joint Ventures); provided, however,
-------- -------
that in the event Consolidated Leverage Ratios for the Borrower and its
Subsidiaries shall not exceed the respective Consolidated Leverage Ratios as
originally set forth in Section 7.1(a) of this Agreement prior to the
effectiveness of the Amendment for four consecutive fiscal quarters, then the
amount of Acquisition Capital Expenditures, Permitted Acquisitions and
investments in Permitted Joint Ventures permitted hereunder shall not exceed
such amounts as originally set forth in Section 7.8A of this Agreement prior to
the effectiveness of the Amendment, which shall be an aggregate amount not to
exceed $30,000,000 in each fiscal year (which amount shall include a maximum of
up to $10,000,000 in each fiscal year which may be used for investments in new
Permitted Joint Ventures formed or acquired after the Closing Date or the
contribution of cash to existing Permitted Joint Ventures); provided, further,
-------- -------
however, that immediately after giving effect to any such Acquisition Capital
- -------
Expenditure, Permitted Acquisition or investments in a Permitted Joint Venture,
(a) no Default or Event of Default shall have occurred and be continuing, and
(b) the Borrower and its Subsidiaries shall be in compliance, on a pro forma
basis as at the end of the last fiscal quarter of the Borrower for which
financial statements are available after giving effect thereto, with the
covenants contained in Section 7.1 calculated as at the last day of the most
recently ended fiscal quarter of the Borrower for which financial statements are
available, as if such transaction (and any related incurrence or repayment of
Indebtedness, with any new Indebtedness being deemed amortized over the
applicable testing period in accordance with its terms, and with any Revolving
Loans borrowed in connection with such acquisition being deemed to be repaid
with excess cash balances as available) had occurred on the first day of each
relevant period for testing such compliance (provided, that, with respect to
--------
determining the compliance by the Borrower and its Subsidiaries with the
covenant for Consolidated Leverage Ratio set forth in Section 7.1(a), each such
ratio for the respective fiscal quarter set forth therein shall be deemed to
have been decreased by 0.25, provided, further, that such decrease shall not
-------- -------
apply in the event the Consolidated Leverage Ratio is at or less than 3.00 to
1.00). With respect to any such amount as set forth above (including the amount
allocated to investments in Permitted Joint Ventures), which is not expended in
the period or fiscal year, as the case may be, for which it is permitted, up to
50% of each such amount may be carried over for expenditure in the next
succeeding fiscal year.
III. Conditions Precedent. This Amendment shall become effective as of the date
--------------------
on which each of the conditions precedent set forth below shall have been
satisfied or waived (the date such conditions are fulfilled, the "Amendment
---------
Effective Date"):
- --------------
A. Documents.
---------
1. Holdings, the Borrower, the Administrative Agent and the Required Lenders
shall have executed and delivered this Amendment.
2. The Administrative Agent shall have received, to the extent that it has not
theretofore received, a certificate of the Secretary or Assistant Secretary of
each of Holdings and the Borrower as to the incumbency and signature of each of
the officers signing this Amendment, and any other instrument or document
delivered by Holdings and the Borrower in connection herewith, together with
evidence of the incumbency of such Secretary or Assistant Secretary.
<PAGE>
B. No Default or Event of Default. On and as of the Amendment Effective Date
------------------------------
and after giving effect to this Amendment and the transactions contemplated
hereby, no Default or Event of Default shall have occurred and be continuing.
C. Fees. The Administrative Agent shall have received (i) for the ratable
----
account of the Lenders who have executed and delivered to the Administrative
Agent this Amendment on or prior to March 17, 2000, an amendment fee in an
amount equal to 0.50% of the amount of such Lenders' Commitments and (ii) all
other fees and expenses (including the reasonable fees and expenses of legal
counsel) incurred in connection with this Amendment, which fees shall be payable
in immediately available funds on or prior to the Amendment Effective Date.
IV. General.
-------
A. Representation and Warranties. To induce the Administrative Agent and the
-----------------------------
Lenders parties hereto to enter into this Amendment, Holdings and the Borrower
hereby jointly and severally represent and warrant to the Administrative Agent
and Lenders parties hereto as of the Amendment Effective Date that:
1. Power; Authorization; Enforceable Obligations.
---------------------------------------------
a. Each of Holdings and the Borrower has the corporate power and authority, and
the legal right, to make, deliver and perform this Amendment, and to perform the
Loan Documents, to which it is a party, as amended by this Amendment, and has
taken all necessary corporate action to authorize the execution, delivery and
performance of this Amendment and the performance of such Loan Documents, as so
amended.
b. No consent or authorization of, filing with, notice to or other act by or in
respect of, any Governmental Authority or any other Person is required in
connection with the execution, delivery, performance, validity or enforceability
of this Amendment, or the Loan Documents to which it is a party, as amended by
this Amendment, except for consents, authorizations, filings and notices which
have been obtained or made and are in full force and effect.
c. This Amendment has been duly executed and delivered on behalf of Holdings
and the Borrower.
d. This Amendment and the Loan Documents to which Holdings or the Borrower is a
party, as amended by this Amendment, each, constitutes a legal, valid and
binding obligation of Holdings and the Borrower, as the case may be, enforceable
against each of Holdings and the Borrower, as the case may be, in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting
the enforcement of creditors' rights generally and by general equitable
principles (whether enforcement is sought by proceedings in equity or at law).
2. No Legal Bar. The execution, delivery and performance of this Amendment and
------------
the performance of the Loan Documents to which Holdings or the Borrower, as the
case may be, is a party, as amended by this Amendment, (a) will not violate or
conflict with any Requirement of Law or any material Contractual Obligation of
Holdings, the Borrower or any of its Subsidiaries and will not result in, or
require, the creation or imposition of any Lien on any of
<PAGE>
their respective properties or revenues pursuant to any Requirement of Law or
any such Contractual Obligation.
3. No Change. Since December 31, 1998 there has been no development or event
---------
that has had or is reasonably expected to have a Material Adverse Effect,
except as disclosed to the Administrative Agent and the Lenders on or prior to
March 1, 2000.
4. Representations and Warranties in Loan Documents. The representations and
------------------------------------------------
warranties made by each Loan Party in each Loan Document to which it is a party
and herein are true and correct on and as of the Amendment Effective Date,
before and after giving effect to the effectiveness of this Amendment, as if
made on and as of the Amendment Effective Date, except to the extent that such
representation and warranty is expressly limited by its terms to an earlier
date.
B. Continuing Effect of Loan Documents. Except as expressly amended, modified
-----------------------------------
and supplemented hereby, the provisions of the Credit Agreement and the other
Loan Documents are and shall remain in full force and effect.
C. Expenses. The Borrower agrees to pay to the Administrative Agent and the
--------
Lenders parties hereto all fees as set forth herein and to reimburse the
Administrative Agent for all of its reasonable out-of-pocket costs and expenses
incurred in connection with this Amendment and any other documents prepared in
connection herewith, including the reasonable fees and expenses of counsel.
D. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
-------------
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
E. Counterparts. This Amendment may be executed in any number of counterparts
------------
by the parties hereto, each of which counterparts when so executed shall be an
original, but all counterparts taken together shall constitute one and the same
instrument. This Amendment may be delivered by facsimile transmission of the
relevant signature pages thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective duly authorized officers as
of the day and year first above written.
CONCENTRA MANAGED CARE, INC.
By: /s/ Thomas E. Kiraly
---------------------------
Name: Thomas E. Kiraly
Title: Executive Vice President and
Chief Financial Officer
CONCENTRA OPERATING CORPORATION
By: /s/ Thomas E. Kiraly
---------------------------
Name: Thomas E. Kiraly
Title: Executive Vice President and
Chief Financial Officer
<PAGE>
THE CHASE MANHATTAN BANK,
as Administrative Agent and a Lender
By: /s/ Stephen P. Rochford
------------------------------
Name: Stephen P. Rochford
Title: Vice President
<PAGE>
DLJ CAPITAL FUNDING, INC., as Syndication Agent
and a Lender
By: /s/ Dana F. Klein
-------------------------
Name: Dana F. Klein
Title: Senior Vice President
<PAGE>
CREDIT SUISSE FIRST BOSTON, as Co-Documentation
Agent and a Lender
By: /s/ William S. Lutkins
--------------------------------
Name: William S. Lutkins
Title: Vice President
By: /s/ Thomas G. Muoio
--------------------------------
Name: Thomas G. Muoio
Title: Vice President
<PAGE>
FLEET NATIONAL BANK, as Co-Documentation Agent and
a Lender
By: /s/ Maryann S. Smith
-------------------------
Name: Maryann S. Smith
Title: Vice President
<PAGE>
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By: /s/ John G. Taylor
-----------------------------
Name: John G. Taylor
Title: Vice President
By: /s/ Robert M. Biringer
-----------------------------
Name: Robert M. Biringer
Title: Executive Vice President
<PAGE>
CANADIAN IMPERIAL BANK OF COMMERCE
By: /s/ Koren Volk
--------------------------
Name: Koren Volk
Title: Authorized Signatory
<PAGE>
CARLYLE HIGH YIELD PARTNERS, L.P.
By: /s/ Linda Pace
-------------------------
Name: Linda Pace
Title: Vice President
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ John C. Oberle
---------------------------
Name: John C. Oberle
Title: Vice President
<PAGE>
ELC (CAYMAN LTD., LENDER)
99-I
By: /s/ Joseph H. Towell
----------------------------
Name: Joseph H. Towell
Title: Senior Vice President
<PAGE>
ELC (CAYMAN LTD., LENDER)
99-II
By: /s/ Joseph H. Towell
-----------------------------------
Name: Joseph H. Towell
Title: Senior Vice President
<PAGE>
ELC (CAYMAN LTD., LENDER)
99-III
By: /s/ Joseph H. Towell
-----------------------------------
Name: Joseph H. Towell
Title: Senior Vice President
<PAGE>
PILGRIM CLO 1999-1 LTD.
By: Pilgrim Investments, Inc.,
as its investment manager
By: /s/ MICHAEL PRINCE
-----------------------------------
Name: Michael Prince, CFA
Title: Vice President
<PAGE>
KZH SHOSHONE, LLC
By: /s/ SUSAN LEE
-----------------------------------
Name: Susan Lee
Title: Authorized Agent
<PAGE>
SANKATY HIGH YIELD PARTNERS II, L.P.
By: /s/ DIANE J. EXTER
-----------------------------------
Name: Diane J. Exter
Title: Executive Vice President,
Portfolio Manager
<PAGE>
GALAXY CLO 1999-I, LTD.
By: /s/ Sabur Moini
-------------------------
Name: Sabur Moini
Title: Authorized Signatory
<PAGE>
SANKATY ADVISORS, INC. AS COLLATERAL MANAGER FOR
GREAT POINT CLO 1999-1 LTD.
