RULE NO. 424(b)(4)
REGISTRATION NO. 333-90765
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PROSPECTUS
Concentra Operating Corporation
Exchange Offer for $190,000,000
13% Series A Senior Subordinated Notes due 2009
--------------------
This is an offer to exchange the outstanding, unregistered 13% senior
subordinated notes of Concentra Operating Corporation you now hold for new,
substantially identical 13% senior subordinated notes that will be free of the
transfer restrictions that apply to the old notes. This offer will expire at
5:00 p.m., New York City time, on March 6, 2000, unless we extend it.
The new notes will not trade on any established exchange.
A DESCRIPTION OF THE RISKS THAT YOU SHOULD CONSIDER BEGINS ON PAGE 12 OF
THIS PROSPECTUS.
This prospectus is dated February 14, 2000.
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TABLE OF CONTENTS
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Page
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Prospectus Summary.................................................. 2
Risk Factors........................................................ 12
This Prospectus Includes Forward Looking Statements ................ 18
Market Share and Industry Data ..................................... 18
The Transactions and Use of Proceeds................................ 18
The Exchange Offer.................................................. 20
Capitalization...................................................... 26
Selected Consolidated
Financial Data.................................................... 27
Management's Discussion and
Analysis of Financial Condition and
Results of Operations............................................. 28
Business............................................................ 45
Management.......................................................... 61
Principal Stockholders.............................................. 71
Certain Relationships and Related
Transactions...................................................... 73
Description of Certain
Indebtedness...................................................... 75
Description of New Notes............................................ 78
Certain U.S. Federal Income
Tax Considerations................................................ 120
Plan of Distribution................................................ 120
Legal Matters....................................................... 121
Experts............................................................. 121
Where You Can Get More Information.................................. 121
Index to Consolidated Financial
Statements and Schedules.......................................... F-1
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PROSPECTUS SUMMARY
The following summary contains a general discussion of our businesses, the
exchange offer and summary financial information. We encourage you to read this
entire prospectus for a more complete understanding of Concentra Operating
Corporation, the subsidiary guarantors and the exchange offer. Concentra
Operating became a wholly-owned subsidiary of Concentra Managed Care, Inc. on
August 17, 1999 as a result of the merger of Concentra and Yankee Acquisition
Corp.
OUR COMPANY
Who We Are
We are the largest company primarily dedicated to providing healthcare
services relating to workplace injuries and illnesses. We have developed a
delivery model of integrated healthcare services to reduce costs for our
customers. This model includes three distinct categories of services:
o Occupational healthcare services involve the provision of healthcare
services to the employees of our local employer customers. These
services include:
- injury care and physical therapy services for work-related
injuries and illnesses,
- physical examinations,
- substance abuse testing, and
- other loss prevention services.
o Specialized cost-containment services involve monitoring the timing and
appropriateness of medical care, as well as the proper pricing for that
care. These services include:
- First report of injury: A computerized reporting service using
two centralized national call centers to which an employer or
insurance company adjuster communicates reports of injuries or
losses as soon as they occur. For injuries, we then forward
the report to the appropriate state agency, the employer and
the insurance company to assist in the timely preparation and
distribution of state-mandated injury reports and providing
our customers with a tool to maximize control over the claim.
- Telephonic case management: A service using the telephone to
manage workers' compensation claims for 30 to 90 days
following the first report of injury. These units accept first
reports of injury, negotiate discounts with hospitals and
other providers, identify care alternatives and work with the
injured employees to minimize lost time on the job.
- Utilization management: A two-step service consisting of (1)
ensuring that medical procedures are certified by one of our
registered nurses and/or physicians for medical necessity and
appropriateness of treatment before the medical procedure is
performed and (2) after a treatment plan has been certified, a
follow-up call by our employee to evaluate compliance and/or
discuss alternative treatment plans.
- In and out-of-network bill review: A service where we use
sophisticated software programs to review and reduce our
customers medical bills, including hospital bills, both within
and outside of their healthcare network, to either the fee
mandated by the state for workers' compensation claims or a
percentage of the usual, customary and reasonable rates that
exist in states that do not mandate such fees. In addition,
our software also enables our clients to access the pricing
schedules of some preferred providers organizations that
represent additional savings below the state mandated fees or
customary rates.
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- Preferred provider organization network access: A service
where we provide injured workers with access to our national
network of selected medical providers capable of providing
quality medical care and pre-negotiated volume discounts.
- Independent medical exams.
- Peer reviews: A service where we review medical files for the
purpose of confirming that the care being provided appears to
be necessary and appropriate.
o Field-case management services involve assisting in the recovery of our
patients and expediting their return to work.
Currently, we provide initial treatment for approximately 4% of the
workplace injuries in the United States. We perform occupational healthcare
services for the employees of more than 80,000 local employers and provide
cost-containment and field-case management services to more than 2,000
customers. We are the largest provider of out-of-network bill review services to
the group health market.
How and Where We Operate
We provide our healthcare services through our network of 201 owned and
managed healthcare centers, located in 60 markets in 32 states. We design these
centers to efficiently provide quality occupational healthcare services directly
to our patients. In addition, they act as a starting point for providing our
cost-containment services. We also employ approximately 1,000 field case
managers nationwide to work on a one-on-one basis with injured employees and
facilitate communication among the employee's doctors, employer and insurance
carrier.
Our Strategy
Our strategy includes the following elements:
o emphasizing early intervention in the provision of healthcare services
in order to better identify cases that have the potential to result in
significant expenses for our clients, particularly lost work time by
injured employees, administrative or legal expenses, and to take
appropriate measures to reduce these costs before they are incurred.
o continuing to acquire and develop occupational healthcare centers and
expand our current healthcare network into both new and existing
markets.
o expanding our penetration of the group health market by offering more
comprehensive out- of-network bill review services.
o continuing to develop and integrate our information systems to make
more effective use of our proprietary knowledge base relating to
workplace injuries, treatment protocols, the outcomes of treatment and
the workers' compensation system's complex web of regulation.
o capitalizing on our national organization and local market presence by
offering potential clients a solution to all of their healthcare
management and cost containment needs.
Our Principal Executive Offices
The address of our principal executive offices is 5080 Spectrum Drive,
Suite 400 West Tower, Addison, Texas 75001. Our telephone number is (800)
232-3550.
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Risk Factors
You should consider all of the information in this prospectus before
tendering your old notes in the exchange offer. The risks of an investment in
our company include our substantial indebtedness, our ability to make future
acquisitions and manage growth, and the potential for adverse regulatory impact.
See the "Risk Factors" section of this prospectus for a discussion of these and
other risks involved in an investment in our company.
The Merger with Yankee
On August 17, 1999, Concentra merged with Yankee Acquisition Corp. As a
result of the merger, Concentra's common stock ceased to be publicly traded and
two new groups of equity investors each affiliated with Welsh, Carson, Anderson
& Stowe VIII, L.P. or Ferrer Freeman Thompson & Co., LLC acquired an aggregate
93% ownership interest in Concentra. Chase Capital Partners, employees of
Donaldson, Lufkin & Jenrette Securities Corporation and employees of Concentra
own the remaining interest. We entered in several financings, including the
issuance of your old notes to fund the merger. See "The Transactions and Use of
Proceeds." Immediately after the merger, Concentra contributed all of its
assets, including all of the shares of its subsidiaries to our company.
Our structure following each of the transactions related to our merger with
Yankee is reflected in the chart below (please note that ownership percentages
do not give effect to the exercise of warrants or options):
[GRAPHIC]
WCAS FFT Other
and Affiliates Investors
\ | /
\ | 7% / 7%
86% \ | /
|------------------------------------|
| Concentra Managed | \ Discount
| Care, Inc. --------- Debentures
| | /
-------------------------------------|
| Concentra | \
| Operating --------- Your Old Notes
| Corporation | /
| ("our company") | \ Senior Credit
|--------------------------------------------- Facilities
| | /
----------------------------
| |
Operating Subsidiaries
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
On August 17, 1999, we completed the private offering of $190.0 million
principal amount of our 13% senior subordinated notes due 2009. In connection
with that offering, we agreed, among other things, to deliver to you this
prospectus and to use our best efforts to complete the exchange offer by June
19, 2000.
The Exchange Offer
We are offering to exchange an equal principal amount of our 13% senior
subordinated notes due 2009, which have been registered under the Securities
Act, for our outstanding 13% senior subordinated notes due 2009. In order to be
exchanged, you must properly tender your outstanding note to us. You may tender
outstanding notes only in integral multiples of $1,000.
As of this date, there is $190.0 million principal amount of notes
outstanding. We will complete the exchange offer regardless of whether all or
less than all of the outstanding notes are tendered for exchange.
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Expiration Date
The exchange offer will expire at 5:00 p.m., New York City time,
March 6, 2000, unless we decide to extend the expiration date.
Procedures for Tendering Old Notes
If you wish to tender your old notes for exchange, you must transmit on or
before the expiration date a properly completed and executed copy of the letter
of transmittal delivered with this prospectus, or a facsimile of the letter of
transmittal, and all other documents required by the letter of transmittal,
together with certificates for your outstanding notes, to United States Trust
Company of New York, as exchange agent for the exchange offer. In the
alternative, you can tender your old notes by book-entry delivery following the
procedures described in this prospectus in "The Exchange Offer" section under
the heading "Procedures for Tendering."
Guaranteed Delivery Procedures
If you wish to tender your old notes and, before the expiration date of the
exchange offer,
o your old notes are not immediately available,
o you cannot deliver your old notes, the letter of transmittal or any
other required documents to United States Trust Company of New York, as
exchange agent, or
o you cannot complete the procedures for book-entry transfer,
you may tender your old notes by following the guaranteed delivery procedures
described in "The Exchange Offer" section under the heading "Guaranteed Delivery
Procedures."
Special Procedures for Beneficial Owners
If you wish to tender old notes that are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee, you should
promptly instruct the registered holder to tender on your behalf. If you wish to
tender on your own behalf, you must, prior to completing the procedures
described above under the heading "Procedures for Tendering Old Notes," either
register ownership of the outstanding notes in your name or obtain a properly
completed bond power from the registered holder.
Withdrawal Rights
You may withdraw the tender of your notes at any time prior to 5:00 p.m.,
New York City time, on the expiration date.
Certain U.S. Federal Income Tax Consequences
The exchange of new notes for outstanding notes in the exchange offer will
generally not be a taxable event for United States federal income tax purposes.
Conditions to the Exchange Offer
We did not put any conditions on the exchange offer other than that it does
not violate applicable law or any applicable interpretation of the SEC staff.
Use of Proceeds
We will not receive any proceeds from the issuance of the new notes in the
exchange offer.
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SUMMARY OF ABILITY TO RESELL THE NEW NOTES
We believe that you may offer the new notes issued in this exchange offer
for resale, or otherwise transfer the new notes without compliance with the
registration and prospectus delivery provisions of the Securities Act, but only
if:
o you acquire the new notes in the ordinary course of business,
o you are not participating, do not intend to participate and have no
arrangement or understanding with any person to participate in a
distribution of the new notes, and
o you are not an affiliate of ours, as the term affiliate is defined in
Rule 405 under the Securities Act and which may include our executive
officers and directors, another person having control over our
operations or management or an entity we control.
By executing and delivering the letter of transmittal, you will represent
to us that the above statements by you are true. If any of these statements are
untrue, you may not resell your notes unless an exemption from the registration
provisions of the Securities Act is available for the transfer or you resell
your notes in compliance with the prospectus delivery provisions of the
Securities Act.
Each broker-dealer that is issued new notes in the exchange offer for its
own account in exchange for old notes which were acquired by the broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of the new notes. A broker-dealer may use this
prospectus, as we may amend or supplement it from time to time, for an offer to
resell, resale or similar transfer of the new notes issued to it in the exchange
offer.
SUMMARY DESCRIPTION OF THE NEW NOTES
Notes Offered
We are offering $190.0 million aggregate principal amount of 13% senior
subordinated notes due 2009. The indenture will make the form and terms of the
new notes the same as the form and terms of the old notes except that:
o the new notes will bear a different CUSIP number from the old notes,
o the exchange offer will register under the Securities Act and,
therefore the new notes, will not bear legends restricting their
transfer, and
o registration rights will not apply to the new notes.
The new notes will evidence the same debt as the old notes, the indenture
and will entitle the new notes to the same benfits governing the old notes and
will treat the new notes as a single class with the old notes.
Issuer
The indenture makes Concentra Operating Corporation is liable for repayment
of the new notes.
Maturity
August 15, 2009.
Interest Payment Dates
We will pay interest on the notes on February 15 and August 15 of each
year, beginning February 15, 2000.
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Subsidiary Guarantees
Each of our subsidiaries, other than our joint ventures, is a guarantor.
Each guarantee is for the full amount of the notes and without condition. If we
cannot make payments on the notes when they are due, the indenture obligates the
guarantor subsidiaries to make them instead.
Ranking
The indenture subordinates the notes and the subsidiary guarantees to all
our senior debt, including all our debt under our senior secured credit
facilities. The notes rank equally with any senior subordinated debt, and rank
senior to all our subordinated debt. The notes rank below our guarantor
subsidiaries' current and future indebtedness, other than trade payables, except
indebtedness that expressly provides that it is equal or subordinate in right of
payment to these notes and the subsidiary guarantees.
On September 30, 1999, the notes ranked junior to $375.6 million of senior
debt under our credit facilities and indebtedness of our subsidiary guarantors.
Optional Redemption
We may redeem any of the notes on or after August 15, 2004 at the
redemption prices set forth in the "Description of the Notes" section under the
heading "Optional Redemption."
Prior to August 15, 2002, we may redeem up to 25% of the aggregate
principal amount of the then outstanding notes with the net proceeds of one or
more equity offerings at 113% of their principal amount, plus accrued and unpaid
interest.
Mandatory Offer to Repurchase
If we experience specific kinds of changes in control or engage in sales of
specific assets, we must offer to repurchase any then-outstanding notes at
prices listed in the section "Description of Notes" under the caption
"Repurchase at the Option of Holders."
Covenants
The indenture governing the notes contains covenants that, among other
things, limit our ability and the ability of some of our subsidiaries to:
o incur additional debt,
o pay dividends on, redeem or repurchase our capital stock,
o make investments,
o restrict dividend or other payments to us,
o enter into transactions with affiliates or related persons,
o guarantee indebtedness,
o sell assets,
o create liens,
o engage in a merger, sale or consolidation, and
o enter into new lines of business.
These covenants are subject to important exceptions and qualifications,
which are described in the section "Description of the Notes" under the caption
"Certain Covenants" in this prospectus.
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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
Set forth below are our summary historical and pro forma financial data. We
derived the summary historical consolidated financial data for the three years
ended December 31, 1998 from, and you should read them in conjunction with, the
audited consolidated financial statements of Concentra and related notes to
those financial statements included elsewhere in this prospectus. We derived the
summary historical consolidated financial data as of September 30, 1999 and for
the nine month periods ended, September 30, 1998 and 1999 from the unaudited
consolidated financial statements of Concentra Operating which, in the opinion
of management, includes all adjustments, consisting only of normal, recurring
adjustments, necessary for a fair presentation of our consolidated financial
condition and results of operations as of and for those periods. The operating
results for the nine month periods ended September 30, 1998 and 1999 do not
necessarily indicate of results to be expected for the full year.
The pro forma data as of and for the periods presented give effect to the
issuance of $565.0 million of new debt and the repurchase of $327.9 million of
existing indebtness in connection with the merger and recapitalization
transactions as if they were consummated at the beginning of the period
indicated.
The accompanying consolidated financial statements as of December 31, 1998
and September 30, 1999 and for the three and nine months ended September 30,
1998 and 1999 and related footnotes reflect the operating results of Concentra
through August 17, 1999 and the operating results of Concentra Operating from
August 18, 1999 through September 30, 1999. Concentra Operating is a
wholly-owned subsidiary of Concentra and we consider them entities under common
control, therefore, combined financial statements have been presented. We have
not reported earnings per share for all periods presented, as Concentra
Operating is a wholly-owned subsidiary of Concentra and has no publicly held
shares. You should read the summary historical consolidated financial data set
forth below together with, and we qualify that data in its entirety by, the
"Selected Historical Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of Concentra and notes to those financial statements
included elsewhere in this prospectus.
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Pro Forma
Pro Forma Nine
Year Months
Nine Months Ended Ended Ended
Year Ended December 31, September 30, December 31, September 30,
---------------------------- ---------------- ------------ -------------
1996 1997 1998 1998 1999 1998 1999
(Unaudited) (Unaudited)
(Dollar amounts in thousands)
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Statement of Operations Data:
Revenues.................... $372,683 $489,318 $611,056 $459,145 $506,157 $611,056 $506,157
Cost of services............ 289,928 372,639 469,297 345,191 392,929 469,297 392,929
-------- -------- -------- -------- -------- -------- --------
Gross profit............... 82,755 116,679 141,759 113,954 113,228 141,759 113,228
General and
administrative expenses.... 33,155 39,831 45,326 33,724 47,218 45,326 47,218
Amortization of intangibles. 3,442 5,908 8,119 6,102 9,495 8,119 9,495
Non-recurring charges(1).... 964 38,625 33,114 12,600 54,419 33,114 54,419
-------- -------- -------- -------- -------- -------- --------
Operating income.......... 45,194 32,315 55,200 61,528 2,096 55,200 2,096
Interest expense(2)......... 3,741 12,667 18,021 13,123 19,614 60,145 45,108
Interest income(2).......... (859) (2,297) (4,659) (2,939) (2,724) -- --
Other, net.................. 836 883 44 88 (147) 44 (147)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes(2).......... 41,476 21,062 41,794 51,256 (14,647) (4,989) (42,865)
Provision (benefit) for
income taxes(2).......... 13,437 11,062 19,308 23,803 9,829 127 (1,643)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) .......... $ 28,039 $ 10,000 $ 22,486 $ 27,453 $(24,476) $ (5,116) $ (41,222)
======== ======== ======== ======== ======== ========= =========
Earnings per share(3)
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Pro Forma
Pro Forma Nine
Year Months
Nine Months Ended Ended Ended
Year Ended December 31, September 30, December 31, September 30,
------------------------------ ----------------- ------------ -------------
1996 1997 1998 1998 1999 1998 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Dollar amounts in thousands)
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Other Financial Data:
EBITDA(4)..................... $ 54,506 $ 48,176 $ 78,555 $ 78,383 $ 27,827 $ 78,555 $ 27,827
Adjusted EBITDA(4)............ 55,470 86,801 111,669 90,983 82,246 111,669 82,246
Depreciation and amortization. 10,148 16,744 23,399 16,943 25,584 23,399 25,584
Capital expenditures.......... 24,024 25,535 34,187 26,243 25,950 34,187 25,950
Cash interest expense(5)...... 3,683 11,890 16,322 11,923 18,366 57,950 43,462
Ratio of earnings to fixed
charges(6).................. 6.2x 2.1x 2.6x 3.8x 0.4x 0.9x 0.2x
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Nine Months Ended
Year Ended December 31, September 30,
----------------------------- ------------------
1996 1997 1998 1998 1999
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Operating Data:
Service locations at end of period:
Occupational healthcare centers(7).................. 109 140 156 151 201
Cost containment services offices................... 70 83 86 86 80
Field case management offices(8).................... 118 122 89 117 89
Occupational healthcare centers
acquired during the period(9)....................... 32 22 12 10 45
Occupational healthcare centers
developed during the period......................... 10 9 4 1 --
Occupational healthcare centers same
market revenue growth(10)........................... 10.7% 11.0% 11.4% 11.5% 8.0%
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As of September 30, 1999
Actual
-----------------------
Balance Sheet Data: (In thousands)
Cash and cash equivalents............................................................... $ 10,584
Working capital......................................................................... 113,555
Total assets............................................................................ 648,804
Total debt.............................................................................. 565,969
Total stockholders' deficit............................................................. (37,445)
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(1) Concentra recorded the following non-recurring charges: (a) $38.6 million
in the third quarter of 1997 primarily related to the formation of
Concentra by the merger of CRA Managed Care, Inc. and OccuSystems, Inc.;
(b) $12.6 million in the first quarter of 1998 primarily related to the
merger with Preferred Payment Systems, Inc.; (c) $20.5 million in the
fourth quarter of 1998 primarily related to the reorganization of the
Managed Care Services division and charges related to the recognition of an
impairment loss on the intangible related to an acquired contract; and (d)
$54.4 million in the third quarter of 1999 primarily for fees, expenses and
other non-recurring charges associated with the merger.
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(2) The table below reflects the pro forma adjustments to record interest
expense, interest income and tax provision adjustments to reflect the
repayment of certain debt and the issuance of new debt associated with the
merger.
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Interest
Interest Expense
Amount Rate Adjustment
------- -------- -----------
Year Nine Months
Ended Ended
Dollars in Thousands December 31, 1998 September 30, 1999
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Repayment or equity contribution of debt:
Commitment fees on Revolving
Credit Facility.............................................. $ -- $ (250) $ (188)
4.5% Convertible Subordinated Notes due March, 2003............ (230,000) 4.50%(a) (8,165) (6,586)
6.0% Convertible Subordinated Notes due December, 2001........ (97,737) 6.00% (5,865) (3,720)
Interest on other indebtedness paid off during the year........ -- (2,042) (285)
--------- -------- --------
Total repayment or equity contribution of debt......... (327,737) (16,322) (10,779)
Issuance of new debt:
Term Facilities:
Commitment fee on new $100,000,000 Credit Facility........... -- 500 375
Tranche B at E.R. plus applicable margin due 2006............ 250,000 8.65%(b) 21,625 16,218
Tranche C at E.R. plus applicable margin due 2007............ 125,000 8.90%(b) 11,125 8,344
Senior Subordinated Notes at 13% due 2009...................... 190,000 13.00% 24,700 18,525
--------- -------- --------
565,000 57,950 43,462
Amortization of deferred finance costs on debt repaid.......... (1,699) (1,248)
Amortization of deferred finance costs on new debt (c)......... 2,195 1,646
Interest expense on new debt incurred to-date (d).............. -- (7,587)
-------- --------
Total interest expense pro forma adjustment.................... 42,124 25,494
Interest income pro forma adjustment (e)....................... 4,659 2,724
-------- --------
Total income (loss) before income taxes pro forma adjustment... (46,783) (28,218)
Provision (benefit) for income taxes pro forma adjustment (f).. (19,181) (11,472)
-------- --------
Total net income (loss) pro forma adjustment........... $(27,602) $(16,746)
======== ========
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(a) The 4.5% convertible subordinated notes were issued in March ($200.0
million) and April ($30.0 million) of 1998, as such, the interest
expense does not reflect a full year of interest expense.
(b) We assume that The Eurodollar Rate (E.R.) is 5.4% for the purposes
of calculating interest expense. The annual effect of a 1/8% change
in the interest rate on the $375.0 million variable rate debt is
$0.5 million for the year ended December 31, 1998 and $0.4 million
for the nine months ended September 30, 1999.
(c) We are amortizing the deferred finance fees of $18.0 million over
the weighted average life of the new debt of 8.2 years.
(d) Interest expense recorded through September 30, 1999 on new
indebtedness issued in connection with the merger.
(e) To record the decrease in interest income due to the use of
available cash.
(f) To record the tax benefit on the pro forma interest adjustments.
(3) As a result of Concentra going private in the merger transaction, there are
no longer publicly held shares outstanding and we believe that historical
earnings per share information is not meaningful.
(4) EBITDA represents net income before interest expense, interest income,
provision for income taxes, depreciation and amortization of intangibles
and includes depreciation and amortization of two 50% owned joint ventures
not consolidated by Concentra. Adjusted EBITDA represents EBITDA before
non-recurring charges. EBITDA is a measure commonly used by debt holders in
assessing a company's leverage. It provides debt holders with a measure of
cash flow available to meet debt service and interest payments. EBITDA
calculations can vary by company. We based our calculation on specific
provisions provided for in your note agreement. Your note agreement
specifically provides that we add back depreciation and amortization
amounts associated with our two 50% owned joint ventures. We do not intend
EBITDA and Adjusted EBITDA to represent cash flow from operations as
defined by generally accepted accounting principles. We prepare a statement
of cash flows, which measures changes in working capital and cash flows
from operations, investing activities and financing activities. For a more
relevant calculation of the sources and uses of Concentra's cash flows and
additional information with respect to our ability to meet our future debt
service, capital expenditures and working capital requirements, see F-5 and
F-16 in this prospectus.
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(5) Cash interest expense represents interest expense that we recorded during
the period excluding the amortzation of debt issuance costs.
(6) We compute the ratio of earnings to fixed charges by dividing the sum of
net earnings, before deducting provisions for income taxes and fixed
charges, and we adjust for the equity in earnings of unconsolidated
subsidiaries and related distributions, by fixed charges. Fixed charges
consist of interest on debt, including amortization of debt issuance costs,
and one-fourth of rent expenses, which management estimates as the interest
component of such rentals. The ratio of earnings to fixed charges is not
adequate to cover fixed charges for the pro forma year ended December 31,
1998 and the nine month and pro forma nine month periods ended September
30, 1999, by $5.2 million, $14.7 million, and $43.2 million, respectively.
(7) Does not include the assets of occupational healthcare centers which we
acquired and subsequently divested or consolidated into existing centers
within a market.
(8) The decline in field case management offices in 1998 is primarily due to
the fourth quarter of 1998 reorganization which included facility
consolidations.
(9) Represents the assets of occupational healthcare centers which we acquired
during each period presented and did not subsequently divest.
(10) Occupational healthcare centers same market revenue growth sets forth the
aggregate net change from the prior period for all markets in which we have
operated healthcare centers for longer than one year, excluding revenue
growth due to acquisitions of additional centers.
RECENT DEVELOPMENTS
Our revenues for the three-month period ended December 31, 1999 increased
15% to $175.3 million from $151.9 million for the three-month period ended
December 31, 1998. Our adjusted EBITDA for the three-month period ended December
31, 1999 increased 9% to $22.5 million from $20.7 million for the three-month
period ended December 31, 1998. Our operating income for the three-month period
ended December 31, 1999 increased to $12.2 million from a loss of $6.3 million
for the three-month period ended December 31, 1998. Our net loss for the
three-month period ended December 31, 1999 decreased to $2.0 million from a loss
of $5.0 million for the three-month period ended December 31, 1998.
Our revenues for the year ended December 31, 1999 increased 12% to $681.4
million from $611.1 million for the year ended December 31, 1998. Our adjusted
EBITDA for the year ended December 31, 1999 decreased 6% to $104.7 million from
$111.7 million for the year ended December 31, 1998. Our operating income for
the year ended December 31, 1999 decreased to $14.3 million from $55.2 million
for the year December 31, 1998. Our net income for the three-month period ended
December 31, 1999 decreased to a loss of $26.5 million from net income of $22.5
million for the three-month period ended December 31, 1998.
Our net income for the full year ended December 31, 1999, includes a
non-recurring charge of $54.4 million, $45.9 million on an after-tax basis,
incurred in the third quarter of 1999 primarily for fees, expenses and
restructuring charges associated with the merger. Similarly, results for the
three-month period ended December 31, 1999 and the year ended December 31, 1999
include non recurring charges of $20.5 million, $12.1 million on an after-tax
basis, and $33.1 million, $21.7 million on an after-tax basis, respectively. The
fourth quarter charge primarily reflects expenses related to severance, facility
closings and consolidation, as well as the write off of some assets. Our results
for the year ended December 31, 1998 include a charge taken during that year,
which reflected fees, expenses and restructuring charges primarily associated
with its acquisition of Preferred Payment Systems, Inc.
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RISK FACTORS
You should carefully consider the following factors, and the other factors
described in this prospectus before deciding to exchange the old notes for new
notes. Any of the following risks could have a material adverse impact on our
business financial condition or results of operations or on the value of the
notes.
Risks Applicable to the Notes
If we cannot generate cash, then we will not be able to service our
indebtedness.
As of September 30, 1999, our consolidated indebtedness was approximately
$566.0 million. This represents approximately 107% of our total capitalization.
In addition, our business strategy calls for significant capital expenditures
for acquisition and development. The indenture governing the notes and our other
debt instruments allow us to incur additional indebtedness, including secured
indebtedness and $98.55 million of unused drawing capacity under the senior
credit facilities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Our ability to make payments on and to refinance our indebtedness,
including the notes, 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 $65.0 million.
We believe our cash flow from operations, available cash and available
borrowings under the senior 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 the
senior credit facilities in an amount sufficient to enable us to pay our
indebtedness, including the notes, or to fund our other liquidity needs.
If we go bankrupt, liquidate or reorganize, then you may not receive full
payment on your notes.
The indenture does not secure the notes nor the guarantees with any of our
or the subsidiary guarantors assets. Further, the notes and guarantees will rank
below our senior debt and most of the subsidiary guarantors existing indebtness.
Accordingly, in the event of a bankruptcy, liquidation or reorganization or
similar proceeding relating to Concentra Operating or the subsidiary guarantors,
holders of the notes will participate with all other holders of our subordinated
indebtedness and the subsidiary guarantors in the assets remaining after we and
the subsidiary guarantors have paid all of the senior debt. As of September 30,
1999, our consolidated indebtedness was $566.0 million, $376.0 million of which
has ranked senior to the notes, and we had $98.5 million of unused drawing
capacity under the senior credit facilities. The subsidiary guarantors have
$376.0 million of indebtedness ranking senior to the guarantees. Because our
senior debt must be paid first, you may receive proportionately less than trade
creditors and other senior creditors in any such proceeding. In any of these
cases, we and the subsidiary guarantors may not have sufficient funds to pay all
of our creditors, therefore, holders of the notes may receive ratably less than
trade creditors.
If our subsidiaries cannot distribute cash to us, then we may not be able to
repay the notes.
We depend on the cash flow from our subsidiaries to meet our obligations,
including all payments on the notes. Accordingly, our ability to make payments
to holders of the notes depends on the receipt of sufficient funds from our
subsidiaries. The possible terms of instruments governing future indebtedness of
our subsidiaries may secure that future indebtedness with the assets of our
subsidiaries, and as a result those governing instruments may restrict our
ability to receive funds from our subsidiaries. The indenture for the notes
permits our subsidiaries to enter into agreements which restrict dividends and
distributions to the obligors under some circumstances. See "Description of
Notes--Certain Covenants--Other Payment Restrictions Affecting Restricted
Subsidiaries."
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Although we can use the cash distributed by our joint ventures to us or our
subsidiaries to make payments on the notes, our joint ventures do not guarantee
the notes.
Restrictions imposed by the senior credit facilities and the indenture will make
it more difficult for us to take the actions listed below.
The senior credit facilities and the indenture restrict our ability to:
o make investments;
o pay dividends and make distributions;
o repurchase stock;
o incur additional indebtedness;
o create liens;
o merge or consolidate our company or any of our subsidiaries;
o transfer and sell assets;
o enter into transactions with our affiliates;
o enter into sale and leaseback transactions; and
o issue common and preferred stock of our subsidiaries.
In addition, we must maintain minimum debt service and maximum leverage
ratios under the 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. The indenture makes our debt service ratio
and leverage ratio requirements or the quarter ended March 31, 2000 2:00 to 1:00
and 5:25 to 1:00, respectively. We have contacted the agent under our senior
credit facilities in order to review whether an amendment to these compliance
ratios is necessary for future periods. Although we believe that we will succeed
in these efforts, we cannot assure you that the banks will agree to any
amendment of the senior credit facilities in the event that we find such an
amendment is necessary. Furthermore, 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. Such an acceleration would also constitute
an event of default under the indenture relating to the notes. See "Description
of Certain Indebtedness" and "Description of Notes-Events of Default and
Remedies" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
If the interests of Welsh Carson diverge from the interests of the holders of
the notes, you may experience additional risk.
Welsh Carson controls a majority of the voting power of the outstanding
common stock of Concentra and controls all of our affairs and policies.
Circumstances may occur in which the interests of Welsh Carson could be in
conflict with the interests of the holders of the notes. In addition, Welsh
Carson may have an interest in pursuing acquisitions, divestitures or other
transactions that, in their judgment, could enhance their equity investment,
even though such transactions might involve risks to the holders of the notes.
See "Management" and "Certain Relationships and Related Transactions."
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If we don't have enough cash or the ability to borrow the necessary funds, we
may not be able to repurchase the notes.
Upon the occurrence of certain specific kinds of change of control events,
the indenture requires us to offer to repurchase all outstanding notes. Upon
such events, the indenture also obligates us to repay the outstanding principal
amount under our credit facilities and the accreted value of Concentra's
discount debentures. As of September 30, 1999, we had $375.6 million in
outstanding principal amount under our credit facilities and $110.0 million in
accreted value under Concentra's discounted debentures. Of this amount we must
repay the senior credit facilities prior to the repurchase of the notes. As a
result, it is possible that we will not have access sufficient funds at the time
of the change of control to make the required repurchase of notes. Further, at
the time such repurchase is to occur, it is possible that the restrictions in
the senior credit facilities will not allow such repurchases. See "Description
of Notes--Repurchase at the Option of Holders."
Bankruptcy law would impair your rights to be repaid if a court determined that
we issued the notes for inadequate consideration or with intent to defraud our
creditors.
Bankruptcy law would impair our ability to repay the notes and the ability
of our subsidiary guarantors to honor the guarantees if it is determined in a
bankruptcy, insolvency or similar proceeding that:
o we issued the notes or the subsidiary guarantors issued the guarantees
with the intent to delay or defraud any creditor;
o we or the subsidiary guarantors contemplated insolvency with a design
to prefer some creditors to the exclusion of others; or
o we issued the notes or the subsidiary guarantors issued the guarantees
for less than reasonably equivalent value and were insolvent at the
time the notes or guarantees were originally issued.
At the time of the merger, Concentra received the opinion of Valuation
Research, Inc. stating that it was not insolvent following the completion of the
merger and related financing transactions. Although we do not believe that a
court could find that we were insolvent at the time we issued the notes and we
believe that we issued the notes at their reasonably equivalent value, it is
possible that we may one day become insolvent. In such event, a court could,
among other things, void all or a portion of our and the subsidiary guarantors
obligations to you. In this case, you may not be repaid in full. A court may
also subordinate these obligations to our other indebtedness to a greater extent
than would otherwise be the case. In this case, other creditors would be
entitled to be paid in full before any payment could be made on the notes or the
guarantees.
If an active trading market does not develop, you may have difficulties
reselling the notes.
Prior to the offering, there was no public market for the notes. The
initial purchasers have informed us that they are making a market in these
notes. However, the initial purchasers may cease their market-making at any
time. In addition, changes in the overall market for high yield securities and
changes in our financial performance or prospects or in the prospects for
companies in our industry generally may reduce the liquidity of the trading
market in the notes and the market price quoted for the notes.
If you do not exchange your old notes for new notes, your old notes may trade at
discount because you may not be able to transfer such notes.
In the event the exchange offer is completed, the registration rights
agreement will not require us to register the old notes under the Securities
Act. In such event, the new notes would rank equally with the old notes. Holders
of old notes seeking liquidity in their investment would have to rely on
exemptions from registration requirements under the securities laws, including
the Securities Act. A reduction of the aggregate principal amount of the old
notes as a result of the completion of the exchange offer may adversely effect
the ability of holders of the old notes to transfer such notes.
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Risks Applicable to the Business
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.
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 will 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.
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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 providing these services, the physicians, 7 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 seven 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, are
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 used 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. See
"Business Information Systems and Technology."
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 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
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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 operation. See "Management."
THIS PROSPECTUS INCLUDES FORWARD LOOKING STATEMENTS
This prospectus includes "forward-looking statements" including, in
particular, the statements about our plans, strategies and prospects under the
headings "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "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 prospectus are in this prospectus, including under the headings
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." These factors
include:
o the effects of economic conditions;
o the impact of competitive services and pricing, including through
legislative reform;
o changes in accounting standards and regulations affecting the workers
compensation, insurance and healthcare industries in general;
o customer demand;
o changes in costs; and
o 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 prospectus. In light of these risks,
uncertainties and assumptions, the forward-looking events we discuss in this
prospectus might not occur.
MARKET SHARE AND INDUSTRY DATA
We based the market and industry data presented in this prospectus upon
third party data or we derived it from sources of industry data. While we
believe that the estimates are reasonable and reliable, in certain cases, the
estimates cannot be verified by information available from independent sources.
Accordingly, we can give no assurance that the market share data are accurate in
all material respects.
Concentra(R), First Notice Systems(R) and Focus Healthcare Management(R),
are our registered service marks. Trade names and trademarks of other companies
appearing in this prospectus are the property of their respective holders.
THE TRANSACTIONS AND USE OF PROCEEDS
The following is a summary of the structure of, and conditions to the
completion of, the merger and related transactions. This summary is not
complete. For a more complete understanding of the terms of the merger, you
should read the merger agreement, a copy of which has been filed with the
Commission.
Structure of the Merger
Under the merger agreement Yankee merged with and into Concentra and
Concentra was the surviving corporation in the merger. At the effective time of
the merger:
o the stockholders of Concentra, including option holders, received an
aggregate of $694.6 million in cash, without interest, for the shares
of Concentra common stock, other than shares held by Yankee, and "in
the money" stock options that they own. The merger agreement cancelled
shares held by Concentra, its subsidiaries, Yankee or its affiliates
in the merger; and
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o the merger agreement converted each outstanding share of common stock
of Yankee into one share of common stock of the same class of Concentra
the surviving corporation in the merger.
As a result of the merger, the Concentra common stock ceased to be publicly
traded. The surviving corporation in the merger continues to operate under the
name "Concentra Managed Care, Inc." Immediately after the merger, Concentra
transferred all of its existing assets, including the shares of its
subsidiaries, to Concentra Operating.
As a result of the merger, the Welsh Carson investors acquired an ownership
interest of approximately 86% in Concentra and Ferrer Freeman acquired an
ownership interest of approximately 7% in Concentra. The other investors own the
remaining approximate 7% interest. We accounted for the merger as a
recapitalization in which we did not affect the historical basis of our assets
and liabilities and did not create any new goodwill related to the merger.
Financing of the Merger
A total of approximately $1.1 billion was required to:
o pay the cash consideration to Concentra stockholders in the merger;
o repay indebtedness, including the purchase of Concentra's outstanding
convertible subordinated notes; and
o pay related fees and expenses.
The sources of funding for the transactions were:
o $80.9 million of cash from Concentra;
o drawings of $375.0 million under the senior credit facilities;
o net proceeds of $110.0 million from the issuance of the discount
debentures;
o proceeds of $423.7 million from the equity contributions; and
o net proceeds of $190.0 million from the offering of the old notes.
Debt Tender Offers
In connection with the merger, Concentra conducted debt tender offers to
acquire all of its outstanding convertible subordinated notes and to eliminate
the interest expense associated with those notes. Concentra bought all but
$190,000 of the 6.0% convertible subordinated notes and bought all but $100,000
of the 4.5% convertible subordinated notes. We completed an offer to repurchase
the outstanding 6.0% convertible subordinated notes and 4.5% convertible
subordinated notes not previously tendered and accepted for payment at $1,000
per $1,000 principal amount plus accrued and unpaid interest. In that offer,
Concentra bought all of the remaining 4.5% convertible subordinated notes and
bought all but $13,000 of the 6.0% convertible subordinated notes. The indenture
governing the notes will permit us to distribute funds to Concentra to pay
interest, principal, any premium and any amounts due upon conversion of the
remaining $13,000 of 6.0% convertible subordinated notes.
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THE EXCHANGE OFFER
Purpose of the Exchange Offer
A registration rights agreement currently entitles the holders of old notes
to registration rights. The registration rights agreement obligates us to file
with the Commission a registration statement covering the offer by us to the
holders of the old notes to exchange all of the old notes for the new notes.
This exchange offer, if completed, will satisfy our obligations under the
registration rights agreement.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying letter of transmittal, we will accept all notes properly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date. We will issue $1,000 principal amount of new notes in exchange
for each $1,000 principal amount of old notes accepted in the exchange offer.
Holders may tender some or all of their notes under the exchange offer.
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, we believe that you may offer for
resale, resell and otherwise transfer the new notes, issued pursuant to the
exchange offer in exchange for old notes, unless you are a holder that is our
"affiliate" within the meaning of the Securities Act or you are a broker-dealer,
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such new notes are acquired in the ordinary
course of business, and you have no arrangement with any person to participate
in the distribution of such new notes. See Morgan Stanley & Co., Inc.,
Commission No-Action Letter (available June 5, 1991), Exxon Capital Holdings
Corporation, Commission No-Action Letter (available May 13, 1988), and Shearman
& Sterling, Commission No-Action Letter (available July 2, 1993).
If you participate in the exchange offer for the purposes of distributing
securities in a manner that the Commission does not permit, you could not rely
on the position of the staff of the Commission in Exxon Capital Holdings
Corporation or similar interpretive letters and could not resell your notes
unless an exemption from the registration provisions of the Securities Act is
available for the transfer or you resell your notes in compliance with the
registration and prospectus delivery requirements of the Securities Act.
A broker-dealer can only transfer new notes issued to a broker-dealer in
the exchange offer for the broker-dealer's own account which the broker-dealer
acquired as a result of market-making activities or other trading activities, if
the broker-dealer acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of new notes.
The letter of transmittal states that by so acknowledging and by delivering a
prospectus, the Commission will not deem a broker-dealer to admit that it is an
"underwriter" within the meaning of the Securities Act. A broker-dealer may use
this prospectus, as we may amend the broker-dealer or supplement it from time to
time, in connection with resales of new notes. See "Plan of Distribution."
Except as described above no one may use this prospectus for an offer to
resell, resale or other transfer of new notes.
We will not make the exchange offer to, nor will we accept tenders for
exchange from, holders of old notes in any jurisdiction in which the exchange
offer or the acceptance of it would not comply with the securities or blue sky
laws of that jurisdiction.
Terms of the Exchange Offer
As of the date of this prospectus, there was $190.0 million aggregate
principal amount of the notes outstanding. We will send this prospectus,
together with the letter of transmittal, to all registered holders of old notes
as of the date of this prospectus.
20
<PAGE>
The exchange agent will deem that we accept validly tendered notes when, as
and if we give written notice of acceptance to the exchange agent. The exchange
agent will act as agent for the tendering holders of old notes for the purposes
of receiving the new notes from us and delivering new notes to the tendering
holders.
If you do not tender your old notes, they will remain outstanding and will
continue to accrue interest from their date of issue, August 17, 1999, at a rate
of 13% per annum.
Except as noted below, in the event we consummate the exchange offer, the
registration rights agreement will not require us to register untendered old
notes. In that event, holders of notes seeking liquidity in their investment
would have to rely on exemptions to registration requirements under the
securities laws, including the Securities Act. See "Risk Factors--Risks
Applicable to the Notes." The registration rights agreement requires us to file
a shelf registration statement with the Commission if a holder of notes notifies
us that such holder is not allowed to participate in this exchange offer by law.
Expiration Date; Extensions
The term "expiration date" means the expiration date on the cover page of
this prospectus, unless we, in our discretion, extend the exchange offer, in
which case the term "expiration date" means the latest date to which we extend
the exchange offer.
In order to extend the expiration date, we will notify the exchange agent
of any extension by written notice and will make a public announcement of that
extension, each prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date. The announcement may state that
we are extending the exchange offer for a specified period of time.
Procedures for Tendering
Unless you make the tender in book-entry form, to tender in the exchange
offer, a holder must complete, sign and date the letter of transmittal, or a
facsimile of it,
o have the signatures guaranteed if the letter of transmittal requires it
and
o mail or otherwise deliver the letter of transmittal or the facsimile,
the old notes and any other required documents, to the exchange agent
prior to 5:00 p.m., New York City time, on the expiration date.
We refer to the Depository Trust Company as the DTC. Any financial
institution that is a participant in The Depository Trust Company's system may
cause DTC to transfer the old notes into the exchange agent's account. In
connection with the delivery of old notes through book-entry transfer into the
exchange agent's account at DTC, you must transmit the letter of transmittal, or
facsimile, with any required signature guarantees and any other required
documents or an agent's message, as described below, to the exchange agent. The
exchange agent must also receive or confirm delivery of the letter of
transmittal and any other required documents at its addresses set forth under
the caption "Exchange Agent," below, prior to 5:00 p.m., New York City time, on
the expiration date. Delivery of documents to DTC in accordance with its
procedures does not constitute delivery to the exchange agent.
To effectively tender notes through DTC, the financial institution that is
a participant in DTC will electronically transmit its acceptance through the
Automatic Tender Offer Program. DTC will then edit and verify the acceptance and
send an agent's message to the exchange agent for its acceptance. The term
"agent's message" means a message that DTC transmits, and that the exchange
agent receives and forms part of the book-entry confirmation. That message
states that a participant in DTC expressly acknowledges to DTC that it is
tendering old notes that DTC subjects to book-entry confirmation. The
participant also acknowledges that the participant received and agrees to be
bound by the terms of the applicable letter of transmittal; and that we may
enforce that agreement against that participant. The exchange agent will make a
request to establish an account for the notes of DTC for the purposes of the
exchange offer promptly after the date of this prospectus.
21
<PAGE>
The method of delivery of old notes and the letter of transmittal and all
other required documents to the exchange agent is at the election and risk of
the holders. Instead of delivery by mail, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. You should not send your letter of transmittal of old notes to us. Holders
may request their respective brokers, dealers, commercial banks, trust companies
or nominees to effect the tenders for those holders.
If a broker, dealer, commercial bank, trust company or other nominee
registered your notes in its name and you wish to tender, you should contact the
registered holder promptly and instruct that registered holder to tender on
behalf of the beneficial owner. If the beneficial owner wishes to tender on that
owner's own behalf, the owner must, prior to completing and executing the letter
of transmittal and delivery of such owner's old notes, either make appropriate
arrangements to register ownership of the old notes in the owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
An eligible institution must guarantee a signature on a letter of
transmittal or a notice of withdrawal, unless you tender the old notes and you
are :
o a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal; or
o tendering for the account of an eligible institution, as described
below.
In the event that we require a guarantee of signatures on a letter of
transmittal or a notice of withdrawal an eligible institution must make that
guarantee.
An "eligible institution" is a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an eligible guarantor institution within the meaning of the
Exchange Act, which is a member of the Securities Transfer Agents Medallion
Program or the Stock Exchange Medallion Signature Program.
If the letter of transmittal is signed by a person other than the
registered holder of any old notes the registered holder must endorse the old
notes or a properly completed bond power signed by the registered holder must
accompany the old notes.
If trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity sign or endorse the letter of transmittal or bond powers, those persons
should so indicate when signing, and unless waived by us, submit evidence
satisfactory to us of their authority to act in that capacity with the letter of
transmittal.
Guaranteed Delivery Procedures
If you desire to accept the exchange offer, and
o certificates for the old notes are not immediately available;
o time will not permit a letter of transmittal or notes to reach the
exchange agent before the expiration date; or
o you cannot complete the procedure for book-entry transfer on a timely
basis;
you may effect a tender if the exchange agent has received at its addresses set
forth under the caption "Exchange Agent" below prior to 5:00 p.m., New York City
time, on the expiration date from an eligible institution a properly completed
and duly executed notice of guaranteed delivery, substantially in the form
provided by us, setting forth:
22
<PAGE>
o the name and address of the registered holder;
o the certificate numbers of the old notes;
o the principal amount of the notes to be tendered;
o stating that you are making the tender by the notice of guaranteed
delivery; and
o guaranteeing that within five New York Stock Exchange trading the
eligible institution will deliver days after the expiration date the
eligible distribution will deliver, the old notes, in proper form for
transfer, or a confirmation of book-entry transfer of the notes into
the exchange agent's account at DTC, together with a properly completed
and duly executed letter of transmittal, and any other required
documents, or, if applicable, an agent's message instead of the letter
of transmittal.
Unless you deposit old notes that you tendered by the above-described
method with the exchange agent within the time period set forth above, along
with a properly completed letter of transmittal and any other required documents
or, if applicable, an agent's message instead of the letter of transmittal, we
may, at our option, reject the tender.
Acceptance of Old Notes for Exchange
The tender by a holder of old notes will constitute an agreement between us
and the holder in accordance with the terms and subject to the conditions in
this prospectus and in the letter of transmittal.
We will determine all questions as to the validity, form, eligibility,
including time of receipt and acceptance for exchange of any tender of old
notes, which determination will be final and binding. We reserve the absolute
right to reject any or all tenders not in proper form or the acceptance for
exchange of which may, in the opinion of our counsel, be unlawful. We also
reserve the absolute right to waive any defect or irregularity in the tender of
any old notes. In addition, we reserve the right to waive any of the conditions
of the exchange offer in our reasonable discretion.
Our interpretation of the terms and conditions of the exchange offer,
including the instructions in the letter of transmittal, will be final and
binding, on all parties. Unless waived, you must cure any defects or
irregularities in connection with tenders of old notes within a time period we
will determine. Although we intend to request the exchange agent to notify
holders of defects or irregularities relating to tenders of old notes, neither
we, the exchange agent nor any other person will have any duty or incur any
liability for failure to give that notification. We will not consider your
tender of old notes valid until you cure or we waive those defects or
irregularities. Any old notes received by the exchange agent that you did not
properly tender and as to which you did not cure or we did not waive the defects
or irregularities will be returned by the exchange agent to the tendering
holders, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
By tendering, you will represent to us that, among other things,
o you will obtain the new notes acquired pursuant to the exchange offer
in the ordinary course of your business;
o you have no arrangement with any person to participate in the
distribution of those new notes;
o you are not an "affiliate," as defined under the Securities Act, of us;
and
o if you are a broker or a dealer, as defined in the Exchange Act, that
you acquired the old notes for your own account as a result of
market-making activities or other trading activities and that you will
comply with the registration and prospectus delivery requirements of
the Securities Act.
23
<PAGE>
Withdrawal of Tenders
Except as otherwise provided in this prospectus, you may withdraw tenders
of old notes at any time prior to 5:00 p.m., New York City time, on the
expiration date.
To withdraw a tender of notes in the exchange offer, the exchange agent
must receive a written transmission notice of withdrawal via telegram, telex,
facsimile transmission or letter at its address set forth under the caption
"Exchange Agent" below prior to 5:00 p.m., New York City time, on the expiration
date. Any notice of withdrawal must:
o specify the name of the person having deposited the old notes to be
withdrawn;
o identify the old notes you are withdrawing, including the certificate
number or numbers and principal amount of those notes, or, in the case
of old notes transferred by book-entry transfer, the name and number of
the account at DTC to be credited;
o be signed by the person having deposited the old notes to be withdrawn
in the same manner as the original signature on the letter of
transmittal by which those notes were tendered, including any required
signature guarantees, or be accompanied by documents of transfer
sufficient to have the trustee with respect to the old notes register
the transfer of such notes into the name of the person having made the
original tender and withdrawing the tender; and
o specify the name in which any notes are to be registered, if different
from that of the person having deposited the notes to be withdrawn.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of withdrawal notices which determination shall be
final and binding on all parties. We will deem as not validly tendered any old
notes you withdraw , and we will not issue new notes to you with respect to
withdrawn old notes unless the old notes so withdrawn are validly retendered. We
will return to you any old notes that you tender but that we do not accept for
exchange as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. We may return properly withdrawn old notes by
following one of the procedures described above under "Procedures for Tendering"
at any time prior to the expiration date.
Conditions
The exchange offer is not subject to any conditions other than that the
exchange offer does not violate applicable law or any applicable interpretation
of the staff of the Commission.
Accounting Treatment
We will record the new notes at the same carrying value as the old notes as
reflected in our accounting records on the date of the exchange. Accordingly, we
will not recognize any gain or loss for accounting purposes upon the completion
of the exchange offer. We will capitalize and amortize over the term of the new
notes any expenses of the exchange offer that we paid.
Exchange Agent
We appointed United States Trust Company of New York as exchange agent for
the exchange offer. You should direct questions and requests for assistance and
requests for additional copies of this prospectus or of the letter of transmital
and deliveries of completed letters of transmittal with tendered old notes to
the exchange agent addressed as follows:
24
<PAGE>
<TABLE>
<CAPTION>
By Overnight Courier & by Hand
after 4:30 P.M. on the expiration only: By Hand up to 4:30 P.M. By Registered or Certified Mail:
<S> <C> <C>
United States Trust Company United States Trust Company United States Trust Company
of New York of New York of New York
770 Broadway, 13th Floor 111 Broadway P.O. Box 844
New York, NY 10003 Lower Level Attn: Corporate Trust Services
Attn: Corporate Trust Services Attn: Corporate Trust Services Cooper Station
New York, NY 10006 New York, NY 10276-0844
</TABLE>
By Facsimile Number:
212-420-6211
Confirm by Telephone Number:
800-548-6565
Fees and Expenses
We will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and will reimburse the exchange
agent for its reasonable out-of-pocket expenses in connection with the exchange
offer. We may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this prospectus, letters of transmittal and related documents to you
in handling or forwarding tenders for exchange. In addition we will pay legal
and accounting fees that we incur in connection with this exchange offer.
25
<PAGE>
CAPITALIZATION
The following table presents, as of September 30, 1999, the unaudited
consolidated capitalization of Concentra Operating, including the sale of the
old notes in the offering, and the application of the net proceeds from the sale
of the notes to complete the merger and retirement of Concentra's existing
indebtedness.
<TABLE>
<CAPTION>
As of September 30, 1999
------------------------
(In thousands)
<S> <C>
Debt (including current portion):
Revolving credit facility............................................................ $ 1,500
6.0% convertible subordinated notes due 2001......................................... --
4.5% convertible subordinated notes due 2003......................................... --
Term loan facilities................................................................. 374,063
13% series A senior subordinated notes due 2009...................................... 190,000
Other debt........................................................................... 406
---------
Total debt......................................................................... 565,969
Total stockholder's deficit............................................................. (37,445)
---------
Total capitalization.................................................................... $ 528,524
=========
</TABLE>
26
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The table below presents consolidated historical financial data that have
been derived from Concentra's audited consolidated financial statements and
Concentra Operating's unaudited consolidated financial statements. You should
read the selected financial data in conjunction with Concentra's and Concentra
Operating's separate historical consolidated financial statements, related notes
and other financial information found elsewhere in this prospectus.
The accompanying consolidated financial statements as of December 31, 1998
and September 30, 1999 and for the three and nine months ended September 30,
1998 and 1999 and related footnotes reflect the operating results of Concentra
through August 17, 1999 and the operating results of Concentra Operating from
August 18, 1999 through September 30, 1999. Concentra Operating is a
wholly-owned subsidiary of Concentra and they are considered entities under
common control, therefore, combined financial statements have been presented.
Earnings per share has not been reported for all periods presented, as Concentra
Operating is a wholly-owned subsidiary of Concentra and has no publicly held
shares.
<TABLE>
<CAPTION>
Nine Months
Year Ended December Ended September 30,
----------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
Statement of Operations Data: (In thousands, except per share amounts) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... $223,499 $305,355 $372,683 $489,318 $611,056 $459,145 $506,157
ost of service............... 186,406 242,920 289,928 372,639 469,297 345,191 392,929
-------- -------- -------- -------- -------- -------- --------
Gross profit................. 37,093 62,435 82,755 116,679 141,759 113,954 113,228
General and administrative
expenses................... 20,299 30,220 33,155 39,831 45,326 33,724 47,218
Amortization of
intangibles............... 866 1,871 3,442 5,908 8,119 6,102 9,495
Non-recurring
charges (1)............... -- 898 964 38,625 33,114 12,600 54,419
-------- -------- -------- -------- -------- -------- --------
Operating income............. 15,928 29,446 45,194 32,315 55,200 61,528 2,096
Interest expense............. 5,956 5,499 3,741 12,667 18,021 13,123 19,614
Interest income.............. (276) (860) (859) (2,297) (4,659) (2,939) (2,724)
Other net.................... 160 561 836 883 44 88 (147)
-------- -------- -------- -------- -------- -------- --------
Income before taxes ......... 10,088 24,246 41,476 21,062 41,794 51,256 (14,647)
Provision for income
taxes (2).................. 6,802 7,771 13,437 11,062 19,308 23,803 9,829
-------- -------- -------- -------- -------- -------- --------
Net income before
extraordinary items (2).... $ 3,286 $ 16,475 $ 28,039 $ 10,000 $ 22,486 $ 27,453 $(24,476)
======== ======== ======== ======== ======== ======== ========
Earnings per share (3)
Other Financial Data:
Ratio of earnings to
fixed charges (4).......... 2.2x 3.6x 6.2x 2.1x 2.6x 3.8x 0.4x
Balance Sheet Data
(at period end):
Total assets................. $113,672 $188,530 $367,900 $482,533 $656,794 $658,772 $648,804
Total debt................... 83,785 34,639 142,229 206,600 327,925 327,898 565,969
Total stockholders'
equity (deficit)........... (5,820) 109,383 178,146 206,441 239,875 243,181 (37,445)
</TABLE>
- ------------
1) Concentra recorded the following non-recurring charges: (a) $38.6 million
in the third quarter of 1997 primarily related to the formation of
Concentra by the merger of CRA Managed Care, Inc. and OccuSystems, Inc.;
(b) $12.6 million in the first quarter of 1998 primarily related to the
merger with Preferred Payment Systems, Inc.; (c) $20.5 million in the
fourth quarter of 1998 primarily related to the reorganization of the
Managed Care Services division and charges related to the recognition of an
impairment loss on the intangible related to an acquired contract and (d)
$54.4 million in the third quarter of 1999 primarily for fees, expenses and
other non-recurring charges associated with the merger.