By: /s/ Diane J. Exter
----------------------------------------
Name: Diane J. Exter
Title: Executive Vice President,
Portfolio Manager
<PAGE>
JACKSON NATIONAL LIFE INSURANCE
COMPANY
BY: PPM AMERICA, INC., as Attorney-in-Fact,
on behalf of JACKSON NATIONAL LIFE
INSURANCE COMPANY
By: /s/ Michael Dire
-------------------------------------
Name: Michael Dire
Title: Senior Managing Director
<PAGE>
KZH SHOSHONE, LLC
By: /s/ SUSAN LEE
--------------------------
Name: Susan Lee
Title: Authorized Agent
<PAGE>
KZH STERLING LLC
By: /s/ Susan Lee
-------------------------------
Name: Susan Lee
Title: Authorized Agent
<PAGE>
KZH SOLEIL-2 LLC
By: /s/ Susan Lee
---------------------------
Name: Susan Lee
Title: Authorized Agent
<PAGE>
MASSMUTUAL HIGH YIELD PARTNERS II LLC
By: /s/ Clifford M. Noreen
-----------------------------------
Name: Clifford M. Noreen
Title: Vice President,
HYP Management Inc.,
As Managing Member
<PAGE>
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY
By: /s/ Steven J. Katz
------------------------------
Name: Steven J. Katz
Title: Second Vice President and
Associate General Counsel
<PAGE>
PERSEUS CDO I, LIMITED
By: /s/ Steven J. Katz
-----------------------------------
Name: Steven J. Katz
Title: Second Vice President and
Associate General Counsel
Massachusetts Mutual Life
Insurance Company, As
Collateral Manager
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
By: /s/ James R. Dingler
------------------------------------
Name: James R. Dingler
Title: Director
<PAGE>
MOUNTAIN CAPITAL CLO I LTD.
By: /s/ Darren P. Riley
------------------------------
Name: Darren P. Riley
Title: Director
<PAGE>
PARIBAS
By: /s/ David I. Canavan
--------------------------------
Name: David I. Canavan
Title: Managing Director
By: /s/ Stas Byhovsky
--------------------------------
Name: Stas Byhovsky
Title: Assistant Vice President
<PAGE>
SEQUILS - PILGRIM I, LTD.
By: Pilgrim Investments, Inc.,
as its investment manager
By: /s/ Michel Prince, CFA
---------------------------------
Name: Michel Prince, CFA
Title: Vice President
<PAGE>
PILGRIM CLO 1999-1 LTD.
By: Pilgrim Investments, Inc.,
as its investment manager
By: /s/ MICHAEL PRINCE, CFA
------------------------------
Name: Michael Prince, CFA
Title: Vice President
<PAGE>
PILGRIM PRIME RATE TRUST
By: Pilgrim Investments, Inc.,
as its investment manager
By: /s/ Michel Prince, CFA
---------------------------------
Name: Michel Prince, CFA
Title: Vice President
<PAGE>
SCOTIABANC INC.
By: /s/ Carolyn A. Calloway
-------------------------------
Name: Carolyn A. Calloway
Title: Director
<PAGE>
SENIOR DEBT PORTFOLIO
By: Boston Management and Research as
Investment Advisor
By: /s/ Scott H. Page
-----------------------------
Name: Scott H. Page
Title: Vice President
<PAGE>
SOCIETE GENERALE
By: /s/ Cynthia A. Jay
--------------------------
Name: Cynthia A. Jay
Title: Managing Director
<PAGE>
SRF TRADING, INC.
By: /s/ Kelly C. Walker
------------------------------
Name: Kelly C. Walker
Title: Vice President
<PAGE>
STEIN ROE & FARNHAM CLO I LTD.
By Stein Roe Farnham Incorporated,
As Portfolio Manager
By: /s/ James R. Fellows
---------------------------------
Name: James R. Fellows
Title: Vice President
<PAGE>
STEIN ROE FLOATING RATE LIMITED
LIABILITY COMPANY
By: /s/ James R. Fellows
----------------------------------------------
Name: James R. Fellows
Title: Vice President
Stein Roe & Farnham Incorporated,
as Advisor to the Stein Roe Floating Rate
Limited Liability Company
<PAGE>
SUMMIT BANK
By: /s/ Miguel J. Medida
---------------------------
Name: Miguel J. Medida
Title: Vice President
<PAGE>
Annex A
-------
<TABLE>
<CAPTION>
PRICING GRID FOR REVOLVING CREDIT LOANS AND COMMITMENT FEES
Consolidated Leverage Ratio Applicable Margin Applicable Margin Commitment Fee
for Eurodollar for ABR Loans Rate
Loans
- ----------------------------------------------------------------------------------======================
<S> <C> <C> <C>
] 4.5 to 1.0 3.50% 2.50% 0.50%
- ----------------------------------------------------------------------------------======================
[ 4.5 to 1.0 and $ 4.0 to 1.0 3.25% 2.25% 0.50%
- ----------------------------------------------------------------------------------======================
[ 4.0 to 1.0 and $ 3.5 to 1.0 3.00% 2.00% 0.50%
- ----------------------------------------------------------------------------------======================
[ 3.5 to 1.0 2.75% 1.75% 0.375%
========================================================================================================
</TABLE>
Changes in the Applicable Margin with respect to the Revolving Loans resulting
from changes in the Consolidated Leverage Ratio shall become effective on the
date (the "Adjustment Date") on which financial statements are delivered to the
---------------
Lenders pursuant to Section 6.1 and shall remain in effect until the next change
to be effected pursuant to this paragraph. If any financial statements referred
to above are not delivered within the time periods specified above, then, until
such financial statements are delivered, the Consolidated Leverage Ratio as at
the end of the fiscal period that would have been covered thereby shall for the
purposes of this definition be deemed to be greater than 4.5 to 1.0. In
addition, at all times while an Event of Default shall have occurred and be
continuing, the Consolidated Leverage Ratio shall for the purposes of this
definition be deemed to be greater than 4.5 to 1.0. Each determination of the
Consolidated Leverage Ratio pursuant to this pricing grid shall be made with
respect to (or, in the case of Consolidated Total Debt, as at the end of) the
period of four consecutive fiscal quarters of the Borrower ending at the end of
the period covered by the relevant financial statements.
<PAGE>
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
---------------------
This Employment Agreement (this "Agreement") is made and entered into as of
the 7th day of December, 1999 (the "Effective Date"), between Concentra Managed
Care, Inc., a Delaware corporation (the "Company"), and Brad Harslem
("Executive").
WITNESSETH:
WHEREAS, Executive desires to be employed as Senior Vice President and
Chief Information Officer of the Company and the Company desires to employ
Executive in such capacity; and
WHEREAS, Executive is desirous of committing himself to serve the Company
on the terms herein provided.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements set forth below, the parties hereto agree as follows:
1. Employment and Term. The Company hereby agrees to employ Executive as
-------------------
its Senior Vice President and Chief Information Officer, and Executive hereby
agrees to accept such employment, on the terms and conditions set forth herein,
for the period commencing on the Effective Date and expiring as of 11:59 p.m. on
the anniversary of the Effective Date (unless sooner terminated as hereinafter
set forth) (the "Term"); provided, however, that commencing on such anniversary
-------- -------
date, and each anniversary of the date hereof thereafter, the Term of this
Agreement shall automatically be extended for one additional year unless at
least thirty (30) days prior to each such anniversary date, the Company or
Executive shall have given notice that it or he, as applicable, does not wish to
extend this Agreement.
2. Duties and Restrictions.
-----------------------
(a) Duties as Employee of the Company. Executive shall, subject to
---------------------------------
the supervision of the Company's Chief Executive Officer or his designee, serve
as the Company's Senior Vice President and Chief Information Officer, with all
such powers as may be set forth in the Company's Bylaws with respect to, and/or
are reasonably incident to, such officerships.
(b) Other Duties. Executive agrees to serve as requested by the
------------
Company as a director of the Company's subsidiaries and affiliates and in one or
more executive offices of any of the Company's subsidiaries and affiliates;
provided, that the Company indemnifies Executive for serving in any and all such
- --------
capacities in a manner acceptable to the Company and Executive. Executive
agrees that he shall not be entitled to receive any compensation for serving in
any capacities of the Company's subsidiaries and affiliates other than the
compensation to be paid to Executive by the Company pursuant to this Agreement.
(c) Noncompetition. Executive agrees that he will not, for a period
--------------
of one year following the termination of his employment with the Company, (1)
solicit the employment of, endeavor to entice away from the Company or its
subsidiaries or affiliates or otherwise
1
<PAGE>
interfere with any person who was an employee of or consultant to the Company or
any of its subsidiaries or affiliates during the one year period preceding such
termination, or (2) be employed by, associated with, or have any interest in,
directly or indirectly (whether as principal, director, officer, employee,
consultant, partner, stockholder, trustee, manager, or otherwise), any
occupational healthcare company or managed care company which has a principal
line of business that is directly competitive with the Company or its
subsidiaries or affiliates in any geographical area in which the Company or its
subsidiaries or affiliates engage in business at the time of such termination or
in which any of them, prior to termination of Executive's employment, evidenced
in writing its intention to engage in business. Notwithstanding the foregoing,
Executive shall not be prohibited from owning five percent or less of the
outstanding equity securities of any entity whose equity securities are listed
on a national securities exchange or publicly traded in any over-the-counter
market.
(d) Confidentiality. Executive shall not, directly or indirectly, at
---------------
any time during or following the termination of his employment with the Company,
reveal, divulge, or make known to any person or entity, or use for Executive's
personal benefit (including, without limitation, for the purpose of soliciting
business, whether or not competitive with any business of the Company or any of
its subsidiaries or affiliates), any information acquired during the course of
employment hereunder with regard to the financial, business, or other affairs of
the Company or any of its subsidiaries or affiliates (including, without
limitation, any list or record of persons or entities with which the Company or
any of its subsidiaries or affiliates has any dealings), other than (1) material
already in the public domain, (2) information of a type not considered
confidential by persons engaged in the same business or a similar business to
that conducted by the Company, or (3) material that Executive is required to
disclose under the following circumstances: (A) in the performance by Executive
of his duties and responsibilities hereunder, reasonably necessary or
appropriate disclosure to another employee of the Company or to representatives
or agents of the Company (such as independent public accountants and legal
counsel); (B) at the express direction of any authorized governmental entity;
(C) pursuant to a subpoena or other court process; (D) as otherwise required by
law or the rules, regulations, or orders of any applicable regulatory body; or
(E) as otherwise necessary, in the opinion of counsel for Executive, to be
disclosed by Executive in connection with the prosecution of any legal action or
proceeding initiated by Executive against the Company or any subsidiary or
affiliate of the Company or the defense of any legal action or proceeding
initiated against Executive in his capacity as an employee or director of the
Company or any subsidiary or affiliate of the Company. Executive shall, at any
time requested by the Company (either during or after his employment with the
Company), promptly deliver to the Company all memoranda, notes, reports, lists,
and other documents (and all copies thereof) relating to the business of the
Company or any of its subsidiaries or affiliates which he may then possess or
have under his control.