27
<PAGE>
(2) Prior to its recapitalization in March of 1994, CRA had elected to be taxed
as an "S" corporation. In connection with its recapitalization, CRA was
required to change from an "S" to a "C" corporation. This change resulted
in CRA recording an incremental tax provision of $3.8 million in the first
quarter of 1994. Concentra's pro forma net income for 1994 would have been
$3.4 million higher had CRA been subject to federal and state income taxes
during the entire period based upon an effective tax rate indicative of the
statutory rate in effect during the period.
(3) As a result of Concentra going private in the merger transaction, there are
no longer publicly held shares outstanding and we believe that historical
earnings per share information is not meaningful.
(4) The ratio of earnings to fixed charges is computed by dividing the sum of
net earnings, before deducting provisions for income taxes and fixed
charges, and adjusted for the equity in earnings of unconsolidated
subsidiaries and related distributions, by fixed charges. Fixed charges
consist of interest on debt, including amortization of debt issuance costs,
and one-fourth of rent expenses, estimated by management to be the interest
component of such rentals. The ratio of earnings to fixed charges is not
adequate to cover fixed charges for the pro forma year ended December 31,
1998 and the nine month and pro forma nine month periods ended September
30, 1999, by $5.2 million, $14.7 million, and $43.2 million, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with the more detailed
information in the historical consolidated financial statements of Concentra and
Concentra Operating, including the related notes thereto, appearing elsewhere in
this prospectus.
Recapitalization Transaction
On August 17, 1999, Concentra merged with Yankee, a corporation formed by
Welsh Carson, a 14.9% stockholder of Concentra. As a result of the merger,
41,056,966 shares of Concentra common stock were converted to $16.50 per share
in cash. The remaining 6,343,203 shares held by Yankee were not converted. Welsh
Carson acquired approximately 86%, funds managed by Ferrer Freeman acquired
approximately 7% and other investors acquired approximately 7% of the
post-merger shares of common stock of Concentra, Concentra Operating's parent
company, for $16.50 per share. Simultaneous with the right to receive cash for
shares, Yankee merged with and into Concentra and Concentra contributed all of
its operating assets and liabilities with the exception of $110,000,000 of 14%
Senior Discount Debentures due 2010 and $327,750,000 of 6.0% and 4.5%
Convertible Subordinated Notes to Concentra Operating, a wholly-owned subsidiary
of Concentra. The 6.0% and 4.5% Convertible Subordinated Notes were
substantially retired during the quarter as a result of the merger. The merger
was accounted for as a recapitalization transaction, with no changes to the
basis of assets or liabilities. Following Concentra's merger with Yankee,
Concentra 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 Concentra.
The merger transaction was valued at approximately $1.2 billion, including
the refinancing of $327.8 million of the 6.0% and 4.5% convertible subordinated
notes that were tendered during the quarter. To finance the acquisition of
Concentra Welsh Carson, Ferrer Freeman and the other investors invested
approximately $423.7 million in equity financing, including the value of shares
already owned by Welsh Carson, and $110.0 million of 14% senior discount
debentures due 2010 with warrants issued by Concentra 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's excess cash balances funded merger and financing
related fees and expenses and related employee stock option exercises and
cancellation payments.
28
<PAGE>
Concentra 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. Of this
non-recurring charge, approximately $16.4 million for professional fees and
services, $13.5 million for employee related stock option exercises and
cancellations, $10.5 million for a Welsh Carson transaction fee and $2.4 million
of other non-recurring charges was paid and $5.5 million of non-cash charges
for deferred compensation expense related to the accelerated vesting and
issuance of 210,000 shares of restricted stock was used through September 30,
1999. At September 30, 1999, approximately $6.1 million of the non-recurring
charge remains for professional fees and services, employee related stock option
exercises and other non-recurring charges.
Overview
Concentra 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. Following Concentra's merger
with Yankee, Concentra 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
Concentra.
Throughout this prospectus, 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 Concentra.
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 nine months ended September
30, 1998 and 1999, Health Services derived 63.2% and 63.7% of its net revenues
from the treatment of work-related injuries and illnesses, respectively, and
36.8% and 36.3% of its net revenues from non-injury related medical services,
respectively. For the years ended December 31, 1996, 1997 and 1998, Health
Services derived 63.8%, 63.5% and 63.1% of its net revenues from the treatment
of work-related injuries and illnesses, respectively, and 36.2%, 36.5% and 36.9%
of its net revenues from non-injury related medical services, respectively.
Physician and physical therapy services are provided at 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:
o Health Services can at all times establish or effect change in the
nominee shareholder;
o Health Services can cause a change in the nominee shareholder an
unlimited number of times;
o Health Services has sole discretion without cause to establish or
change the nominee shareholder;
o Health Services and each physician group would incur no more than a
nominal cost to cause a change in the nominee shareholder; and
o neither Health Services nor the physician groups are subject to any
significant adverse impact upon a change in the nominee shareholder.
29
<PAGE>
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.
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:
o first-report-of-injury, utilization management, precertification and
concurrent review;
o retrospective medical bill review;
o telephonic case management;
o preferred provider organizations, or preferred provider organization
network access;
o independent medical examinations;
o peer reviews; and
o out-of-network bill review services.
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 Concentra Subsidiary, Inc. 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., 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 experienced
significant growth in its specialized cost containment services by virtue of the
acquisitions of:
o Focus Healthcare Management, Inc. on April 2, 1996;
o Prompt Associates, Inc. on October 29, 1996;
o First Notice Systems, Inc. on June 4, 1997;
o About Health, Inc. by Preferred Payment Systems in a two-step
transaction on August 1, 1997 and October 31, 1997; and
o 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 six 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.
30
<PAGE>
The following table provides some information concerning our service
locations:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended Sept 30,
--------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998 1998 1999
Service locations at the end of the period:
Occupational healthcare centers (1)............. 54 71 109 140 156 151 201
Cost containment services offices............... 37 50 70 83 86 86 80
Field case management offices (2)............... 95 110 118 122 89 117 89
Occupational healthcare centers acquired
during the period (3)......................... 17 24 32 22 12 10 45
Occupational healthcare centers developed
during the period............................. 6 3 10 9 4 1 --
Occupational healthcare centers--
same market revenue growth (4)................ 13.4% 12.2% 10.7% 11.0% 11.4% 11.5% 8.0%
</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 market.
(2) The decline in field case management offices in 1998 is primarily due to
the fourth quarter of 1998 reorganization which included facility
consolidations.
(3) Represents the assets of occupational healthcare centers which were
acquired during each period presented and not subsequently divested.
(4) Occupational healthcare centers same market revenue growth sets forth the
aggregate net change 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 acquisitions of additional centers.
Results of Operations for the Three and Nine Months Ended September 30, 1998 and
1999
Revenues
Our total revenues increased 12.3% in the third quarter of 1999 to $176.7
million from $157.4 million in the third quarter of 1998. Health Services'
revenues increased 29.1% in the third quarter of 1999 to $89.9 million from
$69.6 million in the third quarter of 1998. Managed Care Services' revenues
decreased 1.1% in the third quarter of 1999 to $86.8 million as specialized cost
containment revenues increased 11.0% for the third quarter of 1999 to $50.7
million from $45.7 million in the third quarter of 1998 and field case
management revenues decreased 14.2% in the third quarter of 1999 to $36.1
million from $42.1 million in the third quarter of 1998.
Our total revenues increased 10.2% for the nine months of 1999 to $506.2
million from $459.1 million for the nine months of 1998. Health Services'
revenues increased 25.2% for the nine months of 1999 to $242.4 million from
$193.7 million for the nine months of 1998. Managed Care Services' revenues
decreased 0.6% for the nine months of 1999 to $263.7 million as specialized cost
containment revenues increased 10.5% for the nine months of 1999 to $151.6
million from $137.2 million for the nine months of 1998 and field case
management revenues decreased 12.6% for the nine months of 1999 to $112.1
million from $128.3 million for the nine months of 1998.
Health Services' revenue growth resulted primarily from the acquisition of
practices and an increase of business in existing markets.
The increase in specialized cost containment revenue growth is largely
attributable to:
o our growth in out-of-network bill review services;
o preferred provider organization network access fees;
31
<PAGE>
o first report of injury; and
o 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 and
the related transition of the field case management business. Prior to this
transition, the field case management business was 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 converted to 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 transition to the "task-based"
approach, but that 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 the Concentra Health and
Concentra Preferred Business System, offset against revenues during the nine
months ended September 30, 1998 and 1999 were $12.2 million and $18.1 million,
respectively.
Cost of Services
Our total cost of services increased 17.1% in the third quarter of 1999 to
$139.0 million from $118.7 million in the third quarter of 1998. Health
Services' cost of sales increased 39.4% in the third quarter of 1999 to $71.4
million from $51.2 million in the third quarter of 1998 while Managed Care
Services' cost of services increased 0.2% in the third quarter of 1999 to $67.6
million from $67.5 million in the third quarter of 1998.
Our total cost of services increased 13.8% for the nine months of 1999 to
$392.9 million from $345.2 million for the nine months of 1998. Health Services'
cost of sales increased 32.1% for the nine months of 1999 to $191.8 million from
$145.2 million for the nine months of 1998 while Managed Care Services' cost of
services increased 0.6% for the nine months of 1999 to $201.2 million from
$200.0 million for the nine months of 1998.
Our total gross profit margin decreased to 21.3% in the third quarter of
1999 compared to 24.6% in the third quarter of 1998. Health Services' gross
profit margin decreased to 20.6% in the third quarter of 1999 compared to 26.4%
in the third quarter of 1998 while Managed Care Services' gross profit margin
decreased to 22.1% in the third quarter of 1999 compared to 23.1% in the third
quarter of 1998.
Our total gross profit margin decreased to 22.4% for the first nine months
of 1999 compared to 24.8% for the first nine months of 1998. Health Services
gross profit margin decreased to 20.9% for the first nine months of 1999
compared to 25.0% for the first nine months of 1998 while Managed Care Services'
gross profit margin decreased to 23.7% for the first nine months of 1999
compared to 24.7% for the first nine months of 1998.
Health Services' gross profit margin decreased primarily as a result of:
o lower same market revenue growth during the quarter and nine months
ended September 30, 1999 than we expected, from 11.5% last year to 8.0%
this year, due to a decrease in visits for existing locations, or visit
growth, while expenses at those locations increased in anticipation of
traditional increases;
o an acceleration in the roll-out of patient tracking and billing systems
into the medical centers, which resulted in additional depreciation
related to those systems this year over last year;
o the impact of lower margins from practices recently acquired and
developed.
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<PAGE>
The decrease in visit growth may be attributable to:
o decreases in national injury trends;
o weather; and
o other operational considerations attributable to the quarter.
We anticipate that same market revenue growth will stabilize at current
levels. In addition, we anticipate that same market expense growth will decrease
to the same market revenue growth rate of 8%.
Health Services has also incurred start-up losses during the quarter of
approximately $1.9 million related to the newly established drug screening lab
in Memphis, TN and the acquisition of recently developed medical centers in
several new markets. Historically, as certain functions are consolidated and
other staff-related changes occur, coupled with increased patient volume, the
margins of acquired or developed practices have tended to improve.
Managed Care Services' gross profit margins decreased in the third quarter
and first nine months of 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:
o pricing concessions made in the second half of 1998;
o an increase of approximately $820,000, primarily related to the
provision for billing adjustments as a result of our experience related
to the billing and collection of revenue; and
o an increase in software maintenance fees associated with a third party
software supplier.
We expect the gross profit margin for provider bill review to continue to be
negatively affected for the remainder of 1999 versus 1998 due to the impact of
pricing concessions made in the second half of 1998 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 payment. 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 34.6% in the third quarter of
1999 to $16.0 million from $11.9 million in the third quarter of 1998, or 9.0%
and 7.5% as a percentage of revenue for the third quarter of 1999 and 1998,
respectively. General and administrative expenses increased 40.0% for the first
nine months of 1999 to $47.2 million from $33.7 million for the first nine
months of 1998, or 9.3% and 7.3% as a percentage of revenue for the first nine
months of 1999 and 1998, respectively. The increases 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 62.9% in the third quarter of 1999 to
$3.3 million from $2.1 million in the third quarter of 1998, or 1.9% and 1.3% as
a percentage of revenue for the third quarter of 1999 and 1998, respectively.
Amortization of intangibles increased 55.6% for the nine months of 1999 to $9.5
million from $6.1 million for the nine months of 1998, or 1.9% and 1.3% as a
percentage of revenue for the nine months of 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.
33
<PAGE>
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 three and nine months
ended September 30, 1998 and for the year ended December 31, 1998 would have
increased approximately $0.8 million, $2.4 million and $3.3 million,
respectively. As of September 30, 1999, net intangible assets consisted of the
following (amounts in thousands):
<TABLE>
<S> <C>
Goodwill, amortization period of 25 years....................................... $311,707
Customer lists, amortization period of 7 years.................................. 1,168
Assembled workforce, amortization period of 5 years............................. 1,330
--------
Total intangible assets, weighted average amortization period of 24.8 years.... $314,205
========
</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 September 30, 1999, we had paid approximately $5.3 million for
professional fees and services, $2.6 million in costs associated with personnel
reductions, $1.1 million in facility consolidations and closings, specifically
the payment of lease obligations related to these facilities, $1.6 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
September 30, 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 September 30, 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, $0.4 million in costs associated with settling claims on
other expired contracts, $2.8 million in facility consolidations and $0.1
million of other non-recurring costs. At September 30, 1999, approximately $5.9
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 September 30, 1999, we had paid approximately $16.4
million for professional fees and services, including legal, accounting and
regulatory fees, $13.5 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, and $2.4 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 September 30, 1999, approximately $6.1 million of the non-recurring
charge remains for professional fees and services, employee related stock option
exercises and other non-recurring charges. We anticipate that a significant
majority of this remaining charge will be used over the next 12 months.
Interest Expense
Interest expense increased $5.6 million in the third quarter of 1999 to
$10.2 million from $4.7 million in the third quarter of 1998 and increased $6.5
million for the first nine months of 1999 to $19.6 million from $13.1 million in
the first nine months of 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% offset by the retirement of
substantially all of the $327.8 million of the 6.0% and 4.5% convertible
subordinated notes.
34
<PAGE>
Interest Income
Interest income decreased $0.7 million in the third quarter of 1999 to $0.6
million from $1.3 million in the third quarter of 1998 and decreased $0.2
million for the first nine months of 1999 to $2.7 million from $2.9 million for
the first nine months of 1998 primarily as a result of excess cash being used to
complete the merger transaction and to pay related fees and expenses. The $0.2
million decrease in interest income for the first nine months of 1999 versus the
first nine months of 1998 is partially offset by the increase in our investment
of excess cash 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.
Other, net
Other income increased $0.4 million in the third quarter of 1999 to $0.4
million from $21,000 in the third quarter of 1998 and increased $0.2 million for
the first nine months of 1999 to $0.1 million from other expense of $0.1 million
for the first nine months of 1998. Other income and expense, net primarily
relates to minority interests.
Provision for Income Taxes
We recorded a tax benefit of $3.2 million in the third quarter of 1999
versus a tax provision of $9.0 million in the third quarter of 1998. The
effective tax rate was 7.0% and 42.0% in the third quarters of 1999 and 1998,
respectively. We recorded a tax provision of $9.8 million for the first nine
months of 1999 versus a tax provision of $23.8 million for the first nine months
of 1998. The effective tax rate was (67.1%) and 46.4% for the first nine months
of 1999 and 1998, respectively. Excluding the tax effects of the non-recurring
charges, the effective tax rate would have been 58.4% and 42.0% for the third
quarters of 1999 and 1998, respectively, and 46.2% and 42.0% for the first nine
months of 1999 and 1998, respectively. The above disparities in the effective
tax rates excluding the tax effects of the non-recurring charges is 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 the remainder of the year as the increase in interest
expense and goodwill amortization from the change in the amortization period to
25 years in 1999 versus 30 to 40 years in 1998 results in lower pre-tax earnings
while expense items not deductible for tax, 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:
o our acquisition of 16 occupational healthcare centers;
o our management of an additional four occupational healthcare centers
pursuant to a management contract acquired in the fourth quarter of
1997;
o an increase in business in our existing markets;
o development of sites in new markets; and
o an increase in our consulting and other ancillary services.
35
<PAGE>
Managed Care Services' specialized cost containment revenue growth is
largely attributable to:
o the growth of Preferred Payment Systems through its acquisition of
About Health, First Notice Systems and other immaterial entities; and
o 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 is 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.
Cost of Services
Our total cost of services increased 25.9% 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:
o an acceleration in the roll-out of patient tracking and billing systems
into our occupational healthcare centers;
o increased spending on marketing and facility improvements; and
o the impact of lower gross profit margins from practices recently
acquired and developed.
Historically, as we consolidate certain functions, make other staff-related
changes, plus experience an increase in patient volume, the gross profit margins
of our acquired or developed practices have tended to improve.
Managed Care Services has seen 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. We expect the gross profit margins for provider bill review to continue
to be affected negatively for the first half of 1999 compared to the first half
of 1998 due to the impact of pricing concessions made in the second half of 1998
and a higher level of bad debt provision.
General and Administrative Expenses
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.
36
<PAGE>
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 is the result of amortizing additional
intangible assets such as:
o goodwill;
o customer lists and assembled workforces primarily associated with the
purchases of First Notice Systems and About Health by Preferred Payment
Systems;
o certain occupational healthcare centers from Vencor, Inc.; and
o various smaller acquisitions by Health Services.
Non-recurring Charge
We recorded non-recurring charges for the years ended December 31, 1997 and
1998 of $38.6 million and $33.1 million, respectively.
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:
o $5.1 million for professional fees and services;
o $2.4 million in costs associated with personnel reductions;
o $0.7 million in facility consolidations and closings;
o $1.6 million associated with the write-off of deferred financing fees
on Preferred Payment; and
o $1.3 million of other non-recurring costs.
At December 31, 1998, approximately $1.5 million of the non-recurring
charge remains primarily related to remaining facility lease obligations.
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:
o $7.4 million in charges related to the recognition of an impairment
loss on the intangible related to an acquired contract;
o $2.5 million in costs associated with personnel reductions; and
o $1.1 million in facility consolidations.
At December 31, 1998, approximately $9.5 million of the non-recurring
charge remains primarily related to remaining facility lease obligations and
costs associated with settling claims on other expired contracts.
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. We
37
<PAGE>
are realizing savings of approximately $2.4 million per quarter in personnel and
facility related expenses and have not experienced any significant interruptions
in our operations as a result of the restructuring.
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:
o $11.6 million for professional fees and services;
o $16.2 million in costs associated with personnel reductions and the
consolidation of CRA's and OccuSystems' employee benefits;
o $5.9 million in facility consolidations and closings;
o $2.5 million for the write-off of start-up costs; and
o $2.4 million of other charges.
We expect to expend approximately $8.4 million over the next twelve months
relating to the first quarter of 1998 and the fourth quarter of 1998
non-recurring charges, consisting of approximately:
o $1.8 million of severance related costs;
o $3.2 million of facility related costs;
o $3.0 million of cost associated with setting claims on expired
contracts; and
o $0.4 million of other costs.
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.
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:
o approximately $122.0 million of outstanding borrowings under our
existing credit facility;
o debt assumed in the merger of Preferred Payment Systems; and
o the payment to Preferred Payment Systems dissenting shareholders.
Other Expense, Net
Our other expense, net primarily consists 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.
38
<PAGE>
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. We expect
to provide for our taxes at an effective tax rate of approximately 41% to 42%
for 1999.
Results of Operations for the Years Ended December 31, 1997 and 1996
Revenues
Our total revenues increased 31.3% in 1997 to $489.3 million from $372.7
million in 1996. Health Services' revenues increased 22.1% in 1997 to $207.7
million from $170.0 million in 1996. Managed Care Services' revenues increased
39.0% in 1997 to $281.6 million from $202.6 million in 1996, as specialized cost
containment revenues increased 70.6% in 1997 to $142.9 million from $83.8
million in 1996 and field case management revenues increased 16.7% in 1997 to
$138.7 million from $118.9 million in 1996.
Health Services' revenue growth resulted from:
o the acquisition of 16 occupational healthcare centers;
o the management of an additional four occupational healthcare centers
from Vencor, Inc. in the fourth quarter of 1997;
o an increase in business in our existing markets;
o development of sites in new markets; and
o an increase in consulting and other ancillary services.
Managed Care Services' specialized cost containment revenue growth is
largely attributable to:
o the acquisitions of Focus, Prompt, First Notice Systems and About
Health; and
o the growth in retrospective medical bill review, telephonic case
management and claims review services in existing service locations and
the expansion into additional service locations.
Managed Care Services' field case management revenue growth is primarily
due to growth in revenues from existing service locations, and our opening of 13
offices during 1996 and 1997.
Our total contractual allowances offset against revenues during the years
ended December 31, 1997 and 1996 were $14.7 million and $3.7 million,
respectively.
Cost of Services
Our total cost of services increased 28.5% in 1997 to $372.6 million from
$289.9 million in 1996. Health Services' cost of services increased 18.8% in
1997 to $155.4 million from $130.8 million in 1996, while Managed Care Services'
cost of services increased 36.5% in 1997 to $217.3 million from $159.2 million
in 1996.
Our total gross profit margins increased to 23.8% in 1997 compared to 22.2%
in 1996. Health Services' gross profit margins increased to 25.2% in 1997
compared to 23.1% in 1996, while Managed Care Services' gross profit margins
increased to 22.9% in 1997 compared to 21.5% in 1996.
39
<PAGE>
Health Services' gross profit margin improvement has resulted from
increased efficiencies and productivity. Managed Care Services has seen
improvement in gross profit margin primarily resulting from a shift in its
revenue mix towards specialized cost containment services, including those
services provided by Focus, Prompt, First Notice Systems and About Health, which
historically have had higher gross profit margins than revenues derived from
field case management.
General and Administrative Expenses
Our general and administrative expenses increased 20.1% in 1997 to $39.8
million from $33.2 million in 1996, or 8.1% and 8.9% as a percentage of revenue
for 1997 and 1996 respectively. This increase in general and adminis- trative
expenses was principally attributable to expenses associated with acquisitions
and our continued investment in the Information Services and Technology Group.
Amortization of Intangibles
Our amortization of intangibles increased 71.6% in 1997 to $5.9 million
from $3.4 million in 1996, or 1.2% and 0.9% as a percentage of revenues for 1997
and 1996, respectively. This increase is the result of amortizing additional
intangible assets such as goodwill, customer lists and assembled workforces
primarily associated with the purchase of:
o Focus;
o Prompt;
o First Notice Systems;
o About Health by Preferred Payment Systems;
o some occupational healthcare centers from Vencor, Inc.; and
o other smaller acquisitions.
Non-recurring Charge
We recorded a non-recurring charge of $38.6 million associated with the
1997 merger of CRA and OccuSystems. The charges we incurred were approximately:
o $11.6 million for professional fees and services;
o $16.2 million in costs associated with personnel reductions and the
consolidation of CRA's and OccuSystem's employee benefits;
o $5.9 million in facility consolidations and closings;
o $2.5 million for the write-off of start-up costs; and
o $2.4 million of other charges.
At December 31, 1997, approximately $7.5 million of the non-recurring
charge remains primarily related to personnel-related charges and facility
consolidations and closings.
Interest Expense
Our interest expense increased $8.9 million in 1997 to $12.7 million from
$3.7 million in 1996 due primarily to the issuance of $97.8 million principal
amount of our 6% convertible subordinated notes in December 1996, the
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issuance of indebtedness by Preferred Payment Systems in August 1996 and to
increased outstanding credit facility borrowings used to finance certain
acquisitions.
Interest Income
Our interest income increased $1.4 million in 1997 to $2.3 million from
$0.9 million in 1996 due primarily to the investment of excess cash generated
from the issuance of our 6% convertible subordinated notes until the funds were
utilized to finance certain acquisitions.
Other Expense, Net
Our other expense, net is primarily made up of minority investors' earnings
in consolidated affiliates. These amounts remained consistent between 1996 and
1997 at $0.9 million.
Provision for Income Taxes
Our provision for income taxes in 1997 and 1996 was $11.1 million and $13.4
million, respectively. On a pro forma basis, giving effect to the Preferred
Payment Systems merger, our provision for income taxes in 1997 and 1996 would
have been $13.9 million and $16.2 million, respectively, resulting in pro forma
effective tax rates of 65.9% and 39.0%, respectively. Excluding the tax effects
of the non-recurring charge, our pro forma effective tax rate would have been
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 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. Managed Care Services' field case management
revenues have historically been flat in the fourth quarter compared to the third
quarter due to the impact of vacations and holidays. Although our revenue growth
may obscure the effect of seasonality in our financial results, the first and
fourth quarters generally reflect lower revenues when compared to our second and
third quarters.
Information Systems--Year 2000
The Year 2000 concern, which is common to most companies, concerns the
inability of information and non-information systems, primarily computer
software programs, to properly recognize and process date sensitive information
as the Year 2000 approaches. System database modifications and/or implementation
modifications will be required to enable such information and non-information
systems to distinguish between 21st and 20th century dates. We have completed a
number of acquisitions in recent years, and the information systems of some of
the acquired operations have not been fully integrated with our information
systems.
We have formed a Year 2000 Program Office to provide a centralized
management function for our entire organization that will assist in identifying,
addressing and monitoring our Year 2000 readiness and compliance programs. Our
Year 2000 Program Office has organized teams at each division to research Year
2000 compliance status and implement the appropriate solutions. Our Year 2000
Program includes five phases -- awareness, assessment, remediation, testing and
implementation. The awareness and assessment phases are complete and the
remediation, testing and implementation phases are substantially complete.
Our Year 2000 Program Office engaged an outside consultant to assist in an
inventory and assessment of Year 2000 affected areas, with a primary focus on
information technology systems, third party software and key suppliers and
selected customers. This inventory and assessment was completed in the fourth
quarter of 1998. Our Year 2000 Program Office also engaged an outside consultant
in the first quarter of 1999 to assist in inventory, assessment and remediation
efforts of our information systems infrastructure Year 2000 compliance. The
remediation of our information systems infrastructure was substantially complete
by the third quarter of 1999. We completed in the fourth quarter of 1998 an
internal inventory and assessment of non-information technology systems, e.g.
embedded systems con-
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tained in medical equipment. The remediation or replacement efforts of our
information systems infrastructure and non-information technology systems was
substantially complete by the end of the third quarter of 1999.
Our Year 2000 Program Office has established a vendor management program
protocol for soliciting Year 2000 compliance information from third parties and
requests for compliance information from all key suppliers and selected
customers were sent in the fourth quarter of 1998 and the first quarter of 1999.
We gathered Year 2000 compliance information from third parties and received the
majority of third party responses by the end of the third quarter of 1999. To
the extent responses have not been received, the division Year 2000 sponsors and
coordinators have ranked the third parties by level of importance to their
operations. Our Year 2000 Program Office conducted phone
surveys, sent additional mailings and performed research of public information
issued by the third-party, i.e., "web research." These responses have provided
compliancy status information that enables us to determine the extent to which
the Company may be vulnerable to those third parties' failure to remediate their
own Year 2000 issues. The vendor management program provides, on an ongoing
basis, the compliancy response information to the divisions for their evaluation
and determination if any action is required. The vendor management program was
substantially completed by October 31, 1999.
Our identified Year 2000 projects overlap with our ongoing investments in
information technology, as such, there are presently Year 2000 projects at the
remediation, testing and implementation phases. We believe that we have
identified most "mission critical" issues and have executed or are executing
appropriate action plans which may include software upgrades, replacement of
noncompliant components or referral of problems related to third party-provided
software to the original supplier. We have prepared our plans to have all
"mission critical" projects Year 2000 compliant by the end of the fourth quarter
of 1999. The majority of the "mission critical" projects have been remediated,
tested and deployed as of October 31, 1999. While some non-critical systems may
not be addressed until after December 1999, we believe those systems will not
disrupt our operations in a material manner. Any additional issues that may
arise will be classified as either "mission critical" or non-critical, and
appropriate action plans will be developed and implemented. We will continue to
formulate, evaluate and refine contingency plans deemed necessary in the fourth
quarter of 1999.
We currently estimate that the total cost of implementing our Year 2000
Program will be between $5.0 million and $10.0 million. This estimate is based
upon presently available information and will be updated as we continue through
implementation. It is expected these costs will not be significantly different
from our current planned investment for information technology, and therefore,
should 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 expect our investment in 1999 to
approximate $40.0 million. Of this investment, our Year 2000 Program Office
incurred expenses of approximately $1.9 million through September 30, 1999
primarily associated with the engagement of outside consultants to assist in the
inventory, assessment and remediation of Year 2000 affected areas.