3. Compensation and Related Matters.
--------------------------------
(a) Base Salary. Executive shall receive a base salary paid by the
-----------
Company ("Base Salary") at the annual rate of Two Hundred Twenty-Five Thousand
Dollars ($225,000) during each calendar year of the Term, payable in
substantially equal monthly installments (or such other more frequent times as
executives of the Company normally are paid). In addition,
2
<PAGE>
the Company's Board of Directors or Option and Compensation Committee of the
Board of Directors shall, in good faith, consider granting increases in the Base
Salary based on such factors as Executive's performance and the growth and/or
profitability of the Company, but the Company shall have no obligation to grant
such increases in compensation.
(b) Bonus Payments. Executive shall be entitled to receive, in
--------------
addition to the Base Salary, such bonus payments, if any, as the Board of
Directors or the Option and Compensation Committee of the Board of Directors may
specify. With respect to calendar year 2000, and subject in all respects to the
Company's standard policies with respect to the earning and payment of bonus
compensation, Executive will be eligible for bonus compensation of up to fifty
percent (50%) of Base Salary based on achievement of individual and corporate
performance objectives which will be developed following the Effective Date.
(c) Expenses. During the term of his employment hereunder, Executive
--------
shall be entitled to receive prompt reimbursement for all reasonable expenses
incurred by him (in accordance with the policies and procedures established by
the Board of Directors for its senior executive officers) in performing services
hereunder, provided that Executive properly accounts therefor in accordance with
Company policy.
(d) Other Benefits. The Company shall not make any changes in any
--------------
employee benefit plans or other arrangements in effect on the date hereof or
subsequently in effect in which Executive currently or in the future
participates (including, without limitation, each pension and retirement plan,
supplemental pension and retirement plan, savings and profit sharing plan, stock
or unit ownership plan, stock or unit purchase plan, stock or unit option plan,
life insurance plan, medical insurance plan, disability plan, dental plan,
health-and-accident plan, or any other similar plan or arrangement) that would
adversely affect Executive's rights or benefits thereunder, unless such change
occurs pursuant to a program applicable to all executives of the Company and
does not result in a proportionately greater reduction in the rights of or
benefits to Executive as compared with any other executive of the Company.
Executive shall be entitled to participate in or receive benefits under any
employee benefit plan or other arrangement made available by the Company now or
in the future to its senior officers and key management employees, subject to
and on a basis consistent with the terms, conditions, and overall administration
of such plan or arrangement. Nothing paid to Executive under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the Base Salary payable to Executive pursuant to paragraph (a)
of this Section 3.
(e) Vacations. Executive shall be entitled to twenty (20) paid
---------
vacation days in each calendar year, or such additional number as may be
determined by the Board of Directors from time to time. For purposes of this
Section 3(e), weekends shall not count as vacation days and Executive shall also
be entitled to all paid holidays given by the Company to its senior officers.
(f) Perquisites. Executive shall be entitled to receive the
-----------
perquisites and fringe benefits appertaining to senior officers of the Company
in accordance with any practice established by the Board of Directors. In the
event Executive's employment hereunder is terminated (whether by Executive or
the Company) for any reason whatsoever (other than
3
<PAGE>
Executive's death), then the Company shall, at Executive's written request and
to the extent permitted by the terms of such policies and applicable law, assign
and convey to Executive any life insurance policies maintained by the Company on
the life of Executive, who shall thereafter be solely responsible, at his
election, to pay all premiums payable after such assignment and conveyance to
maintain the coverage under such policies with respect to Executive. Executive
shall not be required to pay any money or other consideration to the Company
upon such assignment and conveyance, it being acknowledged and agreed by the
parties hereto that Executive's execution and delivery hereof constitute
adequate and satisfactory consideration for such assignment and conveyance.
(g) Proration. Any payments or benefits payable to Executive
---------
hereunder in respect of any calendar year during which Executive is employed by
the Company for less than the entire year, unless otherwise provided in the
applicable plan or arrangement, shall be prorated in accordance with the number
of days in such calendar year during which he is so employed.
4. Executive's Office and Relocation.
---------------------------------
(a) Executive shall primarily perform his duties and responsibilities
hereunder at the Company's offices located at 5080 Spectrum Drive, Addison,
Texas (or at such other location within the Dallas, Texas, metropolitan area, to
which the Company may in the future relocate such principal executive offices),
except for reasonable required travel on the Company's business. If the Company
requests Executive to report for the performance of his services hereunder on a
regular or permanent basis at any location or office more than thirty-five (35)
miles from the office location described in the first sentence of this Section
4, and Executive agrees to such change, the Company shall, in accordance with
the Company's standard relocation expense reimbursement policies reimburse
Executive for reasonable relocation and moving expenses.
(b) Following the Effective Date, in accordance with the Company's
standard relocation expense reimbursement policies, the Company shall reimburse
Executive for reasonable relocation and moving expenses incurred by Executive in
relocating his home from Omaha, Nebraska, to the Dallas, Texas, metropolitan
area.
5. Termination. Executive's employment hereunder may be terminated by
-----------
the Company or Executive, as applicable, without any breach of this Agreement,
only under the following circumstances.
(a) Death. Executive's employment hereunder shall terminate upon his
-----
death.
(b) Disability. If, as a result of Executive's incapacity due to
----------
physical or mental illness, Executive shall have been unable, with reasonable
accommodation, to perform the essential functions of his duties and
responsibilities hereunder on a full time basis for one hundred eighty (180)
consecutive calendar days, and within thirty (30) days after written notice of
termination is given (which may occur before or after the end of such one
hundred eighty (180) day period) Executive shall not have returned to the
performance of his material
4
<PAGE>
managerial duties and responsibilities hereunder on a full time basis, the
Company may terminate Executive's employment hereunder.
(c) Cause. Subject to the provisions of Section 7(d), the Company may
-----
terminate Executive's employment hereunder for Cause. For purposes of this
Agreement, the Company shall have "Cause" to terminate Executive's employment
hereunder upon:
(1) Executive's willful or intentional failure to perform or gross
negligence in the performance of Executive's material duties and
responsibilities hereunder (other than any such failure resulting from
Executive's incapacity due to physical or mental illness or any such actual or
anticipated failure after the issuance of a Notice of Termination for Good
Reason (as hereinafter defined) by Executive);
(2) The commission by Executive of dishonesty or fraud of a
material nature in connection with the performance of his duties hereunder, or
willful or intentional misconduct of a material nature in connection with the
performance of his duties hereunder;
(3) The conviction of Executive, or the entering of a plea of
nolo contendere by Executive, with respect to a felony;
(4) Unprofessional or unethical conduct of a material nature by
Executive in connection with the performance of his duties hereunder as
determined in a final adjudication of any board, institution, organization or
governmental agency having any privilege or right to pass upon the conduct of
Executive;
(5) Intentional, willful, or grossly negligent conduct by
Executive which is materially detrimental to the reputation, character,
business, or standing of the Company, including, without limitation, the use by
Executive of a controlled substance; or
(6) The continued breach by Executive of any of Executive's
material obligations under this Agreement.
(d) Termination by Executive. Subject to the provisions of Section
------------------------
7(c), and at his option, Executive may terminate his employment hereunder (1)
for Good Reason, or (2) if his health should become impaired to an extent that
makes the continued performance of his duties hereunder hazardous to his
physical or mental health or his life.
For purposes of this Agreement, the termination of Executive's
employment hereunder by Executive because of the occurrence of any one or more
of the following events shall be deemed to have occurred for "Good Reason":
(A) a reduction in Executive's Base Salary or any other failure
by the Company to comply with Section 3 hereof that is not consented to or
approved by Executive;
(B) the relocation of Executive's office at which he is to
perform his duties and responsibilities hereunder to a location outside of the
Dallas-Fort Worth, Texas, metropolitan area, or a materially adverse alteration
in the office space within which Executive is
5
<PAGE>
to perform his duties and responsibilities hereunder or in the secretarial and
administrative support provided to Executive; or
(C) a failure by the Company or any subsidiary or affiliate of
the Company to comply with any other material term or provision hereof or of any
other written agreement between Executive and the Company or any such subsidiary
or affiliate.
6. Compensation Upon Termination or Failure to Renew. Executive shall be
-------------------------------------------------
entitled to the following compensation from the Company upon the termination of
his employment or upon the Company's delivery of notice pursuant to Section 1
that the Term of this Agreement shall not following any anniversary of the date
hereof be automatically extended for an additional year.
(a) Death. If Executive's employment shall be terminated by reason of
-----
his death, the Company shall pay to such person as shall have been designated in
a notice filed with the Company prior to Executive's death, or, if no such
person shall be designated, to his estate as a death benefit, his Base Salary to
the date of his death in addition to any payments Executive's spouse,
beneficiaries, or estate may be entitled to receive pursuant to any pension or
employee benefit plan or other arrangement or life insurance policy maintained
by the Company. In addition, the Company shall make payments of premiums to
continue the medical and dental insurance coverage of Executive's spouse and
children under age twenty-five (25) as in effect at and as of the date of
Executive's death (or to provide as similar coverage as possible for the same
premiums if the continuation of existing coverage is not permitted) for one (1)
year after the date of Executive's death, in each case to the extent such
coverage is available.
(b) Disability. During any period that Executive fails to perform his
----------
material managerial duties and responsibilities hereunder as a result of
incapacity due to physical or mental illness, Executive shall continue to
receive his Base Salary and any bonus payments until Executive's employment is
terminated pursuant to Section 5(b) hereof or until Executive terminates his
employment pursuant to Section 5(d)(2) hereof, whichever first occurs. After
such termination, the Company shall pay to Executive, on or before the fifth day
following the Date of Termination (as hereinafter defined) his Base Salary to
the Date of Termination. In addition, the Company shall make payments of
premiums as necessary to cause Executive and Executive's spouse and children
under age twenty-five (25) to continue to be covered by the medical and dental
insurance as in effect at and as of the Date of Termination (or to provide as
similar coverage as possible for the same premiums if the continuation of
existing coverage is not permitted) for one (1) year after the Date of
Termination, in each case to the extent such coverage is available.
(c) Cause. If Executive's employment shall be terminated for Cause,
-----
the Company shall pay Executive his Base Salary through the Date of Termination
at the rate in effect at the time Notice of Termination is given. Such payments
shall fully discharge the Company's obligations hereunder.
(d) Breach by the Company, for Good Reason, or Upon Failure to Renew.
----------------------------------------------------------------
If (1) in breach of this Agreement, the Company shall terminate Executive's
employment (it being
6
<PAGE>
understood that a purported termination of Executive's employment by the Company
pursuant to any provision of this Agreement that is disputed and finally
determined not to have been proper shall be a termination by the Company in
breach of this Agreement), or (2) Executive shall terminate his employment for
Good Reason, or (3) the Company shall give Executive notice pursuant to Section
1 prior to any anniversary of the date hereof that the Term of this Agreement
shall not be automatically extended for an additional year on any such
anniversary date, then the Company shall pay Executive:
(A) his Base Salary through the Date of Termination at the rate in
effect at the time Notice of Termination is given;
(B) in lieu of any further salary payments to Executive for periods
subsequent to the Date of Termination, the Company shall pay as severance pay to
Executive on or before the fifth day following the Date of Termination and on
the fifth day of each of the eleven (11) months thereafter (amounting to a total
of twelve (12) months), an amount in cash equal one-twelfth (1/12) of
Executive's annual Base Salary at the rate in effect at the time the Notice of
Termination is given; and
(C) all benefits payable under the terms of any employee benefit plan
or other arrangement as of the Date of Termination.