Although we do not anticipate any disruption in our operations or financial
reporting as a result of system upgrades or system integrations, we cannot
assure you that such disruption will not occur or that the desired benefits from
the Year 2000 compliance of our information and non-information systems will be
realized. If we do not identify and remediate Year 2000 issues prior to January
1, 2000, our operations could be disrupted which could have a material adverse
effect on our business or operating results or financial condition. In addition,
we place a high degree of reliance on computer systems of third parties, such as
customers, trade suppliers and computer hardware and commercial software
suppliers. Although we are assessing the readiness of these third parties, there
can be no guarantee that the failure of these third parties to modify their
systems in advance of December 31, 1999 would not have a material adverse effect
on us. In addition, our operations could be disrupted if the companies with
which we do business do not identify and correct any Year 2000 issues and such
failure adversely affects their ability to do business with us. If all Year 2000
issues are not identified and all action plans are not completed and contingency
plans become necessary, we may not be Year 2000 compliant which could have a
material adverse effect on our long-term results of operations, liquidity, or
consolidated financial position. The amount of potential liability and lost
revenue has not been estimated.
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Liquidity and Capital Resources
Cash flows generated from (used for) operations were $34.9 million, ($0.5
million) and $15.6 million for the years ended December 31, 1998, 1997 and 1996,
respectively, and $4.3 million and $30.0 million for the first nine months of
1999 and 1998, respectively. During 1998, working capital used $20.3 million of
cash primarily due to an increase in accounts receivable of $19.8 million,
offset by a decrease in prepaid expenses and income taxes of $1.5 million and an
increase in accounts payable, accrued expenses and income taxes of $0.9 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 and the remaining obligations relating to the first quarter and
fourth quarter of 1998 non-recurring charges. During the first nine months of
1999, working capital used $13.0 million of cash due primarily to an increase in
accounts receivable of $23.7 million and prepaid expenses of $1.0 million
partially offset by an increase in accounts payable and accrued expenses of
$11.7 million. Within the next twelve months, it is anticipated that
approximately $11.3 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 $5.6 million of fees and other expenses related to the merger, $0.4
million of severance related costs, $3.9 million of facility related costs, $1.4
million of costs associated with settling claims on certain expired contracts.
We used net cash of $18.1 million in connection with acquisitions, $15.5
million to purchase marketable securities and $34.2 million of cash to purchase
property and equipment during 1998, the majority of which was spent on new
computer hardware and software technology. During the first nine months of 1999,
we used net cash of $43.3 million in connection with acquisitions and $26.0
million to purchase property and equipment, the majority of which was spent on
new computer and software technology partially offset by $15.5 million provided
by the sale of marketable securities.
Cash flows provided by financing activities of $121.6 million in 1998 was
due primarily to the issuance of $230.0 million principal amount of our 4.5%
convertible subordinated notes, $223.6 million, net of deferred finance fees. A
portion of the proceeds from the issuance of our 4.5% convertible subordinated
notes was used to:
o repay borrowings under our existing credit facility;
o repay debt assumed in our merger with Preferred Payment Systems; and
o for the payment of $15.0 million to Preferred Payment Systems
dissenting shareholders.
Net proceeds from the issuance of common stock under employee stock
purchase and option plans and the related tax benefit was $14.4 million. Cash
flows used by financing activities of $41.1 million in the nine months ended
September 30, 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 $32.0 million in 1998 and expected to be
approximately $40.0 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 expenditure not already disclosed in the
Year 2000 concern disclosure.
We were in compliance with our covenants, including our financial covenant
ratio tests, in the fourth quarter of 1999. We had borrowings outstanding under
the revolving credit facility of $4.0 million as of December 31, 1999. We have
contacted the agent under our senior credit facilities in order to review
whether an amendment to our financial compliance ratios is necessary for future
periods. Although we believe that we will succeed in these efforts, we cannot
assure you that the banks will agree to any amendment of the senior credit
facilities in the event that we find such an amendment is necessary. A failure
to comply with these ratios could cause an event of default under the senior
credit facilities which could result in an acceleration of the related
indebtedness before the terms of that indebtedness otherwise requires us to pay
that indebtedness.
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Such an acceleration would also constitute an event of default under the
indenture relating to the notes could also result in an acceleration of the
notes before the indenture otherwise requires us to pay the notes.
We 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 twelve
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 sure that any future debt or equity
financing will be available on terms favorable to us.
Legal Proceedings
As of November 1, 1999, we were aware of one consolidated lawsuit that was
originally filed in three suits by alleged stockholders of Concentra relating to
our merger with Yankee. All three lawsuits were filed in the Chancery Court for
New Castle County, Delaware. Each lawsuit named Concentra, its directors and
Yankee as defendants. The plaintiffs in each lawsuit sought to represent a
putative class of all public holders of Concentra common stock.
The lawsuits alleged, among other things, that Concentra's directors
breached their fiduciary duties to their stockholders by approving our merger.
Specifically, the directors were alleged to have breached their fiduciary duties
of care and loyalty by failing to conduct an impartial auction to determine the
maximum value attainable for the common stock of Concentra. The complaints
alleged that certain relationships between Welsh Carson and Concentra caused
Concentra's directors to favor Welsh Carson throughout the sale of Concentra and
to enter into a merger agreement that had the effect of capping the price of
Concentra's stock. The lawsuits sought among other things, preliminary and
permanent injunctive relief prohibiting consummation of the merger, unspecified
damages, attorneys' fees and other relief.
We have reached an agreement in principle to settle all outstanding class
action litigation filed in connection with the merger. In connection with the
proposed settlement, we amended the proxy statement mailed to our stockholders
to disclose the relationship prior to the merger between Concentra, Welsh Carson
and the individuals affiliated with Welsh Carson. In return, we, Welsh Carson
and their respective affiliates, officers, directors and other representatives
will be released from all claims of the class. As of the date of this
prospectus, the settlement remains conditioned upon the approval of the Delaware
court. Under the terms of the proposed settlement, the defendants agreed to pay
up to $325,000 in court-awarded attorneys' fees and expenses.
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BUSINESS
We are the largest company dedicated primarily to serving the occupational
healthcare market. We provide initial treatment for approximately 4% 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
worker's 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:
o efficiently managing the application of care and the return-to-work
process, thereby providing appropriate medical care while reducing the
non-medical costs associated with a claim; and
o 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 1998, we generated revenues of $611.1
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:
o healthcare services;
o specialized cost containment services; and
o field case management services.
We provide healthcare services through our network of 201 owned and managed
occupational healthcare centers, located in 60 markets in 32 states as of
November 1, 1999. As a primary starting point for the provision of 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 1998, revenues from healthcare services represented
approximately 42% 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
1998, 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
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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 1998, revenues from field case management services
represented approximately 28% of our total revenues.
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:
o workers' compensation injury care and related services; and
o 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 associated costs.
Typically, work-related injuries are broadly defined, and injured or ill
employees are entitled to extensive benefits. Employers are required, directly
or indirectly, to provide first-dollar coverage with no co-payment or deductible
due from the injured or ill employee for medical treatment and, in many states,
there is no lifetime limit on expenses. However, in exchange for providing this
coverage for employees, employers are not subject to litigation by employees for
benefits in excess of those provided pursuant to the relevant state statute. The
extensive benefits coverage, for both medical costs and lost wages, is provided
through the purchase of commercial insurance from private insurance companies,
participation in state-run insurance funds or employer self-insurance.
According to 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 of healthcare management and
cost containment services offering a full range of 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:
o broader definitions of work-related injuries and illnesses covered by
workers' compensation laws;
o the shifting of medical costs from group health plans to the workers'
compensation system;
o an aging work force;
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o the continued requirement that employers pay all of an employee's cost
of medical treatment, without any co-payment or deductible, and related
lost wages and non-medical costs; and
o the under-use 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
1998, 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.
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. Of the 32 states in which we currently operate occupational
healthcare centers, as of November 1999, 24 have fee schedules.
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, two states prohibited employee change of provider and 37
states and the District of Columbia placed restrictions on all employees
switching 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:
o employment-related physical examinations;
o drug and alcohol testing;
o functional capacity testing; and
o 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
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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 two broad
categories:
o specialized cost containment services; and
o 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:
o first report of injury;
o telephonic case management;
o utilization management;
o precertification and concurrent review;
o both in- and out-of-network bill review services;
o preferred provider organization network access;
o independent medical examinations; and
o peer reviews.
Field case management services involve:
o working on a one-on-one basis with injured employees; and
o facilitating communication among their various healthcare
professionals, employers and insurance company adjusters.
Field case management services are designed both to assist in maximizing
medical improvement and, where appropriate, to expedite return to work.
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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.
Our 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
always try to control their rising healthcare costs.
Healthcare Services
Occupational Healthcare Centers
Our 201 occupational healthcare centers at November 1, 1999 provide
treatment for:
o work-related injuries and illnesses;
o physical therapy;
o preplacement physical examinations and evaluations;
o certain diagnostic testing;
o drug and alcohol testing; and
o various other employer-requested or government-mandated occupational
health services.
During 1998, approximately 52% of all patient visits to our centers were
for the treatment of injuries or illnesses and 48% were for substance abuse
testing, physical examinations and other non-injury occupational healthcare
services.
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 346 affiliated physicians as of November 1, 1999 have 40-year terms.
Pursuant to each management agreement, we provide a wide array of business
services to the physician groups, such as:
o providing nurses and other medical support personnel;
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o practice and facilities management;
o billing and collection;
o accounting;
o tax and financial management;
o human resource management;
o risk management;
o 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.
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 11 joint ventures through which we operate 29 centers. In addition, we
have entered into three management agreements through which we operate six
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
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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 through our on-site risk assessment
and injury prevention programs. These programs include:
o identifying workplace hazards;
o designing plant-specific safety programs; and
o helping clients comply with federal and state occupational health
regulations.
We also provide ongoing educational programs for our clients.
For 1998, revenues from healthcare services represented approximately 42%
of our total revenues.
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:
o first report of injury;
o telephonic case management;
o utilization management;
o precertification and concurrent review;
o in and out-of-network bill review services;
o preferred provider organization network access;
o independent medical examinations;
o 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.
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We believe that the demand for specialized cost containment services will
continue to increase due to a number of factors, including:
o the increasing payor awareness of the availability of these techniques
for cost containment and case management;
o the effectiveness of managed care techniques at reducing costs for
group health insurance plans;
o the verifiable nature of the savings that can be obtained by
application of specialized cost containment techniques applicable to
workers' compensation; and
o 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 Concentra Preferred Systems, we continue to expand our market
presence in bill review services. We believe that Concentra Preferred Systems 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 have
not established fee schedules and into the auto insurance market where
appropriate. Concentra Preferred Systems uses a variety of techniques to reduce
expenses by repricing hospital and other facilities' bills. Using its services,
Concentra Preferred Systems 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:
o professional fee negotiation;
o line-item analysis;
o other specialized audit and bill review processes; and
o access to a nationwide preferred provider organization network.
Concentra Preferred Systems provides out-of-network bill review services to
healthcare payors in most risk categories:
o indemnity;
o preferred provider organization;
o health maintenance organization;
o ERISA self-insured plans;
o Taft-Hartley Plans;
o reinsurance carriers; and
o intermediaries such as administrative services organizations and third
party administrators.
Concentra Preferred Systems 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:
o over-use;
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o upcoding;
o cost shifting;
o various forms of revenue enhancement tactics; and
o inflated retail charge practices.
The current technology employed at Concentra Preferred Systems is designed
to:
o review most provider bill types;
o employ four transmission methods to aid the exchange of bill data;
o use various database technologies as part of the bill screening
process;
o score each bill referred based on the individual service requirements
of each client group; and
o route each bill to the most appropriate bill review service included in
our range of cost containment services.
Concentra Preferred Systems 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
reporting, as well as to property and casualty carriers that write both auto and
workers' compensation insurance. For injuries, each report is electronically
transferred or mailed to the state agency, the employer and the insurance
company. This service assists in the timely preparation and distribution of
state-mandated injury reports, 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.
Telephonic Case Management
This service provides for short-duration of 30 to 90 days for telephonic
management of workers' compensation claims. The telephonic case management
units:
o accept first reports of injury;
o negotiate discounts with hospitals and other providers;
o identify care alternatives; and
o 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.
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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, 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 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. Focus's national network includes approximately 227,000 individual
providers and over 2,800 hospitals covering 42 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 14
of our service locations and, upon completion, prepare reports describing their
findings.
Peer Reviews
Peer review services are provided by a physician, therapist, chiropractor
or other provider who reviews medical files to confirm that the care being
provided appears to be necessary and appropriate. The reviewer does not meet
with the patient, but merely reviews the file as presented.
For 1998, 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.
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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 89
offices in 49 states, the District of Columbia and Canada. This service
typically involves a case with a significant potential or actual amount of lost
work time or a catastrophic injury that requires detailed management and
therefore is referred out by the local adjuster to 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:
o increased acceptance of field case management techniques due to greater
exposure to the workers' compensation managed care market;
o 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;
o increased market share at the expense of smaller, undercapitalized
competitors; and
o the ability to access national accounts for use of case management
services.
For 1998, revenues from field case management services represented
approximately 28% of our total revenues.
Customers
Our occupational healthcare centers currently serve more than 80,000
employers-including local offices of national companies-ranging from large
corporations to businesses with only a few employees. 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 6% of our total revenue in
1998. 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.
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 350 full-time sales
and marketing personnel, or their part-time equivalent.
We market our services at both the local insurance company adjuster and
employer level. 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 critically important component of our
strategy, because of the decision-making authority that resides at the local
level and the relationship-driven nature of that portion of the business.
However,
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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.
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.
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:
o our specialization in the occupational healthcare industry;
o or broad knowledge and expertise;
o the effectiveness of our services as measured by favorable outcome;
o our ability to offer services in multiple markets; and
o 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.
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. We also compete
with many smaller companies that generally provide unbundled services on a local
level where such companies often have a relationship with a local adjuster.
Several large workers' compensation insurance carriers offer managed care
services for their insurance customers either through the insurance
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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:
o our specialized knowledge and expertise in the workers' compensation
managed care services industry;
o the effectiveness of our services;
o our ability to offer a full range of services in multiple markets;
o our information systems; and
o the prices at which we offer our services.
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. This makes our operations more efficient while improving our
ability to demonstrate the costs 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 our 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 integrated with the FNSNet web-based product. The Integrated Case
Management Software System application enables a clear, precise and immediate
transmission of data from First Notice into the Integrated Case Management
Software System. This pre-population of data eliminates redundant and
duplicative data entry for nurse case managers, thus resulting in greater time
efficiency and cost savings. The development and implementation of the
Integrated Case Management Software System allow for shared data in situations
in which multiple case managers are working on a case. The Integrated Case
Management Software System also creates better customer access to information
and allows us to produce specific, user-friendly reports to demonstrate the
value of our services.
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Finally, our subsidiary, Concentra Preferred Systems, 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 EDI transfer to Concentra Preferred Systems, entry of appropriate
bills into a customized, Data Access Point system, on-site bill entry by a
Concentra Preferred Systems employee into the Data Access Point system, and
overnight mail or facsimile of client bills to a Concentra Preferred Systems
service center. These access strategies are designed to increase the number of
appropriate bills that Concentra Preferred Systems 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 Concentra Preferred Systems 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
Concentra Preferred System's client preference profile that is created at the
time of Concentra Preferred Systems 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
Concentra Preferred Systems service department.
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:
o 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;
o laws regarding the provision of healthcare services generally;
o laws regulating the operation of managed care provider networks; and
o 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 treatment of injured workers.
Many states are considering or have enacted legislation reforming their
workers' compensation laws. These reforms generally give employers greater
control over who will provide healthcare services to their employees and where
those services will be provided and attempt to contain medical costs associated
with workers' compensation claims. At present, 24 of the states in which we do
business have implemented treatment specific fee schedules that set maximum
reimbursement levels for healthcare services. The District of Columbia and 10
states provide for a "reasonableness" review of medical costs paid or reimbursed
by workers' compensation. When not governed by a fee schedule, 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 business. Approximately half
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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:
o 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
o 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 seven 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.
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.
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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:
o additional licensing;
o requirements;
o financial oversight; and
o 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 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.
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.
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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 "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations--Seasonality."
Insurance
We and our physician groups maintain medical malpractice insurance in the
amount of $1.0 million per incident/$3.0 million annual aggregate per provider,
subject to an annual aggregate limit in the amount of $20.0 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/$3.0 million annual aggregate.
In addition, we maintain $3.0 million 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 per occurrence and
$30.0 million in the aggregate.
Employees
We had approximately 8,800 employees at November 1, 1999. 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.
Properties
Our principal corporate office is located in Boston, Massachusetts. We
lease the 11,000 square feet of space in this site pursuant to a lease agreement
expiring in 2003. We make annual rental payments under that lease of $396,000.
Except for 12 properties owned by us, we lease all of our offices located in 49
states, the District of Columbia and Canada. Twelve 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.
MANAGEMENT
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 Concentra.
Concentra
Executive officers of Concentra 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 are listed below along with their
business experience during at least the past five years.
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<PAGE>
<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
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 Concentra since January 1998.
He has served as President and Chief Executive Officer of Concentra since
September 1998, and he served as President and Chief Operating Officer of
Concentra from January 1998 until September 1998. He served as Executive Vice
President and President of the Practice Management Services subsidiary of
Concentra from August 1997 until January 1998. He served as a director of
OccuSystems and as its President and Chief Operating Officer from January 1997
to August 1997. From April 1993 through December 1996, Mr. Thomas served as
OccuSystems' Executive Vice President and Chief Operating Officer. Prior to
joining OccuSystems in 1993, Mr. Thomas served in various capacities with
Medical Care International, Inc., most recently as its Senior Vice President and
Divisional Director. Mr. Thomas is a certified public accountant.
Thomas E. Kiraly has served as Executive Vice President, Chief Financial
Officer and Treasurer of Concentra 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 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 since February 1998 and as Senior Vice President of Corporate
Development of Concentra 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 Concentra 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.
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<PAGE>
W. Tom Fogarty, M.D. has served as Senior Vice President and Chief Medical
Officer of Concentra 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.
Paul B. Queally is a director and the Chairman of Concentra. He has served
as a managing member or general partner of the respective sole general partner
of Welsh Carson and other associated investment partnerships since February
1996. Prior to joining Welsh Carson 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 served as a Director of Concentra since August 1997 and
Chairman from September 1998 until August 17, 1998. Mr. Carlyle also served as
Chairman of the Board of Directors of Concentra 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 is a director of Concentra. 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.
D. Scott Mackesy is a director of Concentra. He has served as an employee
of WCA Management Corporation, an affiliate of Welsh Carson since 1998. Prior to
joining Welsh Carson 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 is a director of Concentra. 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 is a director of Concentra. He has served as a managing
member or general partner of the respective sole general partners of Welsh
Carson and other associated investment partnerships since 1984. He is a director
of Centennial Healthcare Corporation, Accredo Health, Incorporated and several
private companies.
The Board of Directors
Corporate Governance
Pursuant to the Delaware General Corporation Law, as implemented by
Concentra's Certificate of Incorporation and Bylaws, the business, property and
affairs of Concentra are managed under the direction of a board of directors.
Members of this board are kept informed of the Concentra's business through
discussions with the Chairman, the President and other officers, by reviewing
materials provided to them and by participating in meetings of the board and its
committees.
During 1998, the board of directors held a total of 13 meetings, including
4 regular meetings and 9 special meetings. Each director attended more than 75%
of the aggregate of (1) the total number of meetings held by the board and (2)
the total number of meetings held by all committees of the board on which he
served.
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<PAGE>
Committees of the Board of Directors
During 1998, the board of directors of Concentra had two standing
committees: an Audit Committee, now known as the Audit and Compliance Committee
and an Option and Compensation Committee, now known as the Compensation
Committee.
The Audit Committee held two meetings in 1998. The Audit Committee reviews
the adequacy of Concentra's system of internal controls and accounting
practices. In addition, the Audit Committee reviews the scope of the annual
audit of Concentra's independent public accountants, Arthur Anderson LLP, prior
to its commencement, and reviews the types of services for which Concentra
retains Arthur Anderson LLP. Commencing in December 1998, the board of directors
designated the Audit Committee as the committee charged with primary oversight
of Concentra's Corporate Integrity Program, currently under development.
The Option and Compensation Committee held six meetings in 1998. The
functions of the Option and Compensation Committee are to establish annual
salary levels, approve fringe benefits and administer any special compensation
plans or programs for officers of Concentra, review and approve the salary
administration program for Concentra and administer Concentra's incentive and
stock option plans.
During the fiscal year ended December 31, 1998, the members of the Audit
Committee were Willis D. Gradison, Jr., Mitchell T. Rabkin, M.D. and Lois E.
Silverman. Currently, D. Scott Mackesy, Steven E. Nelson and John K. Carlyle
serve on the Audit and Compliance Committee.
During the fiscal year ended December 31,1998, the members of the Option
and Compensation Committee were John K. Carlyle, George H. Conrades and Robert
A. Ortenzio. Currently, John K. Carlyle, Carlos Ferrer, Paul B. Queally and
Andrew M. Paul serve on the Compensation Committee.
Compensation Committee Interlocks and Insider Participation
Messrs. Paul and Queally are managing members of the sole general partner
of Welsh Carson. Because of these affiliations, Messrs. Paul and Queally may be
deemed to have a material interest in the matters described under "Certain
Relationships and Related Transactions--Equity Investor Agreements."
Compensation of Directors
Concentra Operating. None of the directors of Concentra Operating will
receive any remuneration from Concentra Operating for their attendance at board
and committee meetings during 1999.
Concentra. During 1998, each director who was not also an employee of
Concentra automatically received options for 5,000 shares of Concentra common
stock and restricted stock valued at $15,000 under Concentra's 1997 Long-Term
Incentive Plan to each director who was not an employee on the date of each
annual meeting of Concentra stockholders. During such period, Concentra
directors who were also employees of Concentra received no remuneration for
attendance at board and committee meetings.
Concentra directors who are not employees receive compensation that is in
accordance with the Welsh Carson's customary practices and consistent with
compensation paid to directors in comparable public companies.
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<PAGE>
Executive Compensation
Summary Compensation
The following table summarizes the compensation paid to Concentra's Chief
Executive Officer, former Chief Executive Officer, and four most highly
compensated executive officers other than the Chief Executive Officer and the
former Chief Executive Officer who were serving as executive officers at the end
of fiscal year 1999 during (a) fiscal year 1998 by Concentra, and (b) fiscal
year 1997 by Concentra and its predecessors, CRA or OccuSystems. These executive
officers are referred to as the named executive officers.
<TABLE>
<CAPTION>
Long-term
Compensation
Awards
Securities
Underlying All Other
Annual Compensation Options/SARS Compensation
------------------------------------ ------------- -------------
Name and Principal Position Year Salary($)(1) Bonus($)(13) (#)(2) ($)(3)
<S> <C> <C> <C> <C> <C>
Daniel J. Thomas 1999 400,000 200,000 0 191,918(6)
President and Chief Executive 1998 294,241 0 250,000 3,276(4)
Officer, Director 1997 248,807 65,000 130,000 198
James M. Greenwood 1999 270,000 80,000 0 165,341(7)
Executive Vice President of 1998 247,495 0 250,000 3,250
Corporate Development 1997 212,974 52,500 85,000 1989
Richard A. Parr II 1999 250,000 70,000 0 52,281(8)
Executive Vice President, 1998 230,000 0 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 0 84,062(9)
Senior Vice President and Chief 1998 240,000 0 30,000 3,416
Medical Officer 1997 223,671 55,000 75,000 864
Donald J. Larson 1999 575,000 0 0 187,043(10)
Former Chairman, President and 1998 434,540 0 0 5,161(5)
Chief Executive Officer 1997 320,204 116,500 100,000 3,200
Joseph F. Pesce (12) 1999 156,587 0 0 940,159(11)
Former Chief 1998 289,221 0 230,000 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) Represents long-term awards of options and restricted stock.
(3) 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 Concentra common stock purchased pursuant to
Concentra's Employee Stock Purchase Plan, (b) Concentra's matching
provision under Concentra's 401(k) Plan and (c) premiums paid by Concentra
for group term life insurance that is taxable compensation to the named
executive officers.
(4) Excludes relocation related costs and benefits totaling $158,709 paid to
Mr. Thomas in 1998 associated with his relocation from Dallas, Texas to
Boston, Massachusetts.
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<PAGE>
(5) Excludes payments totaling $1,354,092 paid to Mr. Larson in connection with
his resignation from Concentra 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. Concentra is further obligated to pay Mr.
Larson an additional $125,000 under his consulting agreement in 1999.
(6) Amount includes payment of $191,285 for cancellation of 477,000 options at
an option price of $19.50 to $33,8750.
(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 payment 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. Amount includes payment of $58,738 for transfer of cash
surrender value of split dollar life insurance policy and $825,000
severance.
(11) Amount includes payment of $58,738 for transfer of cash surrender value of
split dollar life insurance policy and $825,000 severance.
(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) Bonuses paid during 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.
Option and Restricted Stock Grants
The following tables set forth certain information concerning grants by
Concentra of stock options and restricted stock to each of the named executive
officers during 1999. In accordance with the rules of the Commission, the
potential realizable values under such options are shown based on assumed rates
of annual compound stock price appreciation of 5% and 10% over the full option
term from the date the option was granted.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of $ of Total Annual Rates of Stock
Securities Options Price Appreciation for
Underlying Granted to Exercise or Option Term ($)(1)
Options Employees in Base Price Expiration ----------------------
Granted (#) Fiscal Year ($/Share) Date 5% 10%
-------------- ------------ ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Daniel J. Thomas 0 0 0 0 0 0
James M. Greenwood 0 0 0 0 0 0
Richard A. Parr II 0 0 0 0 0 0
Thomas E. Kiraly 89,803 12,85% 16.50 8/17/09 931,864 2,361,527
W. Tom Fogarty, M.D. 0 0 0 0 0 0
Donald J. Larsen 0 0 0 0 0 0
Joseph F. Pesce 0 0 0 0 0 0
</TABLE>
- ------------
(1) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises will depend upon the future
performance of Concentra's common stock.
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<PAGE>
Long-Term Incentive Plans-Awards in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Number of Securities % of Total Price Appreciation for Option
Underlying Awards Granted Options Term ($)(1)
(#) Performance Granted to Exercise ------------------------------
------------------------- Period Until Employees in Price
Stock Restricted Maturation or Fiscal Year of Options
Options Stock Payout ($/Shares) 5% 10%
------- ---------- ------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel J. Thomas 0 0 0 0 0 0 0
James M. Greenwood 0 0 0 0 0 0 0
Richard A. Parr II 0 0 0 0 0 0 0
Thomas E. Kiraly 89,803 0 1999-2007 12.85% 16.50 931,864 2,361,527
W. Tom Fogarty, M.D. 0 0 0 0 0 0 0
Donald J. Larson 0 0 0 0 0 0 0
Joseph F. Pesce 0 0 0 0 0 0 0
</TABLE>
(1) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises will depend upon the future
performance of Concentra's common stock.
Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Option and Restricted Stock Values
The named executive officers and other key executives of Concentra were
granted new options to acquire up to 10.5% of Concentra common stock following
the merger at a price per share equal to $16.50 under Concentra's 1999 Stock
Option and Restricted Stock Purchase Plan. Some of these new options are
non-qualified and vest 20% per year over a five year period; other options vest
upon the achievement of certain performance criteria.
The following table provides information about option exercises by the
named executive officers during 1999 and the value realized by them (whether
through Concentra or one of its predecessors). The table also provides
information about the number and value of options held by the named executive
officers at December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of In-The-Money
Options At Fiscal Options At Fiscal
Shares Year End (#) Year End ($)(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 0 0 0 0
James M. Greenwood 24,750 408,375 0 0 0 0
Richard A. Parr II 0 0 0 0 0 0
Thomas E. Kiraly 0 0 0 89,803 0 1,481,750
W. Tom Fogarty, M.D. 53,300 508,400 0 0 0 0
Donald J. Larson 0 0 0 0 0 0
Joseph F. Pesce 105,547 1,191,785 0 0 0 0
</TABLE>
- ------------
(1) Market value of underlying securities based on the closing price of
Concentra's common stock on the Nasdaq National 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 Concentra's common stock on August 17, 1999 (the last
trading day of the fiscal year) on the Nasdaq National Market of $16.50.
minus the exercise price.
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<PAGE>
Employment Agreements
Each of Daniel J. Thomas, Thomas A. Kiraly, James M. Greenwood, Richard A.
Parr II, and W. Tom Fogarty, M.D. have entered into employment agreements
between such individuals and Concentra. The principal terms of these employment
agreements are as follows:
o each agreement has a term of two years, subject to automatic renewal
for additional one-year terms, unless terminated in accordance with the
agreement's terms;
o each agreement provides for compensation consisting of base salary
amounts, bonuses at the discretion of the board of directors of
Concentra and participation in any employee benefit plan adopted by us
for our employees;
o each agreement provides for a severance payment in the event of (1)
termination by Concentra without cause, or (2) resignation by the
employee for good reason; consisting of two years' base salary for Mr.
Thomas and one year's base salary for Messrs. Greenwood, Kiraly, Parr
and Fogarty; provided, however, if termination by Concentra occurs on
or before August 17, 2000, each agreement provides for a severance
payment consisting of two and half year's base salary for Mr. Thomas
and two years' base salary for each of Messrs. Greenwood, Kiraly, Parr,
and Fogarty.