In addition, the Company shall make payments of premiums as necessary to
cause Executive and Executive's spouse and children under age twenty-five (25)
to continue to be covered by the medical and dental insurance as in effect at
and as of the Date of Termination (or to provide as similar coverage as possible
for the same premiums if the continuation of existing coverage is not permitted)
for one (1) year after the Date of Termination, in each case to the extent such
coverage is available.
(e) Mitigation. Executive shall not be required to mitigate the amount
----------
of any payment provided for in this Section 6 by seeking other employment or
otherwise; provided, however, that, anything herein to the contrary
-------- -------
notwithstanding, in the event of the termination of Executive's employment prior
to a Change in Control (as defined in the Concentra Managed Care, Inc., 1997
Long-Term Incentive Plan) which occurs after the consummation of the Merger (as
defined in that certain Amended and Restated Agreement and Plan of Merger, dated
as of March 24, 1999, by and between Yankee Acquisition Corp., a Delaware
corporation, and the Company) (but not if Executive's employment terminates
after such a Change in Control), the amount of any payment pursuant to Section
6(d)(B) shall be reduced by any compensation earned by Executive as the result
of employment by another employer (whether as a director, officer, employee,
manager, owner, consultant, independent contractor, advisor or otherwise) after
the Date of Termination until the end of the twelve month period of clause (B)
of Section 6(d) above.
7. Other Provisions Relating to Termination.
----------------------------------------
(a) Notice of Termination. Any termination of Executive's employment by
---------------------
the Company or by Executive (other than termination because of the death of
Executive) shall be
7
<PAGE>
communicated by written Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) Date of Termination. For purposes of this Agreement, "Date of
-------------------
Termination" shall mean: (1) if Executive's employment is terminated by his
death, the date of his death; (2) if Executive's employment is terminated
because of a disability pursuant to Section 5(b), then thirty (30) days after
Notice of Termination is given (provided that Executive shall not have returned
to the performance of his duties on a full-time basis during such thirty (30)
day period); (3) if Executive's employment is terminated by the Company for
Cause or by Executive for Good Reason, then, subject to Sections 7(c) and 7(d),
the date specified in the Notice of Termination; (4) if the Company gives
Executive notice pursuant to Section 1 prior to any anniversary of the date
hereof that the Term of this Agreement shall not be automatically extended for
an additional year on any such anniversary date, the date upon which the Term
expires; and (5) if Executive's employment is terminated for any other reason,
the date on which a Notice of Termination is given.
(c) Good Reason. Upon the occurrence of an event described in clauses
-----------
(A) through (C) of the definition of "Good Reason" in Section 5(d), Executive
may terminate his employment hereunder for Good Reason within one hundred eighty
(180) days thereafter by giving a Notice of Termination to the Company to that
effect. If the effect of the occurrence of the event giving rise to Good Reason
under Section 5(d) may be cured, the Company shall have the opportunity to cure
any such effect for a period of thirty (30) days following receipt of
Executive's Notice of Termination. If the Company fails to cure any such effect,
the termination for Good Reason shall become effective on the date specified in
Executive's Notice of Termination. If Executive does not give such Notice of
Termination to the Company, then this Agreement will remain in effect; provided,
--------
however, that the failure of Executive to terminate this Agreement for Good
- -------
Reason shall not be deemed a waiver of Executive's right to terminate his
employment for Good Reason upon the occurrence of a subsequent event described
in Section 5(d) in accordance with the terms of this Agreement.
(d) Cause. In the case of any termination of Executive for Cause, the
-----
Company will give Executive a Notice of Termination describing in reasonable
detail, the facts or circumstances giving rise to Executive's termination (and,
if applicable, the action required to cure same) and will permit Executive
thirty (30) days to cure such failure to comply or perform. Cause for
Executive's termination will not be deemed to exist until the expiration of the
foregoing cure period, so long as Executive continues to use his best efforts
during the cure period to cure such failure. If within thirty (30) days
following Executive's receipt of a Notice of Termination for Cause, Executive
has not cured the facts or circumstances giving rise to Executive's termination
for Cause, then Executive's termination for Cause shall be effective as of the
date specified in the Notice of Termination.
8
<PAGE>
(e) Interest. Until paid, all past due amounts required to be paid by
--------
the Company under any provision of this Agreement shall bear interest at the
highest non-usurious rate permitted by applicable federal, state, or local law.
8. Successors; Binding Agreement.
-----------------------------
(a) Successors. This Agreement shall be binding upon, and inure to the
----------
benefit of, the Company, Executive, and their respective successors, assigns,
personal and legal representatives, executors, administrators, heirs,
distributees, devisees, and legatees, as applicable.
(b) Assumption. The Company will require any successor (whether direct
----------
or indirect, by purchase of securities, merger, consolidation, sale of assets,
or otherwise) to all or substantially all of the business or assets of the
Company, by an agreement in form and substance reasonably satisfactory to
Executive, to expressly assume this Agreement and to agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle Executive to
compensation from the Company in the same amount and on the same terms as he
would be entitled to hereunder if he terminated his employment for Good Reason,
except that for purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the Date of Termination.
(c) Certain Payments. If Executive should die while any amounts would
----------------
still be payable to him hereunder if he had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to Executive's devisee, legatee, or other designee or, if there
be no such designee, to Executive's estate.
9. Notice. For purposes of this Agreement, all notices and all other
------
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when (a) delivered personally, (b) sent by
facsimile or similar electronic device and confirmed, (c) delivered by overnight
express, or (d) if sent by any other means, upon receipt. Notices and all other
communications provided for in this Agreement shall be addressed as follows:
If to Executive: Brad Harslem
13310 Bedford Avenue
Omaha, Nebraska 68164
If to the Company: Concentra Managed Care, Inc.
5080 Spectrum Drive, Suite 400 - West
Addison, Texas 75001
Fax No.: (972) 387-1938
Attention: General Counsel
or to such other address as either party may have furnished to the other in
writing in accordance herewith.
9
<PAGE>
10. Miscellaneous. No provision of this Agreement may be modified,
-------------
waived, or discharged unless such waiver, modification, or discharge is agreed
to in a written instrument signed by Executive and the Company. No waiver by
either party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement. The validity,
interpretation, construction, and performance of this Agreement shall be
governed by the laws of the State of Delaware, excluding any choice-of-law
provisions thereof.
11. Attorney Fees. All legal fees and costs incurred by Executive
-------------
in connection with the resolution of any dispute or controversy under or in
connection with this Agreement shall be reimbursed by the Company to Executive
as bills for such services are presented by Executive to the Company, unless
such dispute or controversy is found to have been brought not in good faith or
without merit by a court of competent jurisdiction.
12. Validity. The invalidity or unenforceability of any provision
--------
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect.
13. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original, but all of which together will
constitute one and the same agreement.
14. Entire Agreement; Effectiveness. This Agreement constitutes the
-------------------------------
entire agreement between the parties with respect to the subject matter hereof
and supersedes in all respects any and all prior employment agreements and/or
severance protection letters, agreements, or arrangements between Executive, on
the one hand, and the Company or any other predecessor in interest thereto or
any of their respective subsidiaries, on the other hand, which prior employment
agreements and/or severance protection letters, agreements, and arrangements, if
any, are hereby cancelled and of no further force or effect.
15. Right and Option of Company to Repurchase Shares Upon Termination of
--------------------------------------------------------------------
Employment.
- ----------
(a) In the event that, prior to an initial public offering of the
Company's equity securities, Executive's employment with the Company is
terminated for any reason, the Company shall thereupon have the right and
option, but not the obligation, to purchase from Executive all or any part of
the shares of common stock, par value $.01 per share, of the Company (the
"Shares") held by Executive as of the date Executive's employment so ceases at a
purchase price equal to the greater of (1) Sixteen and 50/100 Dollars ($16.50)
per Share, and (2) the fair market value (as hereinafter defined) of such Shares
as of the date Executive's employment so ceases.
(b) The Company may exercise the right and option provided in Section
15(a) above by giving Executive a written notice of such election to purchase at
any time within ninety
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(90) days after the date Executive's employment so ceases. The closing for the
purchase by the Company of any such Shares pursuant to the provisions of said
Section 15(a) shall take place at the offices of the Company on the date
specified in such written notice, which date shall be a business day not later
than sixty (60) days after the date such notice is given. At such closing,
Executive will deliver or cause to be delivered such Shares, duly endorsed for
transfer, against payment of the applicable purchase price therefor. Such
purchase price shall be payable to Executive in cash or other immediately
available funds. To the extent the Company chooses not to exercise such right
and option under said Section 15(a) to purchase any Shares, such Shares shall
thereupon cease to be subject to the provisions of this Section 15.
(c) For the purposes of this Agreement, "fair market value" of a
Share as of any date shall mean the value of such stock as determined in good
faith by the Board of Directors of the Company on a basis consistent with the
manner of determining the fair market value of the Company's common stock for
purposes of offering the Company's common stock to equity investors.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year first above written.
COMPANY:
CONCENTRA MANAGED CARE, INC.
By: /s/ Richard A. Parr II
--------------------------------------
Richard A. Parr II
Executive Vice President and Secretary
EXECUTIVE:
/s/ Brad Harslem
------------------------------------------
Brad Harslem
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EXHIBIT 10.19
AMENDED AND RESTATED
SOFTWARE LICENSE AGREEMENT
("Agreement")
THE SOFTWARE LICENSE AGREEMENT made and entered into effective February 10,
1995 by and between CompReview, Inc., a California corporation, now known as HNC
Insurance Solutions, ("Licensor") with its principal place of business presently
located a 110 Theory, Irvine, California 92612, and Comprehensive
Rehabilitation Associates, Inc., a Massachusetts Corporation, now known as
Concentra Managed Care Services, Inc., ("Licensee"), with its principal place of
business presently located at 312 Union Wharf, Boston, Massachusetts, as
subsequently amended prior to the date hereof (the "Original Agreement") is
hereby amended and restated in its entirety by this Agreement, effective as of
May 1, 1999.
On the terms and conditions set forth herein, Licensee desires to continue its
license from Licensor to use copies of (i) Licensor's computer program known as
CRLink, Versions 1.0, 2.0 and 2.5 (the "Programs") for reviewing and repricing
medical bills related to workers' compensation claims and personal injuries
arising out of automobile accidents, and (iii) the related documentation listed
on Exhibit A (the "Documentation"), and (B) to use the Programs and
Documentation to review and reprice a limited number of group health medical
bills. The Programs and the Documentation collectively are referred to as the
"Software."
NOW, THEREFORE, in consideration of the mutual promises and covenants set forth
herein, Licensor and Licensee agree as follows:
1. Grant of License
1.1 The license previously granted by Licensor to Licensee under the Original
Agreement shall continue, subject to the terms and conditions of this Agreement,
as a personal, nontransferable, non-exclusive license (the "License") (i) to use
copies ofthe Programs, in object code form only, solely at the Licensee
locations listed on Exhibit B (or such other location(s) as such company offices
may be subsequently moved to) (the "Designated Location(s)") for Licensee's
review and repricing of workers compensation and automobile personal injury
medical bills submitted to it by its clients and (ii) to use copies of the
Documentation solely for use in connection with the use of the Programs
authorized hereunder. Additional Designated Locations may be added to Exhibit B
from time to time with Licensor's consent, which shall not be unreasonably
withheld, delayed or conditioned. Additional Designated Locations may require
additional license fees. The License is hereby expanded to use copies of the
Programs and Documentation at the Designated Location(s) to review and reprice
group health medical bills that are submitted to Licensee by its clients with
either workers compensation medical bills or automobile personal injury medical
bills. The number of group health medical bills that may be reviewed and
repriced may not materially exceed 2.5% per month of the total number of bills
processed through the Software. The License includes the right to copy the
Software as reasonably required by Licensee solely for internal bill review at
the Designated Locations and for archival and back-up purposes. Licensee may not
allow its clients or any third parties access to the Software via modem or
otherwise for any reason whatsoever without Licensor's prior written consent.
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1.2 Licensee agrees that the License does not include, and Licensee shall not
by virtue of this Agreement have, any right to use or authorize the use of the
Software for any purpose other than review and repricing of workers compensation
medical bills and automobile personal injury medical bills submitted to it for
repricing, together with a limited number of group health medical bills
submitted to Licensee for repricing. The medical bills that Licensee is licensed
to use the Software to review and reprice are referred to herein as "Medical
Bills." Licensee acknowledges and agrees that it has no right whatsoever to
license the use, reproduction or distribution of the Software by any person,
firm or entity.
1.3 Licensor shall not provide Licensee with a copy of, and Licensee acquires
no right of any kind with respect to, any source code for the Programs. Licensee
agrees not to, and shall insure that its employees do not, create or attempt to
create, by decompiling, disassembling, reverse engineering or otherwise, the
source code for the Programs. Licensee acknowledges and agrees that it has no
right whatsoever to modify the Software or any portion thereof in any manner.
1.4 Licensee shall make provision for and install a modem and telephone line
for dial-up access to Licensee's computer system by the Licensor for the
purposes of Software maintenance or the provision of software updates. All such
access shall be with the Licensee's advance knowledge and approval and Licensee
agrees to allow such right of reasonable access by the Licensor. Licensor agrees
to schedule such maintenance so as to not materially interfere with Licensee's
business.
1.5 During the term of this Agreement. and at no additional charge, Licensor
will provide to Licensee (a) all updates to the Software reflecting changes to
states workers compensation regulations within 15 working days after such
regulations are published by the appropriate State agency and (b) such other
updates to the Software as Licensor makes generally available to its customers.
1.6. The preferred provided organization networks ("PPO Networks") whose
contract rates the Software is currently able to access are listed on Exhibit C
hereto. Licensor has the authority to offer access through the Software to the
PPO Networks listed on Exhibit C. Licensee may not access any other PPO Networks
through the Software without Licensor having first advised Licensee that it has
the authority to access such PPO Networks. Licensee may not use the Software to
access the PPO Networks for any purpose or in any manner other than as expressly
permitted hereby.
1.7 Licensor does not represent or warrant that its access to the contract
rates of each PPO Network listed will continue throughout the term of this
Agreement. Access to PPO Network rates may be terminated for a number of
reasons, including expiration of the term of an access agreement and a PPO
Networks refusal to extend the agreement, or a third-party decision not to
maintain the PPO Network, which decision may occur in connection with the
combination of one or more PPO Networks through business acquisitions. Licensor
will promptly advise Licensee of any notice of termination of access it receives
from any PPO. In no event will there be a retroactive termination of PPO access.
Licensor will use its best efforts to maintain its access to the PPO Networks
throughout the term of this Agreement, provided, however, Licensor shall not
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be obligated to incur any additional material cost, obligation or burden to
maintain such access.
1.8 If Licensee requests that any PPO Networks be "stacked" in any particular
order, Licensor will request written approval from each of the PPO Networks to
the stacking, and, if such approval is obtained, will stack the PPO Networks as
requested. If Licensee requests that Licensor include one or more additional PPO
Networks in the Software, Licensor will investigate the feasibility of doing so,
and will use its reasonable best efforts to add such additional PPO Networks to
the Software only if it is (i) technically feasible to automate the PPO Network
through the Software, (ii) Licensor is able to obtain an access and distribution
agreement with the PPO Network on terms that are acceptable to Licensor, and
(iii) in Licensors reasonable business judgment the costs of adding,
distributing and maintaining the additional PPO Network on the Software is
justified. Licensor will promptly notify Licensee of the addition of any new PPO
Networks to the Software.
2. Installation and Training
2.1 The parties acknowledge that the Programs have been installed by Licensor
at the Designated Location(s) and accepted by Licensee in accordance with the
Original Agreement. The parties also acknowledge that an electronic data
interface ("EDI") exists which enables the Software to interface for data
exchange with Licensee's claims and managed care systems. Licensor will maintain
the EDI in accordance with Exhibit D hereto. Any requests by Licensee for
modifications to the EDT will be handled in accordance with Section 2.3 below.
2.2 The history of all Medical Bills processed on other systems that are
submitted to Licensor will be converted and input into the data base of the
Software. Licensee will provide Licensor with all bill review historical data,
case management information, data calls, and data necessary to convert the bill
history of previously processed bills into the Software database. Licensor will
continue to support CrLink Versions 1.0 and 2.0 until the migration of the
Medical Bill history to CrLink Version 2.5 is completed. Such support will be in
accordance with Exhibit D and Licensor's standard support policies.
2.3 Any "system change requests" ("SCR") by Licensee for changes to the
Programs by Licensor, including changes to the existing electronic data
interface will be prioritized as level 1 through 4 requests and performed by
Licensor in accordance with Exhibit D hereto. Licensee will provide Licensor in
a timely manner with such assistance and input as Licensor may request in
connection with any SCR. Licensor will schedule regular releases of enhancements
to CRLink Version 2.5 as long as it remains the current version of the Software.
Licensee may make recommendations on priorities for enhancements to Version 2.5
of the Program in accordance with Exhibit D.
2.4 The cost and timing to complete the bill history conversion and SCR is set
forth in Exhibit D hereto.
2.5 The parties acknowledge that all free training required under the Original
Agreement during the first month period following completion of the installation
of the Programs has been provided. If further training is required, the cost to
provide this service shall be at a rate of $400 per day, plus all reasonable
out-of-pocket travel expenses. including, transportation, lodging and meals.
Training shall, at the election of Licensee, be at either Licensor's office or
at one of the Designated
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Locations, and shall be scheduled at such times as are mutually convenient for
the parties. If training is done at a Designated Location, each day that
Licensor's personnel is available at such location shall constitute a full day
of training regardless of the number of hours actually utilized by Licensee.
Training during any day shall not exceed 8 hours of actual training. If training
is done at Licensor's office, training days of less than 8 full hours shall be
prorated on an hourly basis of $50 per hour. Payment for training shall be due
within thirty (30) days after Licensee has been invoiced for the training.
3. Term and Termination
3.1 The term of this Agreement shall commence on the date hereof as set forth
on page 1 and continue until the second anniversary date hereof or until this
Agreement is terminated pursuant to any provision hereof. Either party may
terminate this Agreement without cause upon 180 days prior written notice to
the other party given at any time after June 30, 2000. Licensor may also
terminate this Agreement upon 1 80 days notice as set forth in Section 10
below.
3.2 Either party shall be entitled to terminate this Agreement (and pursue all
of its rights hereunder at law or in equity) upon written notice to the other
party in the event of a breach by such other party of any of its obligations
hereunder and the failure of such other party to cure any such breach within 30
days from receipt of written notice of such breach, unless such breach by its
nature cannot be cured, in which event the nonbreaching party shall be entitled
to terminate this Agreement upon written notice to the other party without any
opportunity to cure.
3.3 This Agreement shall immediately terminate upon the filing by or against
Licensee of a proceeding under any bankruptcy or similar law, unless such
proceeding is dismissed within 60 days from the date of filing; the making by
Licensee of any assignment for the benefit of creditors; the filing by or
against Licensee of a proceeding for dissolution or liquidation, unless such
proceeding is dismissed within 60 days from the date of filing; the appointment
of or the application for the appointment of a receiver, trustee or custodian
for all or part of the assets of Licensee to make any adjustment, settlement or
extension of its debts with its creditors generally; the insolvency of Licensee;
or the filing or recording of a notice of lien or the issuance or the obtaining
of a levy of execution upon or against a material portion of the assets of
Licensee, unless such lien or levy of execution is dissolved within 60 days from
the date thereof;
3.4 Upon termination or expiration of this Agreement for any reason (including,
without limitation, discontinuation of use of the Software by Licensee), the
rights of Licensee to possess or use the Software shall end, and Licensee shall
immediately, at Licensor's sole option, deliver to Licensor or destroy the
original Software and all copies of the Software or any portion thereof in its
possession or control. Within 20 days following the date of such termination or
expiration, an officer of Licensee shall certify in writing to Licensor that the
terms of this Section 3.4 have been complied with.
4. License Fees; Payment
4.1 The fees to be paid to Licensor for this License and the services to be
provided by Licensor hereunder are set forth in Exhibit D hereto. Licensor will
from time to time provide such
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additional services as the parties may mutually agree. Such services will be
provided at Licensor's prevailing rates at the time the services are performed.
If such services are not customarily provided by Licensor to other licensees,
they will be provided at such rates as Licensor and Licensee may agree to.
4.2 License fees will be billed monthly through Licensor's then current billing
system. Third party fees for databases such as usual, customary and reasonable
fees and drug costs, as well as preferred provider organization access fees
(collectively "Third Party Fees") are not included in the licensee fees set
forth above, but will be billed by Licensor to Licensee. Licensee will be
responsible for all Third Party Fees during the first 12 months of this
Agreement, as referenced in Exhibit D hereto, and for all increases in such
Third Party Fees that may occur from time to time thereafter that do not exceed
on an aggregate basis 10% per annum. All license fees, together with any Third
Party Fees owed by Licensee are due and payable within thirty (30) days after
receipt of the electronic invoice.
4.3 In addition to any other amounts due hereunder, Licensee shall pay to or
reimburse Licensor the amount of any sales, use, excise, property or other
federal, state, local or foreign taxes, duties, tariffs or other assessments
(other than any tax based solely on Licensor's net income) any related interest
and penalties which Licensor is at any time obligated to pay or collect in
connection with or arising out of the transactions contemplated by this
Agreement.
4.4 In the event Licensor does not receive any amounts from Licensee due under
this Section 4 or any other Section hereunder on or before the date on which
such amounts are due and payable, such outstanding amounts shall bear interest
until payment is received at the maximum rate permitted by law, but in no event
to exceed twelve percent (12%) per annum. Amounts received by Licensor hereunder
shall first be credited against any unpaid interest, and accrual of such
interest shall be in addition to and without limitation of any and all
additional rights or remedies which Licensor may have hereunder or at law or in
equity.