Officers' and Directors' Indemnification Insurance
The merger agreement provides that, for a period of six years after the
effective time, Concentra will indemnify the present and former officers,
directors, employees and agents of Concentra and its subsidiaries from
liabilities arising out of actions or omissions in that capacity prior to the
effective time of the merger, to the full extent permitted under Delaware law or
as provided in Concentra's or its subsidiaries' organization documents or any
written indemnification agreements. In addition, the surviving entity will
maintain directors' and officers' insurance coverage for six years after the
effective time on terms no less favorable to such indemnified parties than
existing insurance coverage, but Concentra will not be required to pay an annual
premium in excess of 200% of the last premium paid prior to the date of the
merger agreement.
Employee Benefit Plans
1999 Long-Term Incentive Plan
General
Concentra's board and stockholders approved its 1999 Stock Option and
Restricted Stock Purchase Plan in August 1999. The purpose of the 1999 Stock
Plan is to promote the interests of Concentra and its subsidiaries and the
interests of our stockholders by providing an opportunity to selected employees
and officers of Concentra and its subsidiaries and to other persons providing
services to Concentra and its subsidiaries to purchase Concentra 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 Concentra 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 the registration statement of which this
prospectus forms in part.
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 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
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<PAGE>
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.
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, consisting entirely of "Non-Employee Directors"
within the meaning of the Exchange Act, 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 two 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 fed-
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<PAGE>
eral income tax purposes with respect to the issuance of an incentive stock
option, the transfer of shares upon exercise of the option of 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
or 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 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 imposes 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
Concentra has a defined contribution retirement plan which complies with
Section 401(k) of the Internal Revenue Code. Substantially all employees of
Concentra, including certain officers and directors of Concentra, 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, Concentra
has the option of matching up to 50% of the participants' pretax contributions
up to a maximum of 6% of compensation. For fiscal year 1998, Concentra elected
to match 50% of up to 4% of compensation.
Employee Stock Purchase Plan
Until March 2, 1999, Concentra maintained an Employee Stock Purchase Plan
that permitted substantially all employees to acquire Concentra common stock at
the end of each specified period at a purchase price of 85% of the lower of the
fair market value at the end of the participation period. Periods were
semi-annual and began on January 1 and July 1 of each year. Employees were
allowed to designate up to 15% of their base compensation for the purchase of
common stock. The Option and Compensation Committee administered the Employee
Stock Purchase Plan. On March 2, 1999, Concentra terminated the Employee Stock
Purchase Plan. The final period for which participating employees acquired
shares of Concentra's common stock began on January 1, 1999 and ended March 2,
1999.
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PRINCIPAL STOCKHOLDERS
After the merger and related transactions, all of the issued and
outstanding capital stock of Concentra Operating is owned by Concentra. The
table below contains information regarding the beneficial ownership of
Concentra's common stock as of September 30, 1999 by
o each stockholder who owns beneficially five percent or more of
Concentra's common stock,
o each director of Concentra,
o each executive officer and
o 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 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 respect to the Concentra common shares shown as
beneficially owned. The percentage ownership of each stockholder is calculated
based on 25,676,498 shares outstanding as of September 30, 1999.
<TABLE>
<CAPTION>
Benefical Ownership
Immediately After Merger
----------------------------
Name and Address Amount Percentage
------------- ------------
<S> <C> <C>
Welsh, Carson, Anderson & Stowe VIII, L.P.(1)...................... 16,889,066 65.78%
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
Daniel J. Thomas................................................... 33,000(3) *
c/o Concentra Operating Corporation
312 Union Wharf
Boston, MA 02109
Thomas E. Kiraly .................................................. -- *
c/o Concentra Operating Corporation
312 Union Wharf
Boston, MA 02109
James M. Greenwood ............................................... 8,250(3) *
c/o Concentra Operating Corporation
5080 Spectrum Drive
Suite 400, West Tower
Addison, TX 75248
</TABLE>
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PRINCIPAL STOCKHOLDERS
<TABLE>
<CAPTION>
Benefical Ownership
Immediately After Merger
----------------------------
Name and Address Amount Percentage
------------- ------------
<S> <C> <C>
Richard A. Parr II ................................................ 15,000(3) *
c/o Concentra Operating Corporation
5080 Spectrum Drive
Suite 400, West Tower
Addison, TX 75248
W. Tom Fogarty, M.D. .............................................. 50,000(4) *
c/o Concentra Operating Corporation
312 Union Wharf
Boston, MA 02109
Paul B. Queally (5)................................................ 16,394,343 63.81
c/o Welsh, Carson, Anderson & Stowe
320 Park Avenue, Suite 2500
New York, NY 10022
John K. Carlyle ................................................... -- *
c/o Concentra Operating Corporation
312 Union Wharf
Boston, MA 02109
Carlos Ferrer (6).................................................. 1,854,545 7.22
c/o Ferrer Freeman Thompson & Co.
The Mill
10 Glenville Street
Greenwich, CT 06831
D. Scott Mackesy (7) .............................................. 16,384,170 63.78
c/o Welsh, Carson, Anderson & Stowe
320 Park Avenue, Suite 2500
New York, NY 10022
Steven E. Nelson .................................................. 18,182 *
c/o Concentra Operating Corporation
312 Union Wharf
Boston, MA 02109
Andrew M. Paul (8) ................................................ 16,440,848 64.00
c/o Welsh, Carson, Anderson & Stowe
320 Park Avenue, Suite 2500
New York, NY 10022
All directors and executive officers as a group (12 individuals)... 18,455,164 71.88
</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 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,
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<PAGE>
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.
(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) These shares are restricted and relate to the performance period beginning
January 1, 1998 and ending December 31, 2005. The lapsing of restrictions
for each officer occurs seven years after the date of grant or earlier if
based on the level of attainment of an earnings per share growth objective.
(4) Includes 18,000 shares of restricted stock that relate to the performance
period beginning January 1, 1998 and ending December 31, 2005. The lapsing
of restrictions on these shares of restricted stock occurs seven years
after the date of grant or earlier if based on the level of attainment of
an earnings per share growth objective.
(5) 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.
(6) The shares reflected as owned by Mr. Ferrer are owned of record 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.
(7) 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.
(8) 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.
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 Concentra with the same rights
as Yankee's Class A common stock prior to the merger.
In connection with their investment in Yankee, the Welsh Carson 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 Concentra common stock with the same rights as Yankee's
common stock prior to the merger.
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<PAGE>
Stockholders Agreement
The Welsh Carson investors, the other investors, Ferrer Freeman and
Concentra also entered into a stockholders agreement. The stockholders agreement
does not provide for any agreements with the Welsh Carson investors, the other
investors, and Ferrer Freeman with respect to voting of shares or management of
Concentra. The stockholders agreement provides for:
o limitations on the transfer of shares owned by the investors;
o tag along rights for Ferrer Freeman, the other investors, and the Welsh
Carson investors, other than Welsh Carson, to participate in proposed
dispositions of Concentra common stock by Welsh Carson;
o in the event that Welsh Carson receives a third party offer to purchase
a significant portion of the outstanding Concentra common stock, Welsh
Carson may require Ferrer Freeman, the Welsh Carson investors and the
other investors to accept the offer and sell their shares of Concentra
to the third party; and
o preemptive rights to the investors to participate, on a pro rata basis
according to their ownership of Concentra capital stock, in equity
offerings of Concentra with certain customary exceptions.
Registration Rights Agreement
At the same time they executed the stockholders agreement, the Welsh Carson
investors, the other investors, Ferrer Freeman and Concentra entered into a
registration rights agreement. The registration rights agreement gives the
investors rights to require Concentra to register their shares of Concentra
capital stock under the Securities Act and to include, upon request, their
shares in any other registration of shares by Concentra.
The Merger and Discount Debentures
Welsh Carson 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
"The Transactions and Use of Proceeds."
In addition, WCAS Capital Partners III, L.P., an investment partnership
affiliated with Welsh Carson, 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. See
"The Transactions and Use of Proceeds."
Other Related Party Transactions
Lois E. Silverman, who was a director of Concentra until August 17, 1999,
is one of the trustees and beneficiaries of Colonial Realty Trust, which leases
twelve offices to Concentra 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 Concentra, 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
$119,091,000 in management fees to Concentra in 1998 under its management
agreement.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Senior Credit Facilities
In connection with the merger, Concentra Operating entered into the senior
credit facilities with a syndicate of financial institutions for which Chase
Securities Inc. and DLJ Capital Funding, Inc. acted as Co-Lead Arrangers and
Joint Book Managers. The Chase Manhattan Bank acted as Administrative Agent. DLJ
Capital Funding, Inc. acted as Syndication Agent. Credit Suisse First Boston and
Fleet National Bank acted as Co-Documentation Agents. The following is a summary
of the material terms and conditions of the senior credit facilities and is
subject to the detailed provisions of the senior credit facilities and the
various related documents entered into in connection with the senior credit
facilities.
Borrower. The borrower under the senior credit facilities was Concentra
Operating.
Loans; Interest Rates. The senior credit facilities consist of:
(1) the term loan facilities consisting of:
o a 7 year $250.0 million tranche B term loan facility, and
o an 8 year $125.0 million tranche C term loan facility, and
(2) the revolving credit facility of up to $100.0 million, including a
letter of credit sub-facility of $25.0 million.
The borrowings under the term loan facilities, together with the aggregate
net proceeds from the offering of old notes and the offering of discount
debentures, the equity contributions and the our remaining cash at the time of
the merger were used to fund the transactions. In addition, the revolving credit
facility will provide financing for future working capital, capital
expenditures, acquisitions and other general corporate purposes.
The revolving credit facility will be available on a revolving basis until
September 30, 2005. At Concentra Operating's option, the senior credit
facilities will bear interest at either:
(1) the greater of (a) The Chase Manhattan Bank's prime rate and (b) the
Federal Funds Effective Rate plus 0.005% plus an additional:
o 1.75% for the revolving credit facility,
o 2.25% for the tranche B term loan facility, and
o 2.50% for the tranche C term loan facility, or
(2) the reserve-adjusted Eurodollar rate plus:
o 2.75% for the revolving credit facility,
o 3.25% for the tranche B term loan facility, and
o 3.50% for the tranche C term loan facility;
provided, that the above rate for the revolving credit facility is subject to
adjustment based on changes in Concentra Operating's leverage ratios effective
four fiscal quarters after the closing of the senior credit facilities. The
default rate under the senior credit facilities is 2.0% above the otherwise
applicable rate.
Maturity of Loans. The revolving credit facility will mature on September
30, 2005. The term loan facilities will amortize over seven years for the
tranche B term loan facility and eight years for the tranche C term loan
facility.
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<PAGE>
The tranche B term loan facility will be payable in 24 consecutive
quarterly installments of $625,000 beginning on September 30, 1999 until June
30, 2005. Beginning on September 30, 2005, Concentra Operating will pay four
consecutive quarterly installments of $58,750,000 until final maturity on June
30, 2006.
The tranche C term loan facility will be payable in 28 consecutive
quarterly installments of $312,500 beginning on September 30, 1999 until June
30, 2006. Beginning on September 30, 2006, Concentra Operating will pay four
consecutive quarterly installments of $29,062,500 until final maturity on June
30, 2007.
Security. The senior credit facilities are secured by a first-priority lien
on:
o 100% of the issued and outstanding capital stock of Concentra Operating
held by Concentra;
o 100% of the issued and outstanding capital stock of the direct and
indirect subsidiaries of Concentra Operating, other than its joint
ventures; and
o all other present and future assets and properties of Concentra
Operating and its subsidiaries, other than its joint ventures.
Guarantors. The senior credit facilities are guaranteed by Concentra and
each of Concentra Operating's present and future direct and indirect
subsidiaries, other than its joint ventures.
Prepayments. In addition, the senior credit facilities provide for
mandatory repayments, subject to stated exceptions, of the Term Loan Facilities
and reductions in the revolving credit facility, based on certain net asset
sales outside the ordinary course of business of Concentra Operating and its
subsidiaries, from the net proceeds of specified debt and equity issuances, and
excess cash flow. Outstanding loans under the senior credit facilities are
voluntarily pre-payable without penalty; provided, however, that we will bear
any Eurodollar rate breakage costs.
Representations and Warranties. The senior credit facilities contain
representations and warranties customary for similar credit facilities.
Affirmative Covenants. The senior credit facilities contain affirmative
covenants customary for similar credit facilities.
Negative Covenants. The senior credit facilities contain negative covenants
that limit the ability of Concentra Operating and its subsidiaries to among
other things:
o incur additional indebtedness or contingent obligations, issue
guarantees or enter into operating leases;
o grant liens or negative pledges;
o make fundamental changes in their business, corporate structure or
capital structure, including, among other things, entering into any
merger, consolidation or amalgamation, or liquidating, winding up or
dissolving itself;
o sell assets;
o make specified restricted payments;
o make capital expenditures;
o make investments, including the advancing of loans or extensions of
credit; or enter into joint ventures, or make acquisitions of assets
constituting a business unit or the capital stock of another entity;
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<PAGE>
o prepay, redeem or repurchase subordinated indebtedness, including the
notes, or amend documents relating to other existing indebtedness or
other material documents; and
o enter into transactions with affiliates.
Financial Covenants. The senior credit facilities also contain financial
covenants requiring Concentra Operating to maintain:
o a maximum leverage ratio;
o a minimum interest coverage ratio; and
o a minimum fixed charge coverage ratio.
Events of Default. The senior credit facilities also contain events of
default that are typical of similar credit facilities and appropriate in the
context of the transactions, including without limitation, subject to certain
exceptions, those related to:
o default in payment of principal and interest;
o materially incorrect representations or warranties;
o default in observance or performance of any of the affirmative or
negative covenants included in the senior credit facilities'
documentation or in the related security documents;
o cross-default in payment of other indebtedness of more than $10.0
million;
o specified events of bankruptcy;
o specified ERISA events;
o specified judgments or decrees involving more than $5.0 million;
o the failure of the applicable senior credit facility documents or any
material provisions of those documents, the guarantees, security
documents or any related documents to be enforceable and in full force
and effect;
o certain change of control events;
o the conduct of Concentra's business; and
o the failure of the subordination of the notes and the subsidiary
guarantees to the right of payment of the lenders under the senior
credit facilities to be valid.
The Discount Debentures
Concentra raised approximately $110.0 million of the funds necessary to
consummate the transactions through the issuance of the discount debentures in
the private capital markets. The discount debentures were issued with warrants
to purchase 5.85% of Concentra common stock at a nominal exercise price.
Concentra is not required to pay any interest on the discount debentures until
2004. The discount debentures:
o mature on August 15, 2010;
o are structurally subordinated to the senior credit facilities and the
notes;
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o have registration rights;
o are redeemable by Concentra after August 15, 2000;
o are redeemable by Concentra at the option of the holders upon a change
of control; and
o subject Concentra and its subsidiaries to customary covenants for this
type of financing, including restrictions on indebtedness, dividends,
liens, affiliate transactions, stock repurchases, assets sales and
mergers.
In addition, the discount debentures bear non-cash interest at a rate of
14% per annum until August 15, 2004. On February 15, 2005, and on subsequent
interest payment dates, Concentra will also pay to the holders of the discount
debentures that amount that is necessary to ensure the current and full tax
deductibility of the accrued discount on the discount debentures. That initial
amount is expected to be approximately $95.0 million. Subsequent amounts are not
expected to be material. The indenture with respect to the notes provides that
all such payments by Concentra will not be payments of cash interest for
purposes of clause (10) of the second paragraph under "Description of
Notes--Certain Covenants--Restricted Payments." If Concentra is unable to make
such payment, there will not be an event of default under the discount
debentures indenture, rather the interest rate on the discount debentures will
increase by 100 basis points until such payment is made. After August 15, 2004,
interest at the rate of 14% per annum will be payable semi-annually in cash on
the discount debentures.
DESCRIPTION OF THE NEW NOTES
The old notes were, and the new notes will be, issued under an indenture
dated August 17, 1999 among Concentra Operating, Health Services and Managed
Care Services, and United States Trust Company of New York, as trustee.
The new notes are the same as the old notes except that the new notes will:
o have a new CUSIP number;
o not bear any legends restricting their transfer; and
o not contain certain terms providing for an increase in the interest
rate under the circumstances described in the registration rights
agreement.
The following description is a summary of the material provisions of the
indenture. It does not restate that agreement in its entirety. We urge you to
read the indenture because it, and not this description, define your rights as
holders of these notes.
In this description of the new notes, we use terms in this section that are
defined under the caption "--Certain Definitions."
Brief Description of the Notes and the Subsidiary Guarantees
The Notes. The notes are:
o general unsecured obligations of Concentra Operating;
o subordinated in right of payment to all existing and future Senior
Indebtedness of Concentra Operating;
o senior or pari passu in right of payment to all existing and future
subordinated Indebtedness of Concentra Operating; and
o unconditionally guaranteed by the Guarantors.
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The Subsidiary Guarantees. These notes are jointly and severally guaranteed
by each Restricted Subsidiary of Concentra Operating, except the Permitted Joint
Ventures.
The Subsidiary Guarantees of these notes:
o are general unsecured obligations of each Guarantor;
o are subordinated in right of payment to all existing and future Senior
Indebtedness of each Guarantor; and
o are senior or pari passu in right of payment to all existing and future
subordinated Indebtedness of each Guarantor.
Assuming Concentra Operating had completed the offering of the old notes,
applied the net proceeds as intended and had completed the merger with Yankee
and related transactions as of June 30, 1999, Concentra Operating and the
Guarantors would have had total Senior Indebtedness of approximately $379.0
million. As indicated above and as discussed in detail below under the caption
"--Subordination," payments on the notes and under the Subsidiary Guarantees
will be subordinated to the payment of Senior Indebtedness. The indenture will
permit Concentra Operating and the Guarantors to incur additional Senior
Indebtedness.
As of August 17, 1999, all of Concentra Operating's Subsidiaries were
"Restricted Subsidiaries." However, under the circumstances described below
under the caption "--Certain Covenants--Designation of Restricted and
Unrestricted Subsidiaries," Concentra Operating will be permitted to designate
certain of Concentra Operating's subsidiaries as "Unrestricted Subsidiaries."
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants in the indenture. Unrestricted Subsidiaries will not guarantee the
notes.
Principal, Maturity and Interest
The notes:
o will be limited to a maximum aggregate principal amount of $190.0
million;
o will mature on August 15, 2009;
o will be issued in denominations of $1,000 and integral multiples of
$1,000;
o will bear interest at the rate of 13% per annum.
Interest will be paid semi-annually on February 15 and August 15 of each
year, beginning on February 15, 2000, to the holder of record on the immediately
preceding February 1 and August 1.
Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
Methods of Receiving Payments on the Notes
If a holder has given wire transfer instructions to Concentra Operating,
Concentra Operating will make all principal, premium and interest payments on
the holder's notes in accordance with those instructions. All other payments on
the notes will be made at the office or agency of the paying agent and registrar
within the City and State of New York unless Concentra Operating elects to make
interest payments by check mailed to the holders at their address set forth in
the register of holders.
Subordination
The payment of principal of, any premium and interest on the notes will be
subordinated to the prior payment in full of all Concentra Operating's Senior
Indebtedness.
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The holders of Senior Indebtedness will be entitled to receive payment in
full in cash of all amounts due or to become due in respect of Senior
Indebtedness before the holders of notes will be entitled to receive any payment
with respect to the notes, except that holders of notes may receive
Reorganization Securities and payments made from the trust described under the
caption "--Legal Defeasance and Covenant Defeasance," in the event of any
distribution to Concentra Operating's creditors pursuant to any Insolvency or
Liquidation Proceeding with respect to Concentra Operating.
Upon any such Insolvency or Liquidation Proceeding, any payment or
distribution of assets of Concentra Operating of any kind, other than
Reorganization Securities, will be paid by Concentra Operating or by any
receiver, liquidating trustee or other person making such payment or
distribution, or by the holders of the notes or by the trustee if received by
them, directly to the holders of Senior Indebtedness, or their representative or
representatives, for the payment of the Senior Indebtedness until all such
Senior Indebtedness has been paid in full in cash.
Concentra Operating also may not make any payment in respect of the notes,
except in Reorganization Securities, if:
o a payment default on Designated Senior Indebtedness occurs and is
continuing; or
o the trustee receives a notice from the agent bank under one of
Concentra Operating's senior credit facilities or the holders or the
representative of any Designated Senior Indebtedness indicating that a
default has occurred that permits the holders of that indebtedness to
accelerate its maturity.
Payments on the notes may and will be resumed:
o in the case of a payment default, upon the date on which such default
is cured or waived; and
o in case of a nonpayment default, the earlier of
(1) the date on which such nonpayment default is cured or waived;
(2) 179 days after the date on which the applicable notice is
received; or
(3) the date on which the trustee receives written notice from the
agent bank or the representative for such Designated Senior
Indebtedness, as the case may be, rescinding the applicable
notice, unless the maturity of any Designated Senior Indebtedness
has been accelerated.
No new notice of default may be delivered unless and until 181 days have
elapsed since the effectiveness of the immediately prior notice.
No event of default that existed or was continuing on the date of delivery
of any such notice to the trustee shall be, or be made, the basis for a
subsequent notice unless such default shall have been cured or waived for a
period of not less than 90 days.
As a result of the subordination provisions described above, in the event
of a bankruptcy, liquidation or reorganization of Concentra Operating, holders
of these notes may recover less ratably than creditors of Concentra Operating
who are holders of Senior Indebtedness. See "Risk Factors--Risks Applicable to
the Notes--Subordination." Concentra Operating and its Restricted Subsidiaries
will be subject to certain financial tests limiting the amount of additional
Indebtedness, including Senior Indebtedness, that Concentra Operating and its
Restricted Subsidiaries can incur. See "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock."
Subsidiary Guarantees
The Guarantors will jointly and severally guarantee, on a senior
subordinated basis, Concentra Operating's obligations under the notes. Each
Subsidiary Guarantee will be subordinated to the prior payment in full of all
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Senior Indebtedness of that Guarantor. The obligations of each Guarantor under
its Subsidiary Guarantee will be limited as necessary to prevent that Subsidiary
Guarantee from constituting a fraudulent conveyance under applicable law. See
"Risk Factors--Fraudulent Conveyance Matters."
A Guarantor may not sell or otherwise dispose of all or substantially all
of its assets, or consolidate with or merge with or into, whether or not such
Guarantor is the surviving person, another person unless:
o immediately after giving effect to that transaction, no Default or
Event of Default exists; and
o either:
(1) the person acquiring the property in any such sale or disposition
or the person formed by or surviving any such consolidation or
merger assumes all the obligations of that Guarantor pursuant to a
supplemental indenture satisfactory to the trustee; or
(2) the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the indenture.
The Subsidiary Guarantee of a Guarantor will be released:
o in connection with any sale or other disposition of all or
substantially all of the assets of that Guarantor, including by way of
merger or consolidation, if Concentra Operating applies the Net
Proceeds of that sale or other disposition in accordance with the
applicable provisions of the indenture;
o in connection with the sale of all of the Capital Stock of a Guarantor
if Concentra Operating applies the Net Proceeds of that sale in
accordance with the applicable provisions of the indenture; or
o if Concentra Operating designates any Restricted Subsidiary that is a
Guarantor as an Unrestricted Subsidiary.
The Net Proceeds of an Asset Sale may be used by Concentra Operating to
make an offer to holders for the repurchase of notes. See "--Repurchase at the
Option of Holders--Asset Sales."
Optional Redemption
General. After August 15, 2004, Concentra Operating may redeem all or a
part of these notes, upon not less than 30 nor more than 60 days' notice, at the
redemption prices, expressed as percentages of principal amount, set forth below
plus accrued and unpaid interest on the new notes, to the applicable redemption
date, if redeemed during the twelve-month period beginning on August 15 of the
years indicated below:
Year Percentage
---- ----------
2004................................... 106.500%
2005................................... 104.875%
2006................................... 103.250%
2007................................... 101.625%
2008 and thereafter.................... 100.000%
Upon Equity Offerings. At any time prior to August 15, 2002, Concentra
Operating may on one or more occasions redeem up to 25% of the aggregate
principal amount of notes originally issued under the indenture at a redemption
price of 113% of the principal amount of the notes, plus accrued and unpaid
interest to the redemption date, with the net cash proceeds of one or more
Equity Offerings; provided that:
o at least 75% of the aggregate principal amount of notes remains
outstanding immediately after the occurrence of such redemption,
excluding notes held by Concentra Operating and its Subsidiaries; and
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o the redemption must occur within 90 days of the date of the closing of
such Equity Offering.
Except pursuant to the preceding paragraphs, the notes will not be
redeemable at Concentra Operating's option prior to August 15, 2004.
Selection and Notice. If less than all of the notes are to be redeemed at
any time, the trustee will select notes for redemption as follows:
o if the notes are listed, in compliance with the requirements of the
principal national securities exchange on which the notes are listed;
or
o if the notes are not so listed, on a pro rata basis, by lot or by such
method as the trustee shall deem fair and appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount of new
notes to be redeemed. A new note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the holder of new
notes upon cancellation of the original note. Notes called for redemption become
due on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of them called for redemption.
Mandatory Redemption
Except as set forth under the caption "--Repurchase at the Option of
Holders," we are not required to make mandatory redemption or sinking fund
payments with respect to the notes.
Repurchase at the Option of Holders
Change of Control. If a Change of Control occurs, each holder of notes will
have the right to require Concentra Operating to repurchase all or any part,
equal to $1,000 or an integral multiple of $1,000, of that holder's notes
pursuant to the Change of Control Offer. In the Change of Control Offer,
Concentra Operating will offer a Change of Control Payment in cash equal to 101%
of the aggregate principal amount of notes repurchased plus any accrued and
unpaid interest on the notes to the date of purchase. Within 60 days following
any Change of Control, Concentra Operating will mail a notice to each holder
describing the transaction or transactions that constitute the Change of Control
and offering to repurchase notes on the Change of Control Payment Date, being no
later than five business days after the termination of the Change of Control
Offer, pursuant to the procedures required by the indenture and described in
such notice. Concentra Operating will comply with the requirements of the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the notes as a result of a Change of Control.
On the Change of Control Payment Date, Concentra Operating will, to the
extent lawful:
o accept for payment all notes or portions of new notes properly tendered
pursuant to the Change of Control Offer;
o deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all notes or portions of notes so tendered; and
o deliver or cause to be delivered to the trustee the notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of notes or portions of notes being purchased by Concentra
Operating.
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The paying agent will promptly mail to each holder of notes so tendered the
Change of Control Payment for such notes, and the trustee will promptly
authenticate and mail, or cause to be transferred by book entry, to each holder
a new note equal in principal amount to any unpurchased portion of any notes
surrendered; provided that each such new note will be in a principal amount of
$1,000 or an integral multiple of $1,000.
Prior to complying with any of the provisions of this "--Repurchase at the
Option of Holders--Change of Control" covenant, but in any event within 90 days
following a Change of Control, Concentra Operating will either repay all
outstanding Senior Indebtedness or obtain any requisite consents, under all
agreements governing outstanding Senior Indebtedness to permit the repurchase of
notes required by this covenant. Concentra Operating will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The provisions described above that require Concentra Operating to make a
Change of Control Offer following a Change of Control will be applicable
regardless of whether or not any other provisions of the indenture are
applicable. Except as described above with respect to a Change of Control, the
indenture does not contain provisions that permit the holders of the notes to
require that Concentra Operating repurchase or redeem the notes in the event of
a takeover, recapitalization or similar transaction.
Concentra Operating's outstanding Senior Indebtedness currently prohibits
Concentra Operating from purchasing any notes, and also provides that certain
change of control events with respect to Concentra and/or Concentra Operating
would constitute a default under the agreements governing the Senior
Indebtedness. Any future credit agreements or other agreements relating to
Senior Indebtedness to which Concentra Operating becomes a party may contain
similar restrictions and provisions. In the event a Change of Control occurs at
a time when Concentra Operating is prohibited from purchasing notes, Concentra
Operating could seek the consent of its senior lenders to the purchase of notes
or could attempt to refinance the borrowings that contain such prohibition. If
Concentra Operating does not obtain such a consent or repay such borrowings,
Concentra Operating will remain prohibited from purchasing notes. In such case,
Concentra Operating's failure to purchase tendered notes would constitute an
Event of Default under the indenture which would, in turn, constitute a default
under such Senior Indebtedness. In such circumstances, the subordination
provisions in the indenture would likely restrict payments to the holders of
notes.
Concentra Operating will not be required to make a Change of Control Offer
upon a Change of Control if a third party makes the Change of Control Offer in
the manner, at the times and otherwise in compliance with the requirements set
forth in the indenture applicable to a Change of Control Offer made by Concentra
Operating and purchases all notes validly tendered and not withdrawn under such
Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Concentra Operating and its Subsidiaries taken as a whole.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of notes to require
Concentra Operating to repurchase such notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of
Concentra Operating and its Subsidiaries taken as a whole to another person or
group may be uncertain.
Asset Sales. Concentra Operating will not, and will not permit any of its
Restricted Subsidiaries to, complete an Asset Sale unless:
(1) Concentra Operating or the Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to
the fair market value of the assets or Equity Interests issued or sold
or otherwise disposed of;
(2) such fair market value is determined by Concentra Operating's board of
directors and evidenced by a resolution of the board of directors set
forth in an officers' certificate delivered to the trustee provided
that the board of directors' determination must be based on an opinion
issued by an accounting, appraisal or investment banking firm of
national standing if such fair market value exceeds $35 million; and
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(3) at least 75% of the consideration received by Concentra Operating or
such Restricted Subsidiary is in the form of cash or Cash Equivalents.
For purposes of this provision, each of the following shall be deemed
to be cash:
o any liabilities, as shown on Concentra Operating's or the
Restricted Subsidiary's most recent balance sheet, of Concentra
Operating or any Restricted Subsidiary, other than contingent
liabilities and liabilities that are by their terms subordinated
to the notes or any Subsidiary Guarantee, that are assumed by the
transferee of any such assets pursuant to a customary novation
agreement that releases Concentra Operating or such Restricted
Subsidiary from further liability; and
o any securities, notes or other obligations received by Concentra
Operating or any such Restricted Subsidiary from such transferee
that are contemporaneously, subject to ordinary settlement
periods, converted by Concentra Operating or such Restricted
Subsidiary into cash or Cash Equivalents, to the extent of the
cash received in that conversion.
The 75% limitation referred to above will not apply to any Asset Sale in
which the cash or Cash Equivalents portion of the consideration received,
determined in accordance with the preceding sentence, is equal to or greater
than what the after-tax proceeds would have been had such Asset Sale complied
with the 75% limitation.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
Concentra Operating or any such Restricted Subsidiary may apply such Net
Proceeds, at its option:
(1) to repay or repurchase Senior Indebtedness of Concentra Operating or
any Restricted Subsidiary;
(2) to acquire all or substantially all the assets of, or a majority of the
Voting Stock of, another Permitted Business;
(3) to make a capital expenditure in a Permitted Business;
(4) to acquire other assets, other than securities, that are used or useful
in a Permitted Business; or
(5) to make an Asset Sale Offer, treating the Net Proceeds as Excess
Proceeds for all purposes.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute excess proceeds. When the
aggregate amount of these excess proceeds exceeds $15 million, Concentra
Operating will be required to make an offer to all holders of notes to purchase
the maximum principal amount of notes that may be purchased out of the excess
proceeds. The offer price in any such offer will be equal to 100% of the
principal amount plus any accrued and unpaid interest to the date of purchase,
and will be payable in cash. Any excess proceeds which remain after consummation
of such an offer, may be used by Concentra Operating for general corporate
purposes. If the aggregate principal amount of notes tendered into such an offer
exceeds the amount of excess proceeds, the trustee shall select the notes to be
purchased on a pro rata basis. Upon completion of each such offer, the amount of
excess proceeds shall be reset at zero.
Certain Covenants
Restricted Payments. Concentra Operating will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, make any Restricted
Payment unless, at the time of and after giving effect to such Restricted
Payment:
(1) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence of such Restricted Payment;
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(2) Concentra Operating would not be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described below
under the caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by Concentra Operating and its
Restricted Subsidiaries after August 17, 1999, excluding Restricted
Payments permitted by clauses (1) through (6), (12), (14) and (15) of
the next succeeding paragraph, is less than the sum, without
duplication, of:
(a) 50% of the Consolidated Net Income of Concentra Operating for the
period, taken as one accounting period, from the beginning of the
first full fiscal quarter commencing after August 17, 1999 to the
end of Concentra Operating's most recently ended fiscal quarter
for which internal financial statements are available at the time
of such Restricted Payment, or, if such Consolidated Net Income
for such period is a deficit, less 100% of such deficit; plus
(b) 100% of the aggregate net proceeds, including the fair-market
value of property other than cash, received by Concentra Operating
as a contribution to Concentra Operating's capital or received by
Concentra Operating from the issue or sale since August 17, 1999
of Equity Interests of Concentra Operating, other than
Disqualified Stock, or of Disqualified Stock or debt securities of
Concentra Operating that have been converted into such Equity
Interests, other than Equity Interests, or Disqualified Stock or
debt securities, sold to a Restricted Subsidiary of Concentra
Operating and other than Disqualified Stock or convertible debt
securities that have been converted into Disqualified Stock; plus
(c) to the extent that any Restricted Investment that was made after
August 17, 1999 is sold for cash or otherwise liquidated or repaid
for cash, the lesser of
o the cash return of capital with respect to such Restricted
Investment, less any cost of disposition, and
o the initial amount of such Restricted Investment; plus
(d) the amount by which Indebtedness of Concentra Operating or its
Restricted Subsidiaries is reduced on Concentra Operating's
balance sheet upon the conversion or exchange subsequent to August
17, 1999 of any Indebtedness of Concentra Operating convertible or
exchangeable for Equity Interests, other than Disqualified Stock,
of Concentra Operating, less the amount of any cash, or other
property, distributed by Concentra Operating or any Restricted
Subsidiary upon such conversion or exchange; plus
(e) if any Unrestricted Subsidiary pays any cash dividends or cash
distributions to Concentra Operating or any of its Restricted
Subsidiaries, 100% of any such cash dividends or cash
distributions made after August 17, 1999.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of its
declaration, if at said date of declaration such payment would have
complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other acquisition
of any Indebtedness or Equity Interests of Concentra Operating or its
Restricted Subsidiaries either in exchange for, or out of the net cash
proceeds of, the substantially concurrent sale or issuance, other than
to a subsidiary of Concentra Operating, of, other Equity Interests of
Concentra Operating, other than Disqualified Stock; provided that the
amount of any such net cash proceeds that are utilized for such
redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (3)(b) of the preceding paragraph;
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(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of Concentra Operating or any Restricted
Subsidiary with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of Concentra
Operating to the holders of its Equity Interests on a pro rata basis
regardless of whether any Default has occurred or is continuing;
(5) the redemption, repurchase, acquisition or retirement of Equity
Interests in a Permitted Joint Venture of Concentra Operating or of any
of Concentra Operating's Restricted Subsidiaries in accordance with the
organizational documents for, and agreements among holders of Equity
Interests in, such Permitted Joint Venture, provided that as a result
of such redemption, repurchase, acquisition or retirement, such
Permitted Joint Venture shall become a wholly-owned Restricted
Subsidiary of Concentra Operating and a Guarantor under the indenture;
(6) the redemption, repurchase, acquisition or retirement of Equity
Interests in and Indebtedness of the Development Corporations in
accordance with the respective securities purchase agreements entered
into and notes issued by such Development Corporations; provided that
as a result of such redemption, repurchase, acquisition or retirement,
such Development Corporations will become wholly-owned Restricted
Subsidiaries of Concentra Operating and Guarantors under the indenture;
(7) the purchase, redemption or other acquisition, cancellation or
retirement for value of Equity Interests of Concentra Operating or any
Restricted Subsidiary of Concentra Operating or any parent of Concentra
Operating held by any existing or former employees of Concentra
Operating or Concentra or any Subsidiary of Concentra Operating or
their assigns, estates or heirs, in each case in connection with the
repurchase provisions under employee stock option or stock purchase
agreements or other agreements to compensate management employees;
provided that such redemptions or repurchases pursuant to this clause
will not exceed $2 million in any calendar year with unused amounts in
any calender year being carried over to succeeding calendar years
subject to a maximum of $10 million in any calendar year; provided that
the amount of any such payments will be included in subsequent
calculations of the amount of Restricted Payments;
(8) loans or advances to employees or directors of Concentra Operating or
Concentra or any Subsidiary of Concentra Operating made in the ordinary
course of business the proceeds of which are used to purchase Capital
Stock of Concentra Operating or Concentra, in an aggregate amount not
to exceed $5 million at any one time outstanding; provided that the
amount of any such payments will be included in subsequent calculations
of the amount of Restricted Payments;
(9) repurchases of Capital Stock deemed to occur upon the exercise of stock
options if such Capital Stock represents a portion of the exercise
price of the stock options; provided that the amount of any such
payments will be included in subsequent calculations of the amount of
Restricted Payments;
(10) if immediately before and immediately after giving them effect, no
Default or Event of Default has occurred and Concentra Operating would
have been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described below under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock",
payments of cash dividends to Concentra in an amount sufficient to
enable Concentra to make semi-annual payments after August 15, 2004 of
cash interest not in excess of 14% per annum on the principal amount of
Concentra Senior Discount Debentures, provided that Concentra is
otherwise unable to pay such interest and such dividends are applied
directly to the payment of such interest; and provided further, that
the amount of any such payments will be included in subsequent
calculations of the amount of Restricted Payments, see "Description of
Certain Indebtedness--The Holdco Notes";
(11) if immediately before and immediately after giving them effect, no
Default or Event of Default has occurred, payments of principal,
interest, any premium or payment due upon redemption, repurchase, con-
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version, acquisition or retirement of our 6.0% and 4.5% convertible
subordinated notes in accordance with their respective terms in effect
on August 17, 1999; provided that the amount of any such payments will
be included in subsequent calculations of the amount of Restricted
Payments;
(12) payments to Concentra in an amount equal to the amount of income tax
that Concentra Operating and the Restricted Subsidiaries would have
paid had they filed consolidated tax returns on a separate company
basis in any given year, less the amount of such taxes paid or to be
paid directly by Concentra Operating and the Restricted Subsidiaries
for such years;
(13) an amount not to exceed $1.0 million in any fiscal year to permit
Concentra to pay:
(a) franchise taxes and other fees required to maintain its legal
existence; and
(b) its corporate overhead expenses incurred in the ordinary course of
business, its audit expenses, any filing fees required by the
Commission and to pay salaries or other compensation of employees
who perform services for both Concentra and Concentra Operating;
provided that the amount of any such payments will be included in
subsequent calculations of the amount of Restricted Payments;
(14) Permitted Investments;
(15) distributions to fund the merger with Yankee and related transactions;
and
(16) other Restricted Payments in an aggregate amount not to exceed $5
million at any one time; provided that the amount of any such payments
will be included in subsequent calculations of the amount of Restricted
Payments.
The amount of all Restricted Payments, other than cash, shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by Concentra Operating or such Subsidiary,
as the case may be, pursuant to the Restricted Payment. The fair market value of
any non-cash Restricted Payment shall be determined in good faith by the board
of directors whose resolution shall be delivered to the trustee. The board of
directors' determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $20 million. Not later than the date of making any
Restricted Payment, Concentra Operating shall deliver to the trustee an
officers' certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by this "--
Restricted Payments" covenant were computed, together with a copy of any
fairness opinion or appraisal required by the indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock. Concentra
Operating will not, and will not permit any of its Subsidiaries to, directly or
indirectly, Incur any Indebtedness, including Acquired Debt, and Concentra
Operating will not issue any Disqualified Stock or preferred stock and will not
permit any of its Restricted Subsidiaries to issue any Disqualified Stock or
preferred stock.
Despite the above, Concentra Operating may Incur Indebtedness, including
Acquired Debt, or issue Disqualified Stock or preferred stock and Concentra
Operating's Restricted Subsidiaries may Incur Indebtedness, including Acquired
Debt, and issue Disqualified Stock or preferred stock if the Fixed Charge
Coverage Ratio for Concentra Operating's most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is Incurred or such
Disqualified Stock or preferred stock is issued:
(1) for such dates from August 17, 1999 up to but not including September
30, 2000, would have been at least 2 to 1;
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(2) for such dates from September 30, 2000 up to but not including March
31, 2001, would have been at least 2.25 to 1; and
(3) after March 31, 2001 would have been at least 2.50 to 1;
each determined on a pro forma basis, on the assumption that the net proceeds
from the additional Indebtedness had been received, or the Disqualified Stock or
preferred stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The above will not prohibit the Incurrence of any of the following items of
Indebtedness:
(l) Indebtedness and letters of credit of Concentra Operating or any of its
Restricted Subsidiaries pursuant to our senior credit facilities;
provided that the aggregate amount of all Indebtedness of Concentra
Operating and the Guarantors outstanding under our senior credit
facilities after giving effect to such incurrence does not exceed an
amount equal to $475 million at any one time;
(2) Existing Indebtedness of Concentra Operating and its Restricted
Subsidiaries;
(3) Indebtedness of Concentra Operating and the Guarantors represented by
the notes and the Subsidiary Guarantees;
(4) Indebtedness of Concentra Operating or any of its Restricted
Subsidiaries represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of Concentra Operating or such Restricted Subsidiary, whether
through the direct purchase of assets or the Capital Stock of any
person owning such Assets, in an aggregate principal amount or accreted
value, as applicable, not to exceed $15 million at any time
outstanding;
(5) Permitted Refinancing Indebtedness of Concentra Operating or any of its
Restricted Subsidiaries in exchange for, or the net proceeds of which
are used to refund, refinance or replace Indebtedness, other than
intercompany Indebtedness, that was permitted by the indenture to be
incurred under the first paragraph of this covenant or clauses (3) or
(14) of this paragraph;
(6) Indebtedness between Concentra Operating and any of its Restricted
Subsidiaries or between any of its Restricted Subsidiaries; provided,
however, that:
(a) if Concentra Operating or any Guarantor is the obligor on such
Indebtedness, such Indebtedness must be expressly subordinated to
the prior payment in full in cash of all Obligations with respect
to the notes, in the case of Concentra Operating, or the
Subsidiary Guarantee of such Guarantor, in the case of a
Guarantor; and
(b) o any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a person other
than Concentra Operating or a wholly-owned Restricted
Subsidiary and
o any sale or other transfer of any such Indebtedness to a
person that is not either Concentra Operating or a
wholly-owned Restricted Subsidiary
shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness by Concentra Operating or such Restricted Subsidiary,
as the case may be, that was not permitted by this clause (6);
(7) Hedging Obligations of Concentra Operating or any of its Restricted
Subsidiaries that are for the purpose of hedging interest rate risk
with respect to any Indebtedness that is permitted by the terms of the
indenture to be outstanding;
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(8) the Guarantee by Concentra Operating or any of its Restricted
Subsidiaries of Indebtedness of Concentra Operating or a Restricted
Subsidiary of Concentra Operating that was permitted by another
provision of this covenant;
(9) Non-Recourse Debt of Concentra Operating's Unrestricted Subsidiaries;
provided, however, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an Incurrence of Indebtedness by a Restricted
Subsidiary of Concentra Operating that was not permitted by this clause
(9);
(10)Indebtedness of Concentra Operating or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to
letters of credit issued in the ordinary course of business, including
without limitation to letters of credit in respect of workers'
compensation claims or self-insurance, or other Indebtedness with
respect to reimbursement type obligations regarding workers'
compensation claims; provided, however, that upon the drawing of such
letters of credit or the incurrence of such Indebtedness, such
obligations are reimbursed within 30 days following such drawing or
incurrence;
(11)Indebtedness arising from agreements of Concentra Operating or a
Restricted Subsidiary providing for indemnification, adjustment of
purchase price or similar obligations, in each case, incurred or
assumed in connection with the disposition of any business, asset or
Subsidiary, other than guarantees of Indebtedness incurred by any
person acquiring all or any portion of such business, assets or
Subsidiary for the purpose of financing such acquisition; provided
that:
(a) such Indebtedness is not reflected on the balance sheet of
Concentra Operating or any Restricted Subsidiary, contingent
obligations referred to in a footnote or footnotes to financial
statements and not otherwise reflected on the balance sheet will
not be deemed to be reflected on such balance sheet for purposes
of this clause (a); and
(b) the maximum aggregate liability in respect of such Indebtedness
shall at no time exceed the gross proceeds, including non-cash
proceeds (the fair market value of such non-cash proceeds being
measured at the time received and without giving effect to any
such subsequent changes in value) actually received by Concentra
Operating and/or such Restricted Subsidiary in connection with
such disposition;
(12)obligations in respect of performance, surety and similar bonds and
completion guarantees provided by Concentra Operating or any Restricted
Subsidiary in the ordinary course of business;
(13)Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument, except in the case
of daylight overdrafts, drawn against insufficient funding in the
ordinary course of business, provided, however, that such Indebtedness
is extinguished within five business days of incurrence; and
(14)additional Indebtedness of Concentra Operating or any of its Restricted
Subsidiaries, including Attributable Debt incurred after August 17,
1999, in an aggregate principal amount, or accreted value, as
applicable, at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
other Indebtedness incurred pursuant to this clause (14), not to exceed
$25 million.
For purposes of determining compliance with this "--Certain
Covenants-Incurrence of Indebtedness and Issuance of Preferred Stock" covenant,
in the event that an item of proposed Indebtedness meets the criteria of more
than one of the categories of permitted debt described in clauses (1) through
(14) above or pursuant to the first paragraph of this covenant, Concentra
Operating will be permitted to classify such item of Indebtedness in any manner
that complies with this covenant. In addition, Concentra Operating may, at any
time, change the classification of an item of Indebtedness, or any portion of
Indebtedness, to any other clause or to the first paragraph of this covenant
provided that Concentra Operating would be permitted to Incur such item of
Indebtedness, or the portion of Indebtedness, pursuant to such other clause or
the first paragraph of this covenant, as the case may be, at such time
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of reclassification. Accrual of interest, accretion or amortization of original
issue discount and the accretion of accreted value will not be deemed to be an
Incurrence of Indebtedness for purposes of this covenant.
Liens. Concentra Operating will not, and will not permit any of its
Restricted Subsidiaries to Incur or become effective any Lien of any kind
securing trade payables, Attributable Debt or Indebtedness that does not
constitute Senior Indebtedness, other than Permitted Liens, upon any of their
property or assets, now owned or hereafter acquired unless:
o in the case of Liens securing Indebtedness that is expressly
subordinated or junior in right of payment to the notes, the notes are
secured on a senior basis to the obligations so secured until such time
as such obligations are no longer secured by a Lien; and
o in all other cases, the notes are secured on an equal and ratable basis
with the obligations so secured until such time as such obligations are
no longer secured by a Lien.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries.
Concentra Operating will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any consensual encumbrance or consensual restriction on the ability of
any Restricted Subsidiary to:
o pay dividends or make any other distributions to Concentra Operating or
any of its Restricted Subsidiaries (a) on its Capital Stock or (b) with
respect to any other interest or participation in, or measured by, its
profits;
o pay any Indebtedness owed to Concentra Operating or any of Concentra
Operating's Restricted Subsidiaries;
o make loans or advances to Concentra Operating or any of Concentra
Operating's Restricted Subsidiaries; or
o transfer any of its properties or assets to Concentra Operating or any
of Concentra Operating's Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
o any encumbrance or restriction pursuant to an agreement in effect at or
entered into on August 17, 1999, including:
(1) our senior credit facilities as in effect as of August 17, 1999,
and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings
of those credit facilities, provided that such amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are no more restrictive,
taken as a whole, as determined in the good faith judgment of
Concentra Operating's board of directors, with respect to such
dividend and other payment restrictions than those contained in
our senior credit facilities as in effect on August 17, 1999; and
(2) the indenture and the notes;
o any applicable law, rule, regulation or order;
o any instrument governing Indebtedness or Capital Stock of a person
acquired by Concentra Operating or any of its Restricted Subsidiaries
as in effect at the time of such acquisition, (except to the extent
incurred in connection with or in contemplation of such acquisition,
which encumbrance or restriction is not applicable to any person, or
the properties or assets of any person, other than the person, or the
property or
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assets of the person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the
indenture to be incurred;
o customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
o any Purchase Money Note or other Indebtedness or contractual
requirements incurred with respect to a Qualified Receiveables
Transaction relating exclusively to a Receiveables Entity that, in the
good faith determination of the board of directors of Concentra
Operating, are necessary to effect such Qualified Receiveables
Transaction;
o purchase money obligations for property acquired in the ordinary course
of business that impose restrictions on the property so acquired of the
nature described in the last clause of the preceding paragraph;
o restrictions with respect solely to a Restricted Subsidiary of
Concentra Operating imposed pursuant to a binding agreement which has
been entered into for the sale or disposition of all or substantially
all of the Capital Stock or assets of such Restricted Subsidiary,
provided that such restrictions apply solely to the Capital Stock or
assets being sold of such Restricted Subsidiary;
o provisions with respect to the disposition or distribution of assets or
property in connection with Permitted Joint Ventures entered into in
accordance with past practice made in the ordinary course of business;
o Permitted Refinancing Indebtedness, provided that the material
restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive, in the good faith
judgment of Concentra Operating's board of directors, taken as a whole,
to the holders of notes than those contained in the agreements
governing the Indebtedness being refinanced; and
o restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business.
Merger, Consolidation or Sale of Assets. Concentra Operating may not:
o consolidate or merge with or into another person, whether or not
Concentra Operating is the surviving corporation; or
o sell, assign, transfer, convey or otherwise dispose of all or
substantially all of its properties or assets, in one or more related
transactions, to another person unless:
(1) either:
(a) Concentra Operating is the surviving corporation; or
(b) the person formed by or surviving any such consolidation or
merger, if other than Concentra Operating, or to which such
sale, assignment, transfer, conveyance or other disposition
shall have been made is a corporation organized or existing
under the laws of the United States, any state of the United
States or the District of Columbia;
(2) the person formed by or surviving any such consolidation or
merger, if other than Concentra Operating, or the person to which
such sale, assignment, transfer, conveyance or other disposition
shall have been made expressly assumes all the obligations of
Concentra Operating under the notes and the indenture pursuant to
a supplemental indenture in a form reasonably satisfactory to the
trustee;
(3) immediately after giving pro forma effect to such transaction no
Default or Event of Default exists; and
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(4) Concentra Operating or person formed by or surviving any such
consolidation or merger, if other than Concentra Operating, or to
which such sale, assignment, transfer, conveyance or other
disposition shall have been made;
(a) will, after giving pro forma effect to such merger, on the
assumption that it had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "-- Certain
Covenants --Incurrence of Indebtedness and Issuance of
Preferred Stock"; or
(b) would, together with its Restricted Subsidiaries, have a
higher Fixed Charge Coverage Ratio immediately after such
merger, after giving pro forma effect to such merger, on the
assumption that it had occurred at the beginning of the
applicable four-quarter period, than the Fixed Charge Coverage
Ratio of Concentra Operating and its Subsidiaries immediately
prior to the transaction.
The preceding clause (4) will not prohibit:
(a) a merger between Concentra Operating and a wholly-owned
Subsidiary; or
(b) a merger between Concentra Operating and an Affiliate
incorporated solely for the purpose of reincorporating
Concentra Operating in another state of the United States;
so long as, in each case, the amount of Indebtedness of Concentra Operating
and its Restricted Subsidiaries is not increased thereby.
In addition, Concentra Operating may not, directly or indirectly, lease all
or substantially all of its properties or assets, in one or more related
transactions, to any other person. This covenant will not be applicable to a
sale, assignment, transfer, conveyance or other disposition of assets between or
among Concentra Operating and any of its wholly-owned Restricted Subsidiaries.
Transactions with Affiliates. Concentra Operating will not, and will not
permit any of its Restricted Subsidiaries to engage in an Affiliate Transaction
unless:
(1) such Affiliate Transaction is on terms that are no less favorable to
Concentra Operating or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by Concentra
Operating or such Restricted Subsidiary made on an arm's-length basis
with an unrelated person; and
(2) Concentra Operating delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess
of $5 million, a resolution of the board of directors set forth in
an officers' certificate certifying that such Affiliate
Transaction complies with clause (1) above and that such Affiliate
Transaction has been approved by a majority of the disinterested
members of the board of directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess
of $15 million, an opinion as to the fairness to the holders of
such Affiliate Transaction from a financial point of view issued
by an accounting, appraisal or investment banking firm of national
standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) customary directors' fees to persons who are not otherwise Affiliates
of Concentra Operating;
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(2) transactions between or among Concentra Operating and/or its Restricted
Subsidiaries;
(3) the payment of Affiliate Management Fees in an amount in any calendar
year not to exceed the greater of:
(a) $1 million; and
(b) 1% of Consolidated EBITDA;
(4) payments by Concentra Operating or any of its Restricted Subsidiaries
to Welsh Carson, Ferrer Freeman and their respective Affiliates made
for any:
(a) financial advisory, financing, underwriting or placement services;
or
(b) in respect of other investment banking activities, including,
without limitation, in connection with acquisitions or
divestitures;
which payments are approved in good faith by a majority of the board of
directors of Concentra Operating or a committee of the board of
directors consisting of disinterested members;
(5) loans or advances to employees in accordance with past practice made in
the ordinary course of business which are approved in good faith by a
majority of the board of directors of Concentra Operating or a
committee of the board of directors consisting of disinterested
members;
(6) any agreement as in effect on August 17, 1999 or any amendment to such
agreement, so long as any such amendment is no less favorable to
Concentra Operating and its Restricted Subsidiaries;
(7) the existence of, or the performance by Concentra Operating or any of
its Restricted Subsidiaries of its obligations under the terms of, our
agreement and plan of merger, registration rights agreement or purchase
agreement related to our merger with Yankee, to which it is a party on
or after August 17, 1999; provided, however, that the existence of, or
the performance by Concentra Operating or any of its Restricted
Subsidiaries of obligations under any future amendment to any such
existing agreement or under any similar agreement entered into after
August 17, 1999 shall only be permitted by this clause;
(8) the payment of all fees and expenses related to our merger with Yankee
and related transactions, including fees to Welsh Carson and Ferrer
Freeman;
(9) any payment pursuant to any tax sharing agreement between Concentra
Operating and Concentra or any other person with which Concentra
Operating is required or permitted to file a consolidated tax return or
with which Concentra Operating is or could be part of a consolidated,
combined or unitary group for tax purposes; provided that in no event
shall the amount permitted to be paid pursuant to all such agreements
exceed the tax liabilities attributable solely to Concentra Operating
and its Restricted Subsidiaries (whether as a consolidated, combined or
unitary group);
(10)Restricted Payments that are permitted by the provisions of the
indenture described above under the caption "--Certain
Covenants--Restricted Payments";
(11)customary fees and compensation paid to, and indemnity provided on
behalf of, officers, directors, employees or consultants of Concentra
Operating or any of its Restricted Subsidiaries; and
(12)any transaction involving ordinary course investment banking, merchant
banking, commercial banking or related activities.
Despite the above, the holders of notes will be entitled to receive payment
in full in cash of all amounts due or to become due in respect of the notes
before any payment is made with respect to Affiliate Management Fees in the
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event of any distribution to creditors of Concentra Operating in any Insolvency
or Liquidation Proceeding with respect to Concentra Operating. No payments of
Affiliate Management Fees shall be made by Concentra Operating or any of its
Restricted Subsidiaries if the Fixed Charge Coverage Ratio for Concentra
Operating's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which
Affiliate Management Fees are to be paid is less than 1.75 to 1; provided,
however, that such payments due but not paid shall accrue and shall be paid only
after such time as the Fixed Charge Coverage Ratio for a four full fiscal
quarter period is no longer less than or equal to 1.75 to 1.
Designation of Restricted and Unrestricted Subsidiaries. The board of
directors may designate any Restricted Subsidiary to be an Unrestricted
Subsidiary if that designation would not cause a Default. If a Restricted
Subsidiary is designated as an Unrestricted Subsidiary, all outstanding
Investments owned by Concentra Operating and its Restricted Subsidiaries, except
to the extent repaid in cash, in the Subsidiary so designated will be deemed to
be Restricted Payments at the time of such designation, to the extent not
designated a Permitted Investment, and will reduce the amount available for
Restricted Payments under the first paragraph of the covenant described above
under the caption "--Certain Covenants--Restricted Payments." All such
outstanding Investments will be valued at their fair market value at the time of
such designation, as determined in good faith by the board of directors. That
designation will only be permitted if such Restricted Payment would be permitted
at that time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary. The board of directors may redesignate any
Unrestricted Subsidiary to be a Restricted Subsidiary if the redesignation would
not cause a Default.
Anti-Layering. Concentra Operating will not, and will not permit any of its
Restricted Subsidiaries to, Incur any Indebtedness that is both:
(1) subordinate or junior in right of payment to any Senior Indebtedness;
and
(2) senior in any respect in right of payment to the notes.
No Guarantor will Incur any Indebtedness that is both:
(1) subordinate or junior in right of payment to any Senior Indebtedness of
such Guarantor; and
(2) senior in any respect in right of payment to the Subsidiary Guarantees.