4.5 Each month Licensor will provide Licensee with documentation describing the
number and types of bills processed by Licensee utilizing the Programs in the
prior month.
4.6 Licensor and Licensee shall each have the right to audit the procedures and
records of the other pertaining to the number and types of bills processed each
month and how such bills were processed. Such audits shall not occur more
frequently than every twelve months, shall be on not less than forty-eight (48)
hours prior notice, and shall be conducted at reasonable times and in a
reasonable manner. The party being audited shall reasonably cooperate with the
party conducting the audit.
5. Proprietary Rights
5.1 Licensee acknowledges that it obtains pursuant to this Agreement only the
right to use copies of the Software on the terms and conditions set forth herein
and that no right, title or interest in or to the Software or any copies thereof
or any copyrights, trademarks or other proprietary rights related to the
Software are transferred to Licensee. Licensee will use its best efforts and
will take all reasonable steps to protect the Software from any use,
reproduction, publication, disclosure or
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distribution except as specifically authorized by this Agreement (collectively
"Unauthorized Use or Disclosure"). Licensee acknowledges and agrees that the
Software contains confidential information and trade secrets developed or
acquired by Licensor through the expenditure of a great deal of time and money.
Licensee agrees to treat the Software as confidential as set forth below.
5.2 Licensee shall not remove, alter, cover or obfuscate any copyright notice,
trademark or other proprietary rights notice placed by Licensor in or on the
Software or any portion thereof and shall insure that all such notices are
reproduced on all copies of the Software or any portion thereof made by
Licensee. Licensee shall comply with reasonable directions submitted by Licensor
from a time to time regarding the form and placement of copyright notices and
other proprietary rights notices on the Software or any portion thereof.
5.3 Licensee and Licensor shall hold and maintain in the strictest confidence
and in trust for the sole and exclusive benefit of the other all "Confidential
Information" (as defined below) of the other and shall not use such information
for its own benefit, except as expressly permitted hereunder, or publish or
otherwise disclose it to third parties, or permit its use or access by third
parties (except as contemplated hereunder)for their benefit or to the detriment
of the other party hereto, except that such disclosure or access shall be
permitted to an employee or representative of Licensee or Licensor to the extent
required for such employee or representative to perform duties for Licensee or
Licensor not inconsistent with the terms of this Agreement. Licensee and
Licensor shall carefully restrict access to the Confidential Information of the
other to those of their respective employees and representatives who clearly
require such access in order to carry out the purposes of this Agreement.
Licensee and Licensor shall each ensure that their respective employees and
representatives who receive access to the Confidential Information of the other
are advised of its confidential and proprietary nature and that they are
prohibited from copying, utilizing, or revealing the Confidential Information or
any portion thereof or from taking any action prohibited to Licensee or Licensor
under this Agreement. Without limiting the foregoing, Licensee and Licensor
shall each employ with regard to the Confidential Information of the other
procedures no less restrictive than the strictest procedures used by them to
protect their own trade secrets.
As used herein, the term "Confidential Information" means the Software, the
licensee fees, the specific terms of this Agreement and the Original Agreement,
claims information, and Licensor's and Licensee's data, practices and
procedures, client names and business relationships with third parties.
Confidential Information shall also include any information concerning
Licensor's and Licensee's clients or suppliers, and any information either party
has received from others which it is obligated to treat as confidential or
proprietary. Confidential Information shall not include (i) any information that
has become publicly known without breach of this Agreement or any other
confidentiality obligation owed by either party hereto to others (ii)
information that is generally known in Licensor's or Licensee's industry, or
(ii) information known to the receiving party prior to the disclosing party's
disclosure of the same; provided the prior knowledge was not obtained as a
result of a breach of any confidentiality obligation owed to Licensor or
Licensee.
5.4 Licensee shall make reasonable efforts to promptly notify Licensor of any
known Unauthorized Use or Disclosure of the Software and will cooperate with
Licensor in any litigation brought by Licensor against third parties to protect
its proprietary rights. Licensee's compliance with the provisions of this
section shall not be construed as a waiver of any of Licensor's rights
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hereunder.
5.5 Because of the unique and proprietary nature of the Software, it is
understood and agreed that Licensor's remedies at law for a breach by Licensee
of its obligations under this Section 5 will be inadequate and that Licensor
shall, in the event of any such breach, be entitled to equitable relief
(including, without limitation, injunctive relief and specific performance)
without any requirement to post a bond as a condition of such relief, in
addition to all other remedies provided under this Agreement or available to
Licensor at law.
6. Warranties
6.1 Licensor warrants that the unmodified Programs shall perform substantially
in accordance with the related Documentation. Licensor shall (i) provide
Licensee with a revised copy of the Programs reflecting any correction or
modification which is incorporated by Licensor into its standard version of such
Programs and shall provide Licensee with any new standard version of the
Programs; (ii) use commercially reasonable efforts to correct any failures of
the latest version of the Programs to perform substantially in accordance with
the related Documentation, provided Licensor is given written notice by Licensee
of such failures and such failures can be recreated by Licensor; and (iii)
provide reasonable amounts of telephone consultation to a designated
representative of Licensee to alleviate any difficulties Licensee may experience
in the operation of the latest version of the unmodified Programs.
HNC Year 2000 Representation and Warranty. Licensor has previously disclosed to
- -----------------------------------------
Licensee that both version 1.0 and version 2.0 of the Programs are not "Year
2000 Compliant" as defined below. Licensor represents and warrants that version
2.5 of the Programs and all electronic data interfaces related to Licensee' s
use of version 2.5 of the Programs, and any other software provided by HNC in
connection with Licensee's use of version 2.5 of the Programs (collectively, the
"Subject Software"), are Year 2000 Compliant (as defined below) or to the extent
the Subject Software is not Year 2000 Compliant, Licensor will inform Licensee,
in detail, of any deficiency as of the date of this Agreement, and that such
deficient Subject Software will be Year 2000 Compliant by November 1, 1999.
Licensor will make a certification on that date that all the Subject Software
are Year 2000 Compliant. If Licensor is unable to make such certification,
Licensee shall be entitled to terminate this Agreement immediately without
further notice or opportunity to cure and Licensor will be liable to Licensee
for any costs related to the transitioning of the services contemplated in this
Agreement to a third party. Licensor further represents and warrants that its
internal business applications and processes (including manufacturing, testing,
and inspection processes) shall be Year 2000 Compliant by November 1, 1999.
Licensor agrees to provide Licensee with regular disclosures regarding its Year
2000 Compliancy efforts and any other information reasonably requested by
Licensee to verify Licensor's Year 2000 compliancy. Licensor further agrees to
cooperate in all reasonable respects with Licensee in such verification efforts.
For purposes of this section, "Year 2000 Compliant" means (i) that the Subject
Software will on a timely basis and as corroborated in a manner approved by
Licensee perform as intended regardless of date and that all data, including
dates, can be accessed and processed with specific result, (ii) that the Subject
Software recognizes year 2000 as a leap year, and (iii) that the Subject
Software
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represents each year as four digits in all user visible interfaces, stores year
with sufficient capacity to support four digit years, and produces accurate
results:
. for any date (whether before, during, or after 2000), within an
acceptable date range; and
. for any time (whether before, during, or after 2000), within an
acceptable date range.
"Acceptable date range" means any date that the application will
encounter from now through fifty years past the millennium. The actual
range of dates supported will vary depending on how dates are used
within the particular application.
EXCEPT AS STATED ABOVE, LICENSOR DOES NOT WARRANT THAT THE SOFTWARE WILL MEET
LICENSEE'S REQUIREMENTS OR THAT OPERATION OF THE SOFTWARE WILL BE UNINTERRUPTED
OR ERROR FREE. EXCEPT AS PROVIDED IN THIS SECTION 6, LICENSOR DOES NOT MAKE BY
VIRTUE OF THIS AGREEMENT, AND HEREBY EXPRESSLY DISCLAIMS, ANY REPRESENTATION OR
WARRANTY OF ANY KIND WITH RESPECT TO THE SOFTWARE OR THE SERVICES OF LICENSOR,
INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.
6.2 Licensee agrees that, regardless of the form of any claim, Licensor's
entire liability and Licensee's exclusive remedy shall be as set forth in this
Section 6. If, after having been given written notice of any failure of the
Programs to perform substantially in accordance with the related Documentation,
Licensor is unable to correct such failure within sixty (60) days, Licensee may
immediately terminate this Agreement with respect to such Programs by complying
with the provisions of Section 3.4 hereof.
6.3 Exclusion ofConseguential Damages; Limitation of Liability
---------------------------------------------------------
NEITHER PARTY SHALL, UNDER ANY CIRCUMSTANCES, BE LIABLE TO THE OTHER FOR
CONSEQUENTIAL, INDIRECT, INCIDENTAL, SPECIAL OR EXEMPLARY DAMAGES ARISING OUT OF
OR RELATED TO THE SOFTWARE OR THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING,
WITHOUT LIMITATION, LOST PROFITS OR SAVINGS, EVEN IF APPRISED OF THE LIKELIHOOD
OF SUCH DAMAGES OCCURRING. IN NO EVENT SHALL LICENSOR'S LIABILITY TO LICENSEE
HEREUNDER (WHETHER BASED ON AN ACTION OR CLAIM IN CONTRACT, TORT OR OTHERWISE)
ARISING OUT OF OR RELATED TO THE SOFTWARE LICENSED HEREUNDER EXCEED THE
AGGREGATE OF THE LAST THREE MONTHS' LICENSE FEES ACTUALLY PAID. FOR PURPOSES OF
THIS PARAGRAPH ONLY, "LICENSE FEES" ARE DEFINED AS THE SUM OF THE TOTAL FEES
PAID FOR BILL REVIEW, PLUS THE ACCESS FEE PAID BY LICENSEE TO LICENSOR FOR USE
OF THE FOCUS PPO, MINUS THE ACCESS FEE PAID BY LICENSOR TO FOCUS FOR USE OF THE
FOCUS PPO FOR LICENSEE.
7. Security Precautions
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To prevent any loss or damage to data as a result of malfunctions, errors or
defects of or in the Software, Licensee will maintain backup data ofall data
used in connection with the Software.
8. Disputes
Any action concerning a dispute arising out of or in connection with this
Agreement or the respective obligations of Licensor and Licensee hereunder shall
be brought and maintained in a court of competent jurisdiction in Orange County,
California.