Sale and Leaseback Transactions. Concentra Operating will not, and will not
permit any of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction unless:
(1) Concentra Operating or such Restricted Subsidiary could have:
(a) incurred Indebtedness in an amount equal to the Attributable Debt
relating to such sale and leaseback transaction under the Fixed
Charge Coverage Ratio test in the first paragraph of the covenant
described above under the caption "--Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock;" and
(b) incurred a Lien to secure such Indebtedness pursuant to the
covenant described above under the caption "--Certain
Covenants--Liens;"
(2) the gross cash proceeds of that sale and leaseback transaction are at
least equal to the fair market value, as determined in good faith by
the board of directors and set forth in an officers' certificate
delivered to the trustee, of the property that is the subject of such
sale and leaseback transaction; and
(3) the transfer of assets in such sale and leaseback transaction is
permitted by, and Concentra Operating applies the proceeds of such
transaction in compliance with, the covenant described above under the
caption "-- Repurchase at the Option of Holders--Asset Sales."
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Limitation on Issuances and Sales of Equity Interests in Restricted
Subsidiaries. Concentra Operating will not, and will not permit any of its
Restricted Subsidiaries to, transfer, convey, sell, lease or otherwise dispose
of any Equity Interests in any Restricted Subsidiary or to issue any of its
Equity Interests, other than, if necessary, Equity Interests constituting
directors' qualifying shares, to any person except:
(1) to Concentra Operating or a wholly-owned Subsidiary, other than a
Receivables Entity; or
(2) in compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales" and
immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would continue to be a Restricted
Subsidiary.
Despite the above, Concentra Operating may sell all the Equity Interests of
a Restricted Subsidiary as long as Concentra Operating complies with the terms
of the covenant described under the caption "--Repurchase at the Option of
Holders--Asset Sales."
Limitations on Issuances of Guarantees of Indebtedness. Concentra Operating
will not permit any Restricted Subsidiary, directly or indirectly, to Incur
Indebtedness or Guarantee or pledge any assets to secure the payment of any
Indebtedness of Concentra Operating or any Restricted Subsidiary unless either
such Restricted Subsidiary:
(1) is a Guarantor; or
(2) simultaneously executes and delivers a supplemental indenture to the
indenture and becomes a Guarantor, which Guarantee shall:
(a) with respect to any Guarantee of Senior Indebtedness, be
subordinated in right of payment on the same terms as the notes
are subordinated to such Senior Indebtedness; and
(b) with respect to any Guarantee of any other Indebtedness, be senior
to or pari passu with such Restricted Subsidiary's other
Indebtedness or Guarantee of or pledge to secure such other
Indebtedness.
Despite the above, any Subsidiary Guarantee of the notes shall provide by
its terms that it shall be automatically and unconditionally released and
discharged under the circumstances described above under the caption
"--Subsidiary Guarantees." The form of the Guarantee will be attached as an
exhibit to the indenture.
Additional Guarantees. If Concentra Operating shall acquire or create a
Restricted Subsidiary after August 17, 1999, or if any Subsidiary of Concentra
Operating becomes a Restricted Subsidiary, then such newly acquired or created
Restricted Subsidiary, other than a Permitted Joint Venture, shall become a
Guarantor and execute a supplemental indenture and deliver an opinion of
counsel, in accordance with the terms of the indenture.
Business Activities. Concentra Operating will not, and will not permit any
Restricted Subsidiary to, engage in any business other than a Permitted
Business.
Advances to Subsidiaries. All advances to Restricted Subsidiaries made by
Concentra Operating after August 17, 1999 will be evidenced by intercompany
notes in favor of Concentra Operating. Each intercompany note will be payable
upon demand and will bear interest at the same rate as the notes. A form of
intercompany note will be attached as an exhibit to the indenture.
Payments for Consents. Concentra Operating will not, and will not permit
any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration to or for the benefit of any holder of notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the indenture or the notes unless such consideration is offered to be paid
and is paid to all holders of the notes that consent, waive or agree to amend in
the time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
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Reports. Whether or not required by the Commission, so long as any notes
are outstanding, Concentra Operating will furnish or make available to the
holders of notes, within the time periods specified in the Commission's rules
and regulations:
(l) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K
if Concentra Operating were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information
only, a report on the annual financial statements by Concentra
Operating's certified independent accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if Concentra Operating were required to file
such reports.
If Concentra Operating has designated any of its Subsidiaries as
Unrestricted Subsidiaries, then the quarterly and annual financial information
required by the preceding paragraph shall include a reasonably detailed
presentation, either on the face of the financial statements or in the
accompanying footnotes, and in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section, of the financial
condition and results of operations of Concentra Operating and its Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of Concentra Operating.
In addition, following this exchange offer, whether or not required by the
Commission, Concentra Operating will file a copy of all the information and
reports referred to in clauses (1) and (2) above with the Commission for public
availability within the time periods specified in the Commission's rules and
regulations (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, Concentra Operating has agreed that, for so long as any
notes remain outstanding, it will furnish to the holders and to securities
analysts and prospective investors, upon their request, the information required
to be delivered pursuant to Rule 144A(d) (4) under the Securities Act.
Events of Default and Remedies
Each of the following is an Event of Default under the indenture:
(1) default for 30 days in the payment when due of interest on the notes
whether or not prohibited by the subordination provisions of the
indenture;
(2) default in payment when due of the principal of or any premium on the
notes, whether or not prohibited by the subordination provisions of the
indenture;
(3) failure by Concentra Operating to comply with the provisions described
under the captions "--Repurchase at the Option of Holders-Change of
Control", "--Repurchase at the Option of Holders--Asset Sales",
"--Certain Covenants-Restricted Payments", "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock"
or "--Certain Covenants--Merger, Consolidation or Sale of Assets";
(4) failure by Concentra Operating for 60 days after notice from the
trustee or holders of at least 25% in principal amount of the notes
then outstanding to comply with any of its other agreements in the
indenture or the notes;
(5) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for borrowed money or Guarantee by Concentra Operating or
any of its Restricted Subsidiaries, or the payment of which is
guaranteed by Concentra Operating or any of its Restricted
Subsidiaries, whether such Indebtedness or Guarantee now exists, or is
created after August 17, 1999, if that default:
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(a) is caused by a failure to pay principal of or any premium on such
Indebtedness prior to the expiration of the grace period provided
in such Indebtedness on the date of such default; or
(b) results in the acceleration of such Indebtedness prior to its
express maturity;
and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a payment default or the maturity of which has
been so accelerated, aggregates $20 million or more;
(6) failure by Concentra Operating or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $20 million, which
judgments are not paid, discharged or stayed for a period of 60 days;
(7) except as permitted by the indenture, any Subsidiary Guarantee which
shall be held in any judicial proceeding to be unenforceable or invalid
or shall cease for any reason to be in full force and effect or any
Guarantor, or any person acting on behalf of any Guarantor, who shall
deny or disaffirm its obligations under its Subsidiary Guarantee; and
(8) certain events of bankruptcy or insolvency with respect to Concentra
Operating or any of its Restricted Subsidiaries.
In the event of a declaration of acceleration of the notes because an Event
of Default has occurred and is continuing as a result of the acceleration of any
Indebtedness described in clause (5) of the preceding paragraph, the declaration
of acceleration of the notes shall be automatically annulled if the holders of
any Indebtedness described in clause (5) of the preceding paragraph have
rescinded the declaration of acceleration in respect of such Indebtedness within
30 days of the date of such declaration and if:
o the annulment of the acceleration of notes would not conflict with any
judgment or decree of a court of competent jurisdiction; and
o all existing Events of Default, except nonpayment of principal or
interest on the notes that became due solely because of the
acceleration of the notes, have been cured or waived.
If any Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the outstanding notes may declare
the principal of the notes to be due and payable immediately; provided, that so
long as any Indebtedness permitted to be incurred pursuant to our senior credit
facilities shall be outstanding, such acceleration shall not be effective until
the earlier of:
o an acceleration of any such Indebtedness under our senior credit
facilities; or
o five business days after receipt by Concentra Operating and the agent
bank to our senior credit facilities of written notice of such
acceleration.
If payment of the notes is accelerated because of an Event of Default,
Concentra Operating shall promptly notify the holders of the Senior Indebtedness
of the acceleration.
Despite the above, in the case of an Event of Default arising from certain
events of bankruptcy or insolvency, with respect to Concentra Operating or any
of its Subsidiaries, the principal and any accrued but unpaid interest on all
outstanding notes shall become due and payable immediately without further
action or notice.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from holders of the
notes notice of any continuing Default or Event of Default, except a Default or
Event of Default relating to the payment of principal or interest, if it
determines that withholding notice is in their interest.
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In the case of any Event of Default occurring on or after August 15, 2004,
by reason of any willful action or inaction taken or not taken by or on behalf
of Concentra Operating with the intention of avoiding payment of the premium
that Concentra Operating would have had to pay if Concentra Operating then had
elected to redeem the notes pursuant to the optional redemption provisions of
the indenture, an equivalent premium shall also become and be immediately due
and payable to the extent permitted by law upon the acceleration of the notes.
If an Event of Default occurs prior to August 15, 2004 by reason of any willful
action, or inaction, taken, or not taken, by or on behalf of Concentra Operating
with the intention of avoiding the prohibition on redemption of the notes prior
to August 15, 2004, then the premium specified in the indenture shall also
become immediately due and payable to the extent permitted by law upon the
acceleration of the notes.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest or any premium on, or the principal of, the notes.
Concentra Operating is required to deliver to the trustee annually a
statement regarding compliance with the indenture. Upon becoming aware of any
Default or Event of Default, Concentra Operating is required to deliver to the
trustee a statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of Concentra
Operating, or any Guarantor, as such, shall have any liability for any
obligations of Concentra Operating or the Guarantors under the notes, the
indenture, the Subsidiary Guarantees or for any claim based on, in respect of,
or by reason of, such obligations or their creation. Each holder of notes by
accepting a note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the notes. The waiver may not be
effective to waive liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
Concentra Operating may, at its option, elect to completely defease the
notes. Such defeasance means that all of its obligations with respect to the
outstanding notes and all of the obligations of the Guarantors with respect to
their Subsidiary Guarantees would be discharged, except for:
o the rights of holders of outstanding notes to receive payments in
respect of the principal of, any premium and interest on such notes
when such payments are due from the trust referred to below;
o Concentra Operating's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed,
lost or stolen notes and the maintenance of an office or agency for
payment and money for security payments held in trust;
o the rights, powers, trusts, duties and immunities of the trustee, and
Concentra Operating's obligations in connection with the indenture; and
o the legal defeasance provisions of the indenture.
In addition, Concentra Operating may, at its option, elect to defease a
covenant under the indenture and after that defeasance any omission to comply
with its obligations and the obligations of the Guarantors with respect to such
covenant will not constitute a Default or Event of Default. In the event a
covenant is defeased, certain events, not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events, described under the caption
"--Events of Default and Remedies" will no longer constitute an Event of Default
with respect to the notes.
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In order to exercise a defeasance:
o Concentra Operating must irrevocably deposit with the trustee, in
trust, for the benefit of the holders of the notes, cash in U.S.
dollars, non-callable Government Securities, or a combination of the
two, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay
the principal of, any premium and interest on the outstanding notes on
the stated maturity or on the applicable redemption date, as the case
may be, and Concentra Operating must specify whether the notes are
being defeased to maturity or to a particular redemption date;
o in the case of any defeasance, Concentra Operating shall have delivered
to the trustee an opinion of counsel in the United States reasonably
acceptable to the trustee confirming that the holders of the
outstanding notes will not recognize income, gain or loss for federal
income tax purposes as a result of such defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such defeasance had not
occurred;
o no Default or Event of Default shall have occurred and be continuing on
the date of such deposit, other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit;
o such defeasance will not result in a breach or violation of, or
constitute a default under, any material agreement or instrument, other
than the indenture, to which Concentra Operating or any of its
Subsidiaries is a party or by which Concentra Operating or any of its
Subsidiaries is bound;
o Concentra Operating must deliver to the trustee an officers'
certificate stating that the deposit was not made by Concentra
Operating with the intent of preferring the holders of notes over the
other creditors of Concentra Operating with the intent of defeating,
hindering, delaying or defrauding creditors of Concentra Operating or
others;
o no event which is, or after notice or lapse of time or both would
become, an Event of Default with respect to such notes or any other
notes shall have occurred and be continuing at the time of such deposit
or, with regard to any such event specified in paragraphs (7) and (8)
under the above caption "--Events of Default and Remedies", at any time
on or prior to the 90th day after the date of such deposit, it being
understood that this condition shall not be deemed satisfied until
after such 90th day; and
o Concentra Operating must deliver to the trustee an officers'
certificate and an opinion of counsel, which opinion may be subject to
customary assumptions and exclusions, each stating that all conditions
precedent relating to the defeasance have been complied with.
Amendment, Supplement and Waiver
With the consent of the holders of not less than a majority in principal
amount of the notes at the time outstanding, Concentra Operating and trustee are
permitted to amend or supplement the indenture or any supplemental indenture or
modify the rights of the holders; provided that without the consent of each
holder affected, no amendment, supplement, modification or waiver may:
o reduce the principal amount of notes whose holders must consent to an
amendment, supplement or waiver;
o reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes, other
than provisions relating to the covenants described above under the
caption "--Repurchase at the Option of Holders";
o reduce the rate of or change the time for payment of interest on any
note;
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o waive a Default or Event of Default in the payment of principal of or
any premium or interest on the notes, except a rescission of
acceleration of the notes by the holders of at least a majority in
aggregate principal amount of the notes and a waiver of the payment
default that resulted from such acceleration;
o make any note payable in money other than that stated in the notes;
o make any change in the provisions of the indenture relating to waivers
of past Defaults or the rights of holders of notes to receive payments
of principal of or any premium or interest on the notes;
o waive a redemption payment with respect to any note, other than a
payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders;"
o make any change in the preceding amendment and waiver provisions; or
o release any Guarantor from any of its obligations under its Guarantee
of the notes or the indenture, except in accordance with the terms of
the indenture.
In addition, any amendment to, or waiver of the provisions of the indenture
relating to subordination that adversely affects the rights of the holders of
the notes will require the consent of the holders of at least 75% in aggregate
principal amount of the notes then outstanding.
Despite the above, without the consent of any holder of notes, Concentra
Operating and the trustee may amend or supplement the indenture or the notes:
o to cure any ambiguity, defect or inconsistency;
o to provide for uncertificated notes in addition to or in place of
certificated notes;
o to provide for the assumption of Concentra Operating's obligations to
holders of notes in the case of a merger or consolidation or the sale
of all or substantially all of Concentra Operating's assets;
o to make any change that would provide any additional rights or benefits
to the holders of notes or that does not adversely affect the legal
rights under the indenture of any such holder;
o to comply with requirements of the Commission in order to effect or
maintain the qualification of the indenture under the Trust Indenture
Act of 1939, as amended;
o to provide for the issuance of additional notes in accordance with the
limitations set forth in the indenture; or
o to allow any Subsidiary to guarantee the notes.
Concerning the Trustee
If the trustee becomes a creditor of Concentra Operating or any Guarantor,
the indenture limits the trustee's right to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
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affairs. Subject to such provisions, the trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request of any holder of notes, unless such holder shall have offered to the
trustee security and indemnity satisfactory to it against any loss, liability or
expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the indenture and
registration rights agreement without charge by writing to Concentra Operating
Corporation, 5080 Spectrum Drive, Suite 400 West Tower, Addison, TX 75001;
Attention: General Counsel.
Book-Entry; Delivery; Form and Transfer
The Global Note. The certificates representing the old notes were issued,
and the certificates representing the new notes will be issued, in fully
registered form, without coupons. The old notes are represented by one or more
permanent global certificates in definitive, fully registered form without
interest coupons in an aggregate amount of $190 million. Except as described in
the next paragraph, the new notes initially will be represented by one or more
permanent global certificates in definitive, fully registered form and will be
deposited with, or on behalf of, the DTC, and registered in the name of Cede &
Co., as the DTC's nominee or will remain in the custody of the trustee pursuant
to a FAST Balance Certificate Agreement between the DTC and the trustee. If your
interest in old notes is represented by the initial global note and you fail to
tender in the exchange offer, we may issue and deliver to you a separate
certificate representing your old notes in registered form without interest
coupons.
Certain Book-Entry Procedures for Global Notes. The descriptions of the
operations and procedures of DTC that follow are provided solely as a matter of
convenience. These operations and procedures are solely within the control of
the respective settlement systems and are subject to change by them from time to
time. Concentra Operating takes no responsibility for these operations and
procedures and urges investors to contact DTC or its participants directly to
discuss these matters.
DTC has advised Concentra Operating that: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, eliminating the need for physical transfer and
delivery of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system is available to other entities
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly.
Under procedures established by DTC:
(1) upon the issuance of the initial global certificate, DTC credited, on
its internal system, the respective principal amount of the individual
beneficial interests represented by such global notes to the accounts
with DTC of the participants through which such interests are held; and
(2) ownership of beneficial interest in the global notes are shown on, and
the transfer of that ownership is effected only through, records
maintained by DTC or its nominees, with respect to interest of
participants, and the records of participants and indirect
participants, with respect to interests of persons other than
participants.
As long as DTC, or its nominee, is the registered holder of a global note,
DTC or such nominee, as the case may be, will be considered the sole owner and
holder of the notes represented by such global note for all purposes under the
indenture and the new notes. Except in the limited circumstances described
below, owners of beneficial interests in a global note will not be entitled to
have any portions of such global note registered in their names, and
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will not receive or be entitled to receive physical delivery of notes in
definitive form and will not be considered the owners or holders of the global
note, or any notes represented by the global note, under the indenture or the
notes.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. The ability to transfer
beneficial interests in a global note to such persons may be limited to that
extent. Because DTC can act only on behalf of its participants, which in turn
act on behalf of indirect participants and certain banks, the ability of a
person having beneficial interests in a global note to pledge such interest to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests.
Payments of the principal of, premium, if any, and interest on global notes
will be made to DTC or its nominee as the registered owner of the global notes.
Neither Concentra Operating, the trustee nor any of their respective agents will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interest in the global notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Concentra Operating expects that DTC or its nominee, upon receipt of any
payment of principal premium or interest in respect of a global note
representing any notes held by it or its nominee, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such global note for such notes as shown on
the records of DTC or its nominee. Concentra Operating also expects that
payments by participants to owners of beneficial interests in such global note
held through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers registered in "street name." Such payments will be the responsibility
of such participants. None of Concentra Operating or the trustee will be liable
for any delay by DTC or any of its participants in identifying the beneficial
owners of the notes, and Concentra Operating and the trustee may conclusively
rely on and will be protected in relying on instructions from DTC or its nominee
as the registered owner of the notes for all purposes.
Interests in the global notes will trade in DTC's Same-Day Funds Settlement
System and secondary market trading activity in such interests will therefore
settle in immediately available funds, subject in all cases to the rules and
procedures of DTC and its participants. Transfers between participants in DTC
will be effected in accordance with DTC's procedures, and will be settled in
same-day funds.
DTC has advised Concentra Operating that it will take any action permitted
to be taken by a holder of notes only at the direction of one or more
participants to whose accounts with DTC interests in the global notes are
credited and only in respect of such portion of the aggregate principal amount
of the notes as to which such participant or participants has or have given such
direction. However, if there is an Event of Default under the notes, DTC
reserves the right to exchange the global notes for notes in certificated form,
and to distribute such notes to its participants. See "--Certificated Notes."
Although DTC has agreed to the foregoing procedures in order to facilitate
transfer of beneficial ownership interests in the global notes among
participants of DTC, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. None of
Concentra Operating, the trustee nor any of their respective agents will have
any responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing its operations, including maintaining, supervising or reviewing the
records relating to or payments made on account of, beneficial ownership
interests in global notes.
Certificated Notes. An entire global note may be exchanged for definitive
notes in registered, certificated form without interest coupons if:
(1) DTC:
(a) notifies Concentra Operating that it is unwilling or unable to
continue as depositary for the global notes and Concentra
Operating then fails to appoint a successor depositary within 90
days; or
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(b) has ceased to be a clearing agency registered under the Exchange
Act;
(2) Concentra Operating, at its option, notifies the trustee in writing
that it elects to cause the issuance of certificated notes; or
(3) there will have occurred and be continuing a Default or an Event of
Default with respect to notes.
In any such case, Concentra Operating will notify the trustee in writing
that, upon surrender by the direct and indirect participants of their interest
in such global note, certificated notes will be issued to each person that such
direct and indirect participants and the DTC identify as being the beneficial
owner of the related notes.
Beneficial interests in global notes held by any direct or indirect
participant may be exchanged for certificated notes upon request to DTC, by a
direct participant, for itself or on behalf of an indirect participant, to the
trustee in accordance with customary DTC procedures. Certificated notes
delivered in exchange for any beneficial interest in any global note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such direct or indirect participant, in accordance with DTC's
customary procedures.
Certain Definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used in this prospectus for which no definition is
provided.
"Acquired Debt" means, with respect to any specified person:
(1) Indebtedness of any other person existing at the time such other person
is merged with or into or became a Subsidiary of such specified person
or assumed in connection with the acquisition of assets from such
person, whether or not such Indebtedness is incurred in connection
with, or in contemplation of, such other person merging with or into,
or becoming a Subsidiary of such specified person or such acquisition;
and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified person.
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition, "control,"
as used with respect to any person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such person, whether through the ownership of voting securities, by
agreement or otherwise, provided that beneficial ownership of 10% or more of the
Voting Stock of a person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings; provided that any affiliated professional
associations and professional corporations which employ physicians and other
professionals who provide health care services for Concentra Operating's
occupational health services centers shall not be deemed to be an Affiliate of
Concentra Operating, Concentra or any of their Subsidiaries.
"Affiliate Management Fees" means any management, consulting, monitoring or
advisory fees, and related expenses, payable to Welsh Carson, Ferrer Freeman or
their respective Affiliates.
"Affiliate Transaction" means any:
(1) payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to;
(2) purchase any property or assets from;
(3) enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or guarantee with; or
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for the benefit of, any Affiliate or any affiliated professional associations or
professional corporations which employ physicians and other professionals who
provide healthcare services for Concentra Operating's occupational and health
services centers.
"Asset Sale" means:
(1) the sale, lease, other than an operating lease entered into in the
ordinary course of business, conveyance or other disposition of any
assets or rights, other than the licensing of its non-exclusive
intellectual property rights, including, without limitation, by way of
a sale and leaseback, provided that the disposition of all or
substantially all of the assets of Concentra Operating and its
Restricted Subsidiaries taken as a whole will be governed by the
provisions of the indenture described above under the caption
"--Repurchase at the Option of Holders--Change of Control" and/or the
provisions described above under the caption "--Certain
Covenants--Merger, Consolidation or Sale of Assets" and not by the
provisions described above under the caption "--Repurchase at the
Option of Holders--Asset Sales"; and
(2) the issue or sale by Concentra Operating or any of its Restricted
Subsidiaries of Equity Interests of any of Concentra Operating's
Restricted Subsidiaries, other than directors' qualifying shares,
that, in the case of either clause (1) or (2) and whether in a single
transaction or a series of related transactions:
o has a fair market value in excess of $5 million; or
o is for net proceeds to Concentra Operating and its Restricted
Subsidiaries in excess of $5 million.
Despite the above, the following items shall not be deemed to be Asset
Sales:
(1) a transfer of assets among Concentra Operating, its wholly-owned
Restricted Subsidiaries and its Permitted Joint Ventures;
(2) an issuance of Equity Interests by a wholly-owned Restricted Subsidiary
to Concentra Operating or to another wholly-owned Restricted
Subsidiary;
(3) a Restricted Payment that is permitted by the covenant described above
under the caption "--Certain Covenants--Restricted Payments";
(4) the sale of Cash Equivalents in the ordinary course of business;
(5) a disposition of inventory in the ordinary course of business;
(6) sales of accounts receivable and related assets or an interest in the
accounts receiveable and related assets of the type specified in the
definition of "Qualified Receivables Transaction" to a Receivables
Entity;
(7) a disposition relating to the foreclosure of a Permitted Lien;
(8) the sale and leaseback of any assets within 90 days of the acquisition
of the assets; and
(9) any exchange of property pursuant to Section 1031 on the Internal
Revenue Code of 1986, as amended, for use in a Permitted Business.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
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"Capital Lease Obligation" means, at the time any determination of the
obligation is to be made, the amount of the liability in respect of a capital
lease that would at such time be required to be capitalized on a balance sheet
in accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents, however
designated, of corporate stock;
(3) in the case of a partnership or limited liability company, partnership
or membership interests, whether general or limited; and
(4) any other interest or participation that confers on a person the right
to receive a share of the profits and losses of, or distributions of
assets of, the issuing person.
"Cash Equivalents" means:
(1) Government Securities having maturities of not more than six months
from the date of acquisition;
(2) certificates of deposit and eurodollar time deposits with maturities of
six months or less from the date of acquisition, bankers' acceptances
with maturities not exceeding six months and overnight bank deposits,
in each case with any lender party to our senior credit facilities or
with any domestic commercial bank having capital and surplus in excess
of $500 million and a Thompson Bank Watch Rating of "B" or better;
(3) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (1) and (2)
above entered into with any financial institution meeting the
qualifications specified in clause (2) above;
(4) commercial paper having the rating of "P-1" or higher from Moody's
Investors Service, Inc. or "A-1" or higher from Standard & Poor's
Corporation and in each case maturing within six months after the date
of acquisition; and
(5) money market funds investing exclusively in investments of which
constitute Cash Equivalents of the kinds described in clauses (1)
through (4) of this definition.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition, other than
by way of merger or consolidation, in one or a series of related
transactions, of all or substantially all of the assets of either:
(a) Concentra Operating and its Subsidiaries taken as a whole; or
(b) Concentra to any "person," as such term is used in Section 13(d)
(3) of the Exchange Act, other than the Welsh Carson or Ferrer
Freeman or a Related Party of either of Welsh Carson or Ferrer
Freeman;
(2) the adoption of a plan relating to the liquidation or dissolution of
Concentra Operating;
(3) the consummation of any transaction, including, without limitation, any
merger or consolidation, the result of which is that any "person," as
defined above, other than the Welsh Carson and Ferrer Freeman and their
Related Parties, becomes the "beneficial owner," as such term is
defined under the Exchange Act, directly or indirectly, of more than
50% of the Voting Stock of Concentra Operating, measured by voting
power rather than number of shares;
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(4) the first day on which a majority of the members of the board of
directors of Concentra Operating are not Continuing Directors; or
(5) Concentra Operating or Concentra consolidates with, or merges with or
into, any person, or any person consolidates with, or merges with or
into, Concentra Operating or the Holding Company, in any such event
pursuant to a transaction in which any of the outstanding Voting Stock
of Concentra Operating or Concentra, as the case may be, is converted
into or exchanged for cash, securities or other property, other than
any such transaction where the Voting Stock of Concentra Operating or
Concentra, as the case may be, outstanding immediately prior to such
transaction is converted into or exchanged for Voting Stock, other than
Disqualified Stock, of the surviving or transferee person constituting
a majority of the outstanding shares of such Voting Stock of such
surviving or transferee person immediately after giving effect to such
issuance.
"Concentra Senior Discount Debentures" means the Senior Discount Debentures
due 2010 issued by Concentra on August 17, 1999 and any Indebtedness of
Concentra issued in exchange for, or the net proceeds of which are used to
extend, refinance, renew, replace, defease or refund such Senior Discount
Debentures due 2010; provided that such Indebtedness complies with clauses (1),
(2) and (3) of the definition of "Permitted Refinancing Indebtedness".
"Consolidated EBITDA" means, with respect to any person, for any period,
the Consolidated Net Income of such person for such period adjusted to add, to
the extent deducted from net revenues in determining Consolidated Net Income,
without duplication, the sum of
(1) consolidated income taxes;
(2) consolidated depreciation and amortization, including amortization of
debt issuance costs in connection with any Indebtedness of such person
and its Restricted Subsidiaries and depreciation and amortization
attributable to the two Permitted Joint Ventures existing at August 17,
1999 which are not consolidated;
(3) Fixed Charges;
(4) expenditures paid prior to or contemporaneously with and related to our
merger with Yankee and the related transactions which are paid or
otherwise accounted for within 90 days of the consummation of such
transactions;
(5) expenditures paid prior to or contemporaneously with and related to any
actual or proposed financing, mergers or dispositions or acquisitions
permitted to be incurred by the indenture, including, without
limitation, financing and legal fees and costs incurred with any such
mergers, acquisitions or dispositions;
(6) the restructuring charge of $20.6 million incurred in the fourth
quarter of 1998; and
(7) all other non-cash charges, excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash expenses in
any future period or amortization of a prepaid cash expense that was
paid in a prior period;
provided that consolidated income taxes, depreciation and amortization of a
Subsidiary of such person that is not a wholly-owned Subsidiary shall only be
added to the extent of the Equity Interest of such person in such Subsidiary.