9. Proprietary Rights Indemnity
Subject to Licensee's fulfillment of its obligations under this Section 9 and
the dollar limitations set forth in this Section, Licensor will hold, to the
extent set forth in this Section, Licensee harmless, and at its own expense
defend or settle any claim, suit, action, or proceeding brought against Licensee
to the extent that such claim, suit, action, or proceeding is based on a claim
that the Software or any portion thereof infringes or constitutes wrongful use
of a United States patent, United States copyright or trade secret right
protected under the law of any state in the United States (a "U.S. Proprietary
Right"). Licensee shall notify Licensor in writing of any such claim promptly
after Licensee first learns of it, and shall provide Licensor with such
cooperation and assistance as Licensor may reasonably request from time to time
in connection with the defense thereof. Licensor shall have sole control over
any such suit or proceeding (including, without limitation, the right to settle
on behalf of Licensee on any terms Licensor deems desirable in the sole exercise
of its discretion). In the event that the use of the Software or any portion
thereof as permitted hereunder is held to infringe or constitute wrongful use of
any U.S. Proprietary Right and Licensee's right to use such Software is enjoined
by a court of competent jurisdiction or if Licensor, in the reasonable exercise
of its discretion, instructs Licensee to cease using any such Software in order
to mitigate or lessen potential damages arising from a claimed infringement or
wrongful use of any U.S. Proprietary Right, Licensee shall cease using such
Software. In the event Licensee ceases to use such Software as provided in this
Section (other than by reason of a temporary restraining order), Licensor shall
(i) replace such Software with equally suitable non-infringing software, (ii)
modify such Software so that the use of the Software by Licensee as permitted
hereunder ceases to be infringing or wrongful, (iii) procure for Licensee the
right to continue using such Software as permitted hereunder, or (iv) after
reasonable efforts under subsections (i), (ii), and (iii) of this sentence, pay
to Licensee the last month's licensee fee paid by Licensee. OTHER THAN AS
EXPRESSLY STATED IN THIS SECTION 9, LICENSOR SHALL HAVE NO LIABILITY WHATSOEVER
TO LICENSEE FOR ANY LOSS OR DAMAGE (INCLUDING, WITHOUT LIMITATION, FOR ANY
CONSEQUENTIAL, INCIDENTAL, SPECIAL OR EXEMPLARY DAMAGES) ARISING OUT OF OR
RELATED TO ANY ALLEGATION OR DETERMINATION THAT LICENSEE'S USE OF THE SOFTWARE
AS PERMITTED HEREUNDER INFRINGES OR CONSTITUTES WRONGFUL USE OF ANY U.S.
PROPRIETARY RIGHT. LICENSOR MAKES NO REPRESENTATION OR WARRANTY AND DISCLAIMS
ALL LIABILITY OF ANY TYPE WHATSOEVER ARISING OUT OF OR RELATING TO ANY
ALLEGATION OR DETERMINATION THAT LICENSEE'S USE OF THE SOFTWARE INFRINGES OR
CONSTITUTES WRONGFUL USE OF ANY COPYRIGHT, TRADE SECRET. PATENT OR
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OTHER PROPRIETARY RIGHT OTHER THAN A U.S. PROPRIETARY RIGHT.
Licensor will hold Licensee harmless and at its own expense defend or settle any
claim, suite, action or proceeding brought against Licensee by any third party
to the extent that such claim, suit, action or proceeding is based upon Licensor
having failed to update the data bases as required in this Agreement or having
distributed data bases it does not have the authority to distribute to Licensee.
10. Assignment
Except as set forth below, Licensee may not assign or transfer this Agreement or
any interest herein (including rights and duties of performance) without the
prior written consent of Licensor, which consent shall not be unreasonably
withheld, it being understood that Licensor may disapprove any assignment or
transfer to a competitor. Licensee may transfer this Agreement to any entity
which acquires all or substantially all of Licensee's operating assets, or into
which or with which Licensee is merged or reorganized without Licensor's prior
written consent; provided, however, that if such entity, or any of its
"affiliates" is a competitor of Licensor, Licensor may terminate this Agreement
upon 1 80 days notice. In addition, if any competitor of Licensor or an
affiliate of such competitor obtains more than 30% of the voting power of
Licensee (a "change of control"), Licensor may terminate this Agreement upon
180 days notice. Licensor may also terminate this Agreement immediately at any
time following a change of control or assignment or transfer of this Agreement
to a competitor of Licensor or an affiliate of such a competitor, if such party
breaches any of the provisions of this Agreement concerning proprietary rights,
confidentiality or restrictions on use of the Software. The term "affiliate" as
used herein means any natural person or entity, including, without limitation,
corporations, limited liability companies, trusts, limited partnerships, joint
ventures and general partnerships, that directly or indirectly, through one or
more intermediaries, controls, is controlled by or is under common control with
Licensee or its assignee.
11. Indemnification by Licensee
Licensee agrees to hold Licensor harmless and at its own expense to defend or
settle any claim, suit, action, or proceeding brought against Licensor by any
third party to the extent that such claim, suit, action or proceeding is based
on any act or omission of Licensee in using the Programs. Licensor's
indemnification of Licensee for third party claims is set forth in Section 9
above.
12. Notices
Except as otherwise specified herein, all notices, requests, demands or
communications required or permitted hereunder shall be in writing, delivered
personally, or sent by courier service of national reputation (e.g., Federal
Express) or sent by first class mail, postage prepaid, to the parties at the
respective addresses above (or at such other address as shall be given
in writing by either of the parties to the other in accordance with this
Section 12). All notices, requests, demands or communications shall be deemed
effective upon personal delivery, or one day following delivery to such courier
service, or four days following deposit in the U.S. mail In accordance with this
Section 12.
10
<PAGE>
13. Excused Performances
Neither party shall not be deemed to be in default of or to have breached any
provision of this Agreement as a result of any delay, failure in performance or
interruption of service, resulting directly or indirectly from acts of God, acts
of civil or military authorities, civil disturbances, wars, strikes or other
labor disputes, shortages of labor or materials, fires, transportation
contingencies, laws, regulations, acts or orders of any government or agency or
official thereof, other catastrophes, or any other occurrences beyond such
party's reasonable control.
14. Miscellaneous Provisions
14.1 Except as otherwise provided herein, no remedy made available to either
party hereto by any of the provisions of this Agreement is intended to be
exclusive of any other remedy, and each and every remedy shall be cumulative and
shall be in addition to every other remedy given hereunder or now or hereafter
existing at law or in equity or by statute or otherwise.
14.2 No waiver of any provision of this Agreement or any rights or obligations
of either party hereunder shall be effective, except pursuant to a written
instrument signed by the party or parties waiving compliance, and any such
waiver shall be effective only in the specific instance and for the specific
purpose stated in such writing.
14.3 This Agreement shall be construed and enforced in accordance with the laws
ofthe State of California which are applicable to the construction and
enforcement of contracts between parties resident in California which are
entered into and fully performed in California, regardless of where this
Agreement is executed or performed or the residency of the parties hereto. The
Agreement shall be interpreted in accordance with its fair meaning and not in
favor or against either party.
14.4 This Agreement may be executed in one or more counterparts, each of which
shall be an original and all of which together shall constitute one and the same
Instrument.
14.5 This Agreement shall inure to the benefit of and shall be binding upon the
parties hereto and their respective permitted successors and assigns.
14.6 Sections 3.4, 4, 5, 6.2, 6.3, 8, 9, 11 and 14 (and the limitations on
liability set forth herein) shall survive expiration or termination of this
Agreement for any reason.
14.7 In the event that any provision hereof is found invalid or unenforceable
pursuant to judicial decree or decision, the remainder ofthis Agreement shall
remain valid and enforceable according to its terms.
14.8 In the event of any litigation hereunder, any such action shall be brought
in a state or federal court of competent jurisdiction located in Orange County,
California, and the prevailing party in the action as determined by the court
will be entitled to recover from the other party its costs and reasonable
attorneys' fees.
11
<PAGE>
14.9 This Agreement constitutes the entire understanding and agreement between
Licensor and Licensee with respect to the transactions contemplated herein and
supersedes any and all prior or contemporaneous oral or written communications
with respect to the subject matter hereof, including, without limitation,
previous efforts to amend and restate the Original Agreement as reflected by a
draft agreement dated October 1, 1998 that was being reviewed and revised by the
parties as of December 23, 1998. It is expressly understood and agreed that no
employee, agent or other representative of either party has any authority to
bind such party with regard to any statement, representation, warranty or other
expression unless the same is specifically set forth or incorporated by
reference herein. It is expressly understood and agreed that, there being no
expectation to the contrary between the parties hereto, no usage of trade or
other regular practice or method of dealing between the parties hereto shall be
used to modify, interpret, supplement or alter in any manner the express terms
of this Agreement or any part hereof. This Agreement shall not be modified,
amended or in any way altered except by an instrument in writing signed by duly
authorized representatives ofthe parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
ofthe date first above-written.
"Licensor" "Licensee"
HNC Insurance Solutions Concentra Managed Care Services, Inc.
BY: /s/ John Falliers BY: /s/ Thomas Cox
------------------------ -----------------------
Title: CFO Title: President
----------------------- --------------------
12
<PAGE>
EXHIBIT A
---------
List of Documentation
The Documentation is the Licensor's "USERS MANUAL." This documentation serves to
provide an overview to users of how to use the Programs. The contents of the
manual are the proprietary property of Licensor. Licensor authorizes Licensee to
copy any portion of the documentation for internal use only. Licensee may not
provide access to any portion of the Users Manual to any party other than those
employees of Licensee who need access to the Users Manual in order to operate
the Programs in accordance with the terms of the License Agreement.
Licensee understands that a single copy of the documentation will be provided at
the time of training. A single set of periodic updates to this documentation
will be provided to the Licensee by the Licensor as said updates become
available.
<PAGE>
EXHIBIT B
---------
Designated Location(s)
R11 - Buffalo: One (1) Production Server
R58 - Denver: One (1) Production Server
R63 - Waltham Three (3) Production Servers, One (1) Test Server
** Note: These are the servers that are physically in each location. At the R63
site, the three production servers are called R55, R63, R85.
<PAGE>
EXHIBIT C
---------
PPO Networks
State Jurisdiction PPO Number PPO
------------------ ---------- ---
AK 09 Focus WC
AL 09 Focus WC
AR 05 Medview WC
09 FocusWC
97 Focus/Fremont
AZ 07 CompAlliance
09 FocusWC
97 Focus/Fremont
CA 05 Medview WC
07 CompAlliance
09 FocusWC
97 Focus/Fremont
CO 05 Medview WC
09 FocusWC
88 Focus Concentra Auto
CT 05 Medview WC
06 Medview Auto
09 FocusWC
19 Medview GH
56 Focus Auto
88 Focus Concentra Auto
DC 05 Medview WC
09 Focus WC
DE 09 Focus WC
FL 05 Medview WC
09 FocusWC
19 Medview GH
97 Focus/Fremont
GA 09 Focus WC
19 MedviewGH
56 Focus Auto
HA 09 FocusWC
88 Focus Concentra Auto
HI 09 FocusWC
1
<PAGE>
State Jurisdiction PPO Number PPO
------------------ ---------- ---
97 Focus/Fremont
IA 09 FocusWC
IL 09 FocusWC
19 Medview GH
05 Medview WC
09 FocusWC
KS 09 FocusWC
97 Focus/Fremont
KY 05 Medview WC
09 FocusWC
79 Medview KY
LA 09 FocusWC
LS 09 FocusWC
MA 05 Medview WC
09 FocusWC
88 Focus Concentra Auto
MD 05 Medview WC
09 FocusWC
97 Focus/Fremont
ME 09 FocusWC
MI 05 Medview WC
09 FocusWC
56 Focus Auto
97 Focus/Fremont
MN 05 Medview WC
09 FocusWC
MO 09 FocusWC
MS 09 FocusWC
MT 09 Focus WC
NC 09 FocusWC
ND 09 FocusWC
NE 09 FocusWC
NH 05 Medview WC
09 FocusWC
19 Medview GH
NJ 06 Medview Auto
09 FocusWC
56 Focus Auto
2
<PAGE>
State Jurisdiction PPO Number PPO
------------------ ---------- ---
88 Focus Concentra Auto
NM 09 FocusWC
NV 09 FocusWC
97 Focus/Fremont
NY 06 Medview Auto
09 FocusWC
56 Focus Auto
71 Focus/MagnaCare
85 Focus/MagnaCare
88 Focus Concentra Auto
OH 05 MedviewWC
09 FocusWC
19 Medview GH
62 OCN
81 OCN
OK 09 FocusWC
19 Medview GH
56 Focus Auto
OR 09 FocusWC
PA 05 Medview WC
09 Focus WC
PP 09 FocusWC
56 Focus Auto
88 Focus Concentra Auto
RI 05 Medview WC
09 FocusWC
SC 09 FocusWC
SD 05 Medview WC
09 FocusWC
TN 09 FocusWC
TX 05 Medview WC
09 FocusWC
19 Medview GH
04 MSCI
97 Focus/Fremont
UA 88 Focus Concentra Auto
UC 05 MedviewWC
06 Medview Auto
09 FocusWC
3
<PAGE>
State Jurisdiction PPO Number PPO
------------------ ---------- ---
19 Medview GH
28 PHS
56 Focus Auto
74 HFN
88 Focus Concentra Auto
97 Focus/Fremont
UT 09 FocusWC
97 Focus/Fremont
VA 09 FocusWC
VT 05 MedviewWC
09 FocusWC
85 Focus/MagnaCare
WA 05 Medview WC
09 FocusWC
WI 05 Medview WC
09 FocusWC
74 HFN
97 Focus/Fremont
WV 09 FocusWC
4
<PAGE>
[LOGO OF HNC]
Effective Date as of May 1, 1999
Exhibit D
Letter of Intent for Revised Agreement
Between CONCENTRA and HNCIS
Pricing
<TABLE>
<CAPTION>
Implementation and Migration Costs Fee
- ------------------------------------------------- ---------------------------------------------------
<S> <C>
. History Conversion . HNCIS New Implementations To Be Determined
. Interface Creation of: Based On Defined Scope and Level of Required
. Claims Data Import Customization for Each New Site
. Provider Data Import
. Employer Data Import . The following table presents current estimates of
. Response File Import costs, based on Difficulty Level:
. Managed Care Direction Import (opt)
. Claims Payment Export Per Migration Charge:
. Bill Image Export . M/1/ 14,250
. Bill Detail Export . M/1/T 16,650
. Quality Assurance and Testing of all built . M/2/ 8,250
processes. . M/3/ 5,250
. Site Audit / Technical Environment and
Operations.
. Systems Adminstration Check-out
. Installation of Software at Client's Site(s)
- ------------------------------------------------- ---------------------------------------------------
Post Installation Training [Optional] Fee
- ------------------------------------------------- ---------------------------------------------------
. Training at client's location . $400 per day + Reasonable Travel Expenses.
. $50 per hour.
. Training as HNCIS location
- ------------------------------------------------- ---------------------------------------------------
Site Minimum Monthly Fees* Fee
- ------------------------------------------------- ---------------------------------------------------
. Each Additional Site Where Software is Located . $1,000
- ------------------------------------------------- ---------------------------------------------------
- ------------------------------------------------- ---------------------------------------------------
- ------------------------------------------------- ---------------------------------------------------
License Fees
- ------------------------------------------------- ---------------------------------------------------
Bills Processed* Fee
- ------------------------------------------------- ---------------------------------------------------
All From July 1, 1999 until June 30, 2000 --
$1.35/bill
From July 1, 2000 Termination --
$1.65/bill
- ------------------------------------------------- ---------------------------------------------------
* Excludes Fees For Fee Negotiation and PPO Access Rates-see below.
- ------------------------------------------------- ---------------------------------------------------
CRExpress Upgrade [Optional] Fee
- ------------------------------------------------- ---------------------------------------------------
. Capstone Decision Engine . Additional $ .25 per bill processed
- ------------------------------------------------- ---------------------------------------------------
Page: 1 of 3
</TABLE>
<PAGE>
[LOGO OF HNC]
Effective Date as of May 1, 1999
<TABLE>
<CAPTION>
Required Databases Fee
- ------------------------------------------------- ---------------------------------------------------
<S> <C>
Usual & Customary Databases: Prices Subject to Annual Review, Currently:
. Medicode (All States) . $32,050 per year for all sites; a rate
. OWCP -- Long Shore & Harbor Claims substantially less than per site or bill
volume based charges under NCIS normal
bill terms.
. No Charge
- ------------------------------------------------- ---------------------------------------------------
- ------------------------------------------------- ---------------------------------------------------
Required Databases Fee
- ------------------------------------------------- ---------------------------------------------------
Btrieve License:
. Site License . If Concentra pays HNCIS, HNCIS will quote
current market fee. Otherwise, Concentra will
maintain a current license with Pervasive for
each site during the term of this agreement.
Concentra is responsible for providing HNCIS
a copy of the license.
- ------------------------------------------------- ---------------------------------------------------
- ------------------------------------------------- ---------------------------------------------------
Preferred Provider Organization Networks Fee
- ------------------------------------------------- ---------------------------------------------------
PPO Access Rates For Networks Currently Accessed Current Rates For Distributed Networks:
Through HNCIS:
Internal Networks
Focus from July 1, 1999 until June 30, 2000
3.5% of savings
Focus from July 1, 1999 until December 31, 2000
4.0% of savings
Focus from January 1, 2001 until termination
4.5% of savings
Ohio Comp 5% of PPO Savings
External Networks Currently Distributed by HNCIS
Medview 15% of PPO savings
CCN* 22% of PPO Savings
FA Richard 25% of PPO Savings
HFN 16% of PPO Savings
Interplan 16% of PPO Savings,
15% in primary
NCC (only Tyson) 18% of PPO Savings
PHN 16% of PPO Savings
Pacific Foundation 16% of PPO Savings
CCN Exceptions:
1. Florida & CA IP @ 30% of PPO Savings
2. New York to be determined
All other networks require execution of a
distribution agreement between HNCIS and
the network before rates can be quoted.
- ------------------------------------------------- ---------------------------------------------------
Page: 2 of 3
</TABLE>
<PAGE>
[LOGO OF HNC]
Effective Date as of May 1, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------- ---------------------------------------------------
<S> <C>
PPO Access Rates For Additional Internally Owned
and Managed Networks Implemented in the Future:
. Currently loaded and Maintained By Client . If added, will be negotiated at that time
. Loaded and Maintained By HNCIS
- ------------------------------------------------- ---------------------------------------------------
PPO Access Rates For Additional External Networks
Not Distributed by HNCIS Implemented in the
Future:
. Loaded and Maintained By HNCIS . If added, will be negotiated at that time
- ------------------------------------------------- ---------------------------------------------------
Mail-In & Processing Support Services Fees
- ------------------------------------------------- ---------------------------------------------------
Mail-In Services For Overflow Support at HNCIS
Service Center: . 15% of Savings
. Nurse Consultant Reviews of Difficult Bills . $3.75 plus $1.25 per line
. Review of Overflow Bills
- ------------------------------------------------- ---------------------------------------------------
Flying Keyers at Client's Site:
. Per Medical Bill Reviewer . $60 per hour
. Travel and Expenses . Actual Expenses Incurred
- ------------------------------------------------- ---------------------------------------------------
Other Services & Fees: Fee
- ------------------------------------------------- ---------------------------------------------------
MedPro Module . $2.50 Per Created or Imported Treatment Plan
- ------------------------------------------------- ---------------------------------------------------
Fee Negotiation Module: . $2.50 Per Recorded Negotiated Record
Notes:
1 . Utilization of PPO Networks with this
module is prohibited.
2. All PPOs loaded on CRLink must have
an agreement to distribute between
HNC Insurance Solutions and the PPO
before being added to the CRLink
system.
- ------------------------------------------------- ---------------------------------------------------
- ------------------------------------------------- ---------------------------------------------------
The parties will agree on SCR agreement items to . Priority Levels 1, 2 & 3 included at no
be billed in an Exhibit to the Definitive additional cost; Priority Level 4 at
Agreement per the following description: $175 per hour + actual expenses incurred
Priorities 1 and 2 have been defined with
priorities and time frames at no charge.
Priority 3 will be included in scheduled
quarterly updates, with primary Concentra
input on priorities. Priority 4 will be
charged at the hourly rate plus expenses.
- ------------------------------------------------- ---------------------------------------------------
- ------------------------------------------------- ---------------------------------------------------
Accelerated Support Fee, Invoiced June 30, 1999: . $225,000.00
- ------------------------------------------------- ---------------------------------------------------
Complex Bill Review Services Additional 15% of savings (does not include
standard per bill fees or PPO fees).
- ------------------------------------------------- ---------------------------------------------------
Page: 3 of 3
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
---- ----------------------
<S> <C>
Concentra Management Services, Inc...................... Nevada
Concentra Preferred Systems, Inc........................ Delaware
Prompt Associates, Inc.................................. Delaware
First Notice Systems, Inc............................... Delaware
Focus Healthcare Management, Inc........................ Tennessee
Hillman Consulting, Inc................................. Nevada
CRA Managed Care of Washington, Inc..................... Washington
CRA-MCO, Inc............................................ Nevada
Drug-Free Consortium, Inc............................... Texas
Concentra Managed Care Services, Inc.................... Massachusetts
Concentra Health Services, Inc.......................... Nevada
Concentra Managed Care Business Trust................... Massachusetts
Occucenters I, L.P...................................... Texas
OCI Holdings, Inc....................................... Nevada
Concentra Laboratory, L.L.C............................. Delaware
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,371
<SECURITIES> 0
<RECEIVABLES> 184,762
<ALLOWANCES> 28,523
<INVENTORY> 0
<CURRENT-ASSETS> 199,284
<PP&E> 174,209
<DEPRECIATION> 70,141
<TOTAL-ASSETS> 654,104
<CURRENT-LIABILITIES> 96,914
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (39,273)
<TOTAL-LIABILITY-AND-EQUITY> 654,104
<SALES> 0
<TOTAL-REVENUES> 681,412
<CGS> 0
<TOTAL-COSTS> 534,489
<OTHER-EXPENSES> 132,670
<LOSS-PROVISION> 43,858
<INTEREST-EXPENSE> 35,779
<INCOME-PRETAX> (18,235)
<INCOME-TAX> 8,269
<INCOME-CONTINUING> (26,504)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,504)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