"Consolidated Interest Expense" means, with respect to any person for any
period, the sum of, without duplication:
(1) the interest expense of such person and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with
GAAP, including amortization of original issue discount, non-cash
interest payments, the interest component of all payments associated
with Capital Lease Obligations, imputed
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interest with respect to Attributable Debt, commissions, discounts and
other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and any net payments pursuant to
Hedging Obligations; provided that in no event shall any amortization
of deferred financing costs be included in Consolidated Interest
Expense; plus
(2) the consolidated capitalized interest of such person and its Restricted
Subsidiaries for such period, whether paid or accrued; plus
(3) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust
to pay interest or fees to such plan or trust; provided, however, that
there will be excluded therefrom any such interest expense of any
Unrestricted Subsidiary to the extent the related Indebtedness is not
Guaranteed or paid by Concentra Operating or any Restricted Subsidiary.
Despite the above, the Consolidated Interest Expense with respect to any
Restricted Subsidiary that is not a wholly-owned Restricted Subsidiary shall be
included only to the extent, and in the same proportion, that the net income of
such Restricted Subsidiary was included in calculating Consolidated Net Income.
"Consolidated Net Income" means, with respect to any person for any period,
the aggregate of the Net Income of such person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that
(1) the Net Income, but not loss, of any person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting
shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent person or a wholly-owned
Subsidiary of the referent person;
(2) the Net Income of any Restricted Subsidiary shall be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental
approval, that has not been obtained, or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to that Subsidiary or its stockholders;
(3) the Net Income of any person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall
be excluded;
(4) the cumulative effect of a change in accounting principles shall be
excluded; and
(5) the Net Income of any Unrestricted Subsidiary shall be excluded,
whether or not distributed to Concentra Operating or one of its
Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the board of directors of Concentra Operating who:
(1) was a member of such board of directors on August 17, 1999;
(2) was nominated for election or elected to such board of directors with
the approval of a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election; or
(3) was nominated by the Welsh Carson or Ferrer Freeman.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Senior Indebtedness" means any Indebtedness outstanding under
our senior credit facilities.
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"Development Corporation" means any corporation, association, limited
liability company or other business, other than a partnership, existing at
August 17, 1999 managed by Concentra Operating but owned by a person, who is not
Concentra Operating or an Affiliate or a Subsidiary of Concentra Operating,
engaged in the development of occupational health centers and financed by the
issue of Equity Interests and notes under securities purchase agreements to
third party investors.
"Disqualified Stock" means any Capital Stock that, by its terms, or by the
terms of any security into which it is convertible or for which it is
exchangeable, or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder of the Capital Stock, in whole or in part, on or prior
to the date that is 91 days after the date on which the notes mature. Despite
the preceding sentence, any Capital Stock that would not qualify as Disqualified
Stock but for change of control or asset sale provisions shall not constitute
Disqualified Stock if the provisions are not more favorable to the holders of
such Capital Stock than the provisions described under "--Repurchase at the
Option of Holders--Change of Control" and "--Repurchase at the Option of
Holders--Asset Sales."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"Equity Offering" means an offering of the Equity Interests, other than
Disqualified Stock, of Concentra Operating.
"Existing Indebtedness" means Indebtedness of Concentra Operating and its
Subsidiaries, other than Indebtedness under our senior credit facilities, in
existence on August 17, 1999, until such amounts are repaid.
"Fixed Charge Coverage Ratio" means with respect to any person for any
period, the ratio of the Consolidated EBITDA of such person for such period to
the Fixed Charges of such person for such period. In the event that Concentra
Operating or any of its Restricted Subsidiaries Incurs any Indebtedness, other
than revolving credit borrowings, or issues or redeems preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made, then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such Incurrence of
Indebtedness, or such issuance or redemption of preferred stock, as if the same
had occurred at the beginning of the applicable four-quarter reference period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions or dispositions that have been made by Concentra Operating
or any of its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during
the four-quarter reference period or subsequent to such reference
period and on or prior to the calculation date shall be calculated to
include the Consolidated EBITDA of the acquired entities on a pro forma
basis, to be calculated in accordance with Article 11-02 of Regulation
S-X, as in effect from time to time, shall be deemed to have occurred
on the first day of the four-quarter reference period and Consolidated
EBITDA for such reference period shall be calculated without giving
effect to clause (3) of the proviso set forth in the definition of
Consolidated Net Income;
(2) the Consolidated EBITDA attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the calculation date, shall be excluded if greater
than zero; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the calculation date, shall be excluded, but only
to the extent that the obligations giving rise to such Fixed Charges
will not be obligations of the specified person or any of its
Restricted Subsidiaries following the Calculation Date.
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For purposes of this definition, whenever pro forma effect is to be given
to an Investment or an acquisition or disposition of assets, the amount of
income or earnings and the amount of Consolidated Interest Expense associated
with any Indebtedness incurred in connection with the Investment, or any other
calculation under this definition, the pro forma calculations will be determined
in good faith by a responsible financial or accounting officer of Concentra
Operating, including pro forma expense and cost reductions calculated on a basis
consistent with Regulation S-X under the Securities Act. If any Indebtedness
bears a floating rate of interest and is being given pro forma effect, the
interest expense on such Indebtedness will be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period, taking into account any interest rate agreement applicable to such
Indebtedness if such interest rate agreement has a remaining term in excess of
12 months.
"Fixed Charges" means, with respect to any person for any period, the sum,
without duplication, of:
(1) the Consolidated Interest Expense of such person for such period, minus
the interest income of such person and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with
GAAP; plus
(2) any interest expense on Indebtedness of another person that is
Guaranteed by such person or one of its Restricted Subsidiaries or
secured by a Lien on assets of such person or one of its Restricted
Subsidiaries, whether or not such Guarantee or Lien is called upon;
plus
(3) the product of:
(a) all dividend payments, whether or not in cash, on any series of
preferred stock of such person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of Concentra Operating, times
(b) a fraction, the numerator of which is one and the denominator of
which is one minus the then current combined federal, state and
local statutory tax rate of such person, expressed as a decimal,
in each case, on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on August 17, 1999.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, letters of credit and
reimbursement agreements in respect to such agreements, of all or any part of
any Indebtedness.
"Guarantors" means each Subsidiary of Concentra Operating that executes a
Subsidiary Guarantee in accordance with the provisions of the indenture, and
their respective successors and assigns.
"Hedging Obligations" means, with respect to any person, the obligations of
such person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such person
against fluctuations in interest rates or currency exchange rates.
"Incur" or as appropriate "Incurrence" means to directly or indirectly
issue, create, incur, assume, guarantee or otherwise become directly or
indirectly liable for, or otherwise become responsible for, contingently or
otherwise.
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"Indebtedness" means, with respect to any specified person, any
indebtedness of such person, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters
of credit, or reimbursement agreements in respect of such instruments;
(3) bankers' acceptances;
(4) representing Capital Lease Obligations; or
(5) the balance deferred and unpaid of the purchase price of any property,
which purchase price is due more than 60 days after the date of placing
such property in service or taking delivery and title, or representing
any Hedging Obligations, except any such balance that constitutes an
accrued expense or trade payable;
if and to the extent any of the preceding items, other than letters of credit
and Hedging Obligations, would appear as a liability upon a balance sheet of the
specified person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified person, whether or not such Indebtedness is assumed by
the specified person, and, to the extent not otherwise included, the Guarantee
by such person of any indebtedness of any other person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value of the Indebtedness, in the case of any Indebtedness
that does not require current payments of interest; and
(2) the principal amount of the Indebtedness, together with any interest on
the Indebtedness that is more than 30 days past due, in the case of any
other Indebtedness.
"Insolvency or Liquidation Proceedings" means:
(1) any insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization or other similar case or proceeding,
relative to Concentra Operating or to the creditors of Concentra
Operating, as such, or to the assets of Concentra Operating;
(2) any liquidation, dissolution, reorganization or winding up of Concentra
Operating, whether voluntary or involuntary, and involving insolvency
or bankruptcy; or
(3) any assignment for the benefit of creditors or any other marshaling of
assets and liabilities of Concentra Operating.
"Investments" means, with respect to any person, all investments by such
person in other persons, including Affiliates, in the forms of direct or
indirect loans, including guarantees of Indebtedness or other obligations,
advances or capital contributions, excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business, or
purchases or other acquisitions of or the transfer of assets for consideration
of, Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If Concentra Operating or any Restricted Subsidiary of
Concentra Operating sells or otherwise disposes of any Equity Interests of any
direct or indirect Restricted Subsidiary of Concentra Operating such that, after
giving effect to any such sale or disposition, such person is no longer a
Restricted Subsidiary of Concentra Operating, Concentra Operating shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Restricted
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "-- Certain
Covenants-Restricted Payments."
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"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
including any conditional sale or other title retention agreement, any lease in
that nature, any option or other agreement to sell or give a security interest
in and any filing of or agreement to give any financing statement under the
Uniform Commercial Code, or equivalent statutes, of any jurisdiction.
"Net Income" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP, excluding, however:
(1) any gain (loss), together with any related provision for taxes on such
gain (loss), realized in connection with:
(a) any Asset Sale; or
(b) the disposition of any securities by such person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness
of such person or any of its Restricted Subsidiaries; and
(2) any extraordinary or nonrecurring gain (loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain
(loss).
"Net Proceeds" means the aggregate cash proceeds received by Concentra
Operating or any of its Restricted Subsidiaries in respect of any Asset Sale,
including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale, net of the
direct costs relating to such Asset Sale, including, without limitation, legal,
accounting and investment banking fees, and sales commissions and any relocation
expenses incurred as a result of the Asset Sale, taxes paid or payable as a
result of the Asset Sale, after taking into account any available tax credits or
deductions and any tax sharing arrangements, the amounts required to be applied
to the payment of Indebtedness, other than Indebtedness incurred pursuant to our
senior credit facilities, secured by a Lien on the asset or assets that were the
subject of the Asset Sale.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Concentra Operating nor any of its Restricted
Subsidiaries:
(a) provides credit support of any kind, including any undertaking,
agreement or instrument that would constitute Indebtedness;
(b) is directly or indirectly liable as a guarantor or otherwise; or
(c) constitutes the lender;
(2) no default with respect to which, including any rights that the holders
of the Indebtedness may have to take enforcement action against an
Unrestricted Subsidiary, would permit upon notice, lapse of time or
both any holder of any other Indebtedness, other than the notes, of
Concentra Operating or any of its Restricted Subsidiaries to declare a
default on such other Indebtedness or cause the payment of the
Indebtedness to be accelerated or payable prior to its stated maturity;
and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of Concentra Operating or
any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any business in which Concentra Operating and
its Restricted Subsidiaries are engaged on August 17, 1999 or any business
reasonably related, incidental or ancillary to such businesses.
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"Permitted Investments" means:
(l) any Investment in Concentra Operating or in a Restricted Subsidiary,
other than a Permitted Joint Venture;
(2) any Investment in cash or Cash Equivalents;
(3) any Investment in receivables owing to Concentra Operating or any
Restricted Subsidiary created or acquired in the ordinary course of
business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as Concentra Operating or any such Restricted
Subsidiary deems reasonable under the circumstances;
(4) any Investment received by Concentra Operating or any Restricted
Subsidiary as consideration for the settlement of any litigation,
arbitration or claim of bankruptcy or in partial or full satisfaction
of accounts receivable owed by a financially troubled person to the
extent reasonably necessary in order to prevent or limit any loss by
Concentra Operating or any of its Restricted Subsidiaries in connection
with such accounts receivable;
(5) Investments in existence on August 17, 1999;
(6) Hedging Obligations entered into in the ordinary course of business
which transactions or obligations are incurred in compliance with the
covenant described above under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock";
(7) Guarantees issued in accordance with the covenant described above under
the caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock";
(8) any Investment by Concentra Operating or a Restricted Subsidiary in a
Receivables Entity or any Investment by Receivables Entity in any other
person, in each case, in connection with a Qualified Receivables
Transaction; provided, however, that any Investment in any such person
is in the form of a Purchase Money Note, or any equity interest or
interests in accounts receivable and related assets generated by
Concentra Operating or a Restricted Subsidiary and transferred to any
person in connection with a Qualified Receivables Transaction or any
such person owning such accounts receivable;
(9) any Investment by Concentra Operating or any Restricted Subsidiary of
Concentra Operating, other than a Permitted Joint Venture, in a person,
if as a result of such Investment:
(a) such person becomes a Restricted Subsidiary, other than a
Permitted Joint Venture, of Concentra Operating or of a Restricted
Subsidiary of Concentra Operating, other than a Permitted Joint
Venture; or
(b) such person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is
liquidated into, Concentra Operating or a Restricted Subsidiary of
Concentra Operating, other than a Permitted Joint Venture;
(10)any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--
Repurchase at the Option of Holders--Asset Sales";
(11)any acquisition of assets solely in exchange for the issuance of Equity
Interests, other than Disqualified Stock, of Concentra Operating; and
(12)any Investment in any Permitted Joint Venture after August 17, 1999 in
an aggregate amount not to exceed $45 million, such aggregate amount to
be increased as a result of any management fees, software fees and
development fees received from such Permitted Joint Ventures in the
ordinary course of business and any
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payment of any dividend or distribution received on a pro rata basis
from any Permitted Joint Ventures as a holder of its Equity Interests.
"Permitted Joint Venture" means, with respect to any person:
(1) any corporation, association or other business entity, other than a
partnership:
(a) of which more than 50%, or in the case of any such business entity
in which Concentra Operating or any Restricted Subsidiary has an
Investment before August 17, 1999, 50% or more, of the Voting
Stock is at the time of determination owned or controlled,
directly or indirectly, by such person or one or more of the
Restricted Subsidiaries of that person or a combination of such
person or one or more of the Restricted Subsidiaries; and
(b) which is either managed or controlled by such person or any of its
Restricted Subsidiaries; and
(2) any partnership, joint venture, limited liability company or similar
entity:
(a) of which more than 50%, or in the case of any such entity in which
Concentra Operating or any Restricted Subsidiary has an Investment
before August 17, 1999, 50% or more, of the capital accounts,
distribution rights, total equity and voting interests or general
or limited partnership interests are owned or controlled, directly
or indirectly, by such person or one or more of the Restricted
Subsidiaries of that person or a combination of such person or one
or more of the Restricted Subsidiaries; and
(b) which is either managed or controlled by such person or any of its
Restricted Subsidiaries, and which in the case of each of clauses
(1) and (2),
o is engaged in a Permitted Business;
o only incurs Indebtedness to Concentra Operating;
o does not enter into any Guarantee; and
o distributes all cash pro rata in accordance with the Equity
Interests in the Permitted Joint Venture at least annually,
other than cash required to be reserved on its balance sheet
in accordance with GAAP consistent with past practice.
"Permitted Liens" means:
(1) Liens that secure up to an aggregate principal amount of $475 million
of Senior Indebtedness and Guarantees incurred pursuant to our senior
credit facilities;
(2) Liens in favor of Concentra Operating or any Restricted Subsidiary;
(3) Liens on property of a person existing at the time such person becomes
a Restricted Subsidiary or is merged into or consolidated with
Concentra Operating or any Restricted Subsidiary of Concentra
Operating, provided that such Liens were not incurred in contemplation
of such event, merger or consolidation and do not extend to any assets
other than those of the person that becomes a Restricted Subsidiary or
merged into or consolidated with Concentra Operating or any Restricted
Subsidiary;
(4) Liens on property existing at the time of acquisition of the property
by Concentra Operating or any Restricted Subsidiary of Concentra
Operating, provided such Liens were not incurred in contemplation of
such acquisition;
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(5) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) Liens existing on August 17, 1999;
(7) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(8) Liens to secure Indebtedness, including Capital Lease Obligations,
permitted by clause (4) of the second paragraph of the covenant
described above under the caption "--Certain Covenants-Incurrence of
Indebtedness and Issuance of Preferred Stock";
(9) Liens securing Permitted Refinancing Indebtedness where the Liens
securing the Indebtedness being refinanced were permitted under the
indenture;
(10)Liens incurred in the ordinary course of business of Concentra
Operating or any Restricted Subsidiary of Concentra Operating with
respect to obligations that do not exceed $5 million at any one time
outstanding and that:
(a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit, other than trade credit in the
ordinary course of business, and
(b) do not in the aggregate materially detract from the value of the
property or materially impair the use of the property in the
operation of business by Concentra Operating or such Restricted
Subsidiary;
(11)Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse
Debt of Unrestricted Subsidiaries;
(12)easements, rights-of-way, zoning and similar restrictions and other
similar encumbrances or title defects incurred or imposed, as
applicable, in the ordinary course of business and consistent with
industry practices;
(13)any interest or title of a lessor under any Capital Lease Obligation;
(14)Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating
to such letters of credit and products and proceeds the letters of
credit;
(15)Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of
Concentra Operating or any of its Restricted Subsidiaries, including
rights of offset and set-off;
(16)Liens securing Hedging Obligations which Hedging Obligations relate to
Indebtedness that is otherwise permitted under the indenture;
(17)deposits by such person, in each case incurred in the ordinary course
of business:
(a) under workmen's compensation laws, unemployment insurance and
other types of social security legislation, other than any Lien
imposed by the Employer Retirement Income Security Act of 1974, as
amended;
(b) made in good faith in connection with bids, tenders, contracts,
other than for the payment of Indebtedness, or leases to which
such person is a party;
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(c) to secure public or statutory obligations of such person or
deposits or cash or Cash Equivalents to secure surety or appeal
bonds to which such person is a party; or
(d) as security for contested taxes or import or customs duties or for
the payment of rent;
(18)Liens imposed by law, including carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet delinquent or being
contested in good faith by appropriate proceedings if a reserve or any
other appropriate provisions as shall be required by GAAP shall have
been made in respect of the Liens;
(19)judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment have not
been finally terminated or the period within which such proceedings may
be initiated has not expired;
(20)Liens securing Indebtedness of a Restricted Subsidiary owing to
Concentra Operating or a wholly-owned Restricted Subsidiary, other than
a Receivable Entity;
(21)Liens securing the notes and Subsidiary Guarantees under the indenture;
(22)Liens on assets transferred to a Receivables Entity or on assets of a
Receivables Entity, in either case incurred in connection with a
Qualified Receivables Transaction;
(23)leases or subleases granted to others that do not materially interfere
with the ordinary course of business of Concentra Operating and its
Restricted Subsidiaries; and
(24)Liens arising from filing Uniform Commercial Code financing statements
regarding leases.
"Permitted Refinancing Indebtedness" means any Indebtedness of Concentra
Operating or any of its Restricted Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Concentra Operating or any of its Restricted
Subsidiaries; provided that:
(1) the principal amount, or accreted value, if applicable, of such
Permitted Refinancing Indebtedness does not exceed the principal amount
of, or accreted value, if applicable, plus accrued interest on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded, plus the amount of reasonable expenses incurred in connection
with the Permitted Refinancing, except, in the case of our senior
credit facilities, the principal amount of such Permitted Refinancing
Indebtedness does not exceed the greater of:
(a) the principal amount of Indebtedness permitted, whether or not
borrowed, under clause (1) of the second paragraph of the covenant
described above under the caption "--Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock"; and
(b) the amount actually borrowed or available to be borrowed under our
senior credit facilities;
(2) such Permitted Refinancing Indebtedness has a final maturity date no
earlier than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes,
such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of
payment to, the notes on terms at least as favorable to the holders of
notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Purchase Money Note" means a promissory note of a Receivables Entity
evidencing a line of credit, which may be irrevocable, from Concentra Operating
or any Restricted Subsidiary of Concentra Operating in connection
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with a Qualified Receivables Transaction to a Receivables Entity, which
note is repayable from cash available to the Receivables Entity, other than
amounts required to be established as reserves pursuant to agreements, amounts
paid to investors and amounts owing to such investors and amounts paid in
connection with the purchase of newly generated accounts receivable.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by Concentra Operating or any of its
Restricted Subsidiaries on an arms' length basis with the Standard
Securitization Undertakings pursuant to which Concentra Operating or any of its
Restricted Subsidiaries may sell, convey or otherwise transfer to:
(1) a Receivables Entity, in the case of a transfer by Concentra Operating
or any of its Restricted Subsidiaries; or
(2) any other person, in the case of a transfer by a Receivables Entity;
or may grant a security interest in, any accounts receivable, whether now
existing or arising in the future, of Concentra Operating or any of its
Restricted Subsidiaries, and any related assets including, without limitation,
all collateral securing such accounts receivable, all contracts and all
guarantees or other obligations in respect of such accounts receivable, the
proceeds of such receivables and other assets which are customarily transferred,
or in respect of which security interests are customarily granted in connection
with asset securitization involving accounts receivable; provided that the
aggregate consideration received in each such sale is at least equal to the
aggregate fair market value of the receivables transferred.
"Receivables Entity" means a wholly-owned Subsidiary of Concentra
Operating, or another person in which Concentra Operating or any Restricted
Subsidiary of Concentra Operating makes an Investment and to which Concentra
Operating or any Restricted Subsidiary of Concentra Operating enters into a
Qualified Receivables Transaction, which engages in no activities other than the
financing of a Qualified Receivables Transaction and which is designated by the
board of directors of Concentra Operating, as provided below, as a Receivables
Entity:
(1) no portion of Indebtedness or any other obligations, contingent or
otherwise, of such person of which:
(a) is guaranteed by Concentra Operating or any Restricted Subsidiary
of Concentra Operating, excluding guarantees of Obligations, other
than the principal, and interest, on Indebtedness, pursuant to
Standard Securitization Undertakings;
(b) has recourse to or obligates Concentra Operating or any Restricted
Subsidiary of Concentra Operating in any way other than pursuant
to Standard Securitization Undertakings; and
(c) subjects any property or asset of Concentra Operating or any
Restricted Subsidiary of Concentra Operating, directly or
indirectly, contingently or otherwise, to the satisfaction of the
Receivables Entity, other than pursuant to Standard Securitization
Undertakings;
(2) with which neither Concentra Operating nor any Restricted Subsidiary of
Concentra Operating has any contract, agreement, arrangement or
understanding other than:
(a) a Qualified Receivables Transaction in the ordinary course of
business; and
(b) fees payable in the ordinary course of business in connection with
servicing accounts receivable both of which shall be on terms no
less favorable to Concentra Operating or such Restricted
Subsidiary than those that might be obtained at the time from
persons that are not Affiliates of Concentra Operating; and
(3) to which neither Concentra Operating nor any Restricted Subsidiary of
Concentra Operating has any obligation to:
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(a) subscribe for additional shares of Capital Stock or other Equity
Interests in the Receivables Entity or make any additional capital
contributions or similar payments or transfers other than in
connection with a Qualified Receivables Transaction; or
(b) maintain or preserve such entity's solvency, any balance sheet
term, financial condition, level of income or cause such entity to
achieve certain levels of operating results.
Any such designation by the board of directors of Concentra Operating shall
be evidenced to the trustee by filing with the trustee a certified copy of the
resolution of the board of directors of Concentra Operating giving effect to
such designation and an officers' certificate certifying that such designation
complied with the foregoing conditions.
"Related Party" with respect to any person means:
(1) any controlling stockholder or partner, 80%, or more, owned Subsidiary,
or spouse or immediate family member, in the case of an individual, of
such person; or
(2) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or persons beneficially holding a 51% or
more controlling interest of which consist of such person and/or such
other persons referred to in the immediately preceding clause.
"Reorganization Securities" means securities distributed to holders of the
notes in an Insolvency or Liquidation Proceeding pursuant to a plan of
reorganization consented to by each class of the Senior Indebtedness, but only
if in such plan of reorganization the holders of the notes on the one hand and
the holders of the Senior Indebtedness on the other hand are placed in separate
and distinct classes from each other and from the classes of other claimants and
the class of the holders of the notes is junior to the class of the holders of
the Senior Indebtedness and only if all of the terms and conditions of such
securities including, without limitation, term, tenor, interest, amortization,
subordination, standstills, covenants and defaults are at least as favorable,
and provide the same relative benefits, to the holders of Senior Indebtedness
and to the holders of any security distributed in such Insolvency or Liquidation
Proceeding on account of any such Senior Indebtedness as the terms and
conditions of the notes and the indenture are, and provide, to the holders of
Senior Indebtedness.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Payment" means:
(1) the declaration or payment of any dividend or any other payment or
distribution on account of Concentra Operating's or any of its
Restricted Subsidiaries' Equity Interests, including, without
limitation, any payment on such Equity Interests in connection with any
merger or consolidation involving Concentra Operating, or to the direct
or indirect holders of Concentra Operating's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such, other than
dividends or distributions payable in Equity Interests, other than
Disqualified Stock, of Concentra Operating or to Concentra Operating or
a Restricted Subsidiary of Concentra Operating;
(2) any payment on account of the purchase, redemption or other acquisition
or retirement for value, including without limitation, in connection
with any merger or consolidation involving Concentra Operating, any
Equity Interests of Concentra Operating or any direct or indirect
parent of Concentra Operating or any Restricted Subsidiary of Concentra
Operating, other than any such Equity Interests owned by Concentra
Operating or any Restricted Subsidiary of Concentra Operating;
(3) any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is
subordinated to the Notes or the Subsidiary Guarantees, except
scheduled payments of interest or principal at stated maturity; or
(4) any Restricted Investment.
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<PAGE>
"Restricted Subsidiary" of a person means any Subsidiary of the referent
person that is not an Unrestricted Subsidiary.
"Senior Indebtedness" means:
(1) all Indebtedness outstanding under our senior credit facilities,
including any Guarantees of the Indebtedness and all related Hedging
Obligations;
(2) any other Indebtedness permitted to be incurred by Concentra Operating
under the terms of the indenture, unless the instrument under which
such Indebtedness is incurred expressly provides that it is on a parity
with or subordinated in right of payment to the notes; and
(3) all Obligations with respect to the preceding clauses (1) and (2).
Despite the above, Senior Indebtedness will not include:
(1) any liability for federal, state, local or other taxes owed or owing by
Concentra Operating;
(2) any Indebtedness of Concentra Operating to any of its Subsidiaries or
other Affiliates;
(3) any trade payables; or
(4) any Indebtedness that is incurred in violation of the indenture.
"Standard Securitization Undertakings" means the interest rate,
representations, warranties, covenants, the events of default and indemnities
entered into by Concentra Operating or any Restricted Subsidiary of Concentra
Operating which shall be customary in securitization of accounts receivable
transactions and on market terms.
"Subsidiary" means, with respect to any person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock entitled,
without regard to the occurrence of any contingency, to vote in the
election of directors, managers or trustees of such business entity is
at the time owned or controlled, directly or indirectly, by such person
or one or more of the other Subsidiaries of that person, or a
combination of such person or one or more of the other Subsidiaries of
that person;
(2) any partnership or limited liability company:
(a) the sole general partner or the managing general partner or
managing member of which is such person or a Subsidiary of such
person or
(b) the only general partners of which are such person or of one or
more Subsidiaries of such person, or any combination of such
person or one or more of the other Subsidiaries of that person;
and
(3) any Permitted Joint Venture of such person.
"Subsidiary Guarantee" means a Guarantee provided by a Restricted
Subsidiary.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
board of directors as an Unrestricted Subsidiary pursuant to a board resolution,
but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
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<PAGE>
(2) is not party to any agreement, contract, arrangement or understanding
with Concentra Operating or any Restricted Subsidiary of Concentra
Operating unless the terms of any such agreement, contract, arrangement
or understanding are no less favorable to Concentra Operating or such
Restricted Subsidiary than those that might be obtained at the time
from persons who are not Affiliates of Concentra Operating;
(3) is a person with respect to which neither Concentra Operating nor any
of its Restricted Subsidiaries has any direct or indirect obligation:
(a) to subscribe for additional Equity Interests; or
(b) to maintain or preserve such person's financial condition or to
cause such person to achieve any specified levels of operating
results;
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of Concentra Operating or any of its
Restricted Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of Concentra Operating or any of its
Restricted Subsidiaries and has at least one executive officer that is
not a director or executive officer of Concentra Operating or any of
its Restricted Subsidiaries.
Any designation of a Subsidiary of Concentra Operating as an Unrestricted
Subsidiary shall be evidenced to the trustee by filing with the trustee a
certified copy of the board resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "--Certain Covenants--Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the preceding requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of Concentra Operating
as of such date and, if such Indebtedness is not permitted to be incurred as of
such date under the covenant described under the caption "-- Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock,"
Concentra Operating shall be in default of such covenant. The board of directors
of Concentra Operating may at any time designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided that such designation shall be deemed to be
an incurrence of Indebtedness by a Restricted Subsidiary of Concentra Operating
of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall be permitted only if:
(1) such Indebtedness is permitted under the covenant described under the
caption "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock;" and
(2) no Default or Event of Default would be in existence following such
designation.
"Voting Stock" of any person as of any date means the Capital Stock of such
person that is at the time entitled to vote in the election of the board of
directors of such person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying:
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including
payment at final maturity, in respect the Indebtedness; by
(b) the number of years, calculated to the nearest one-twelfth, that
will elapse between such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
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<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The summary below describes the material United States federal income tax
consequences of the exchange of old notes for new notes as of the date of this
prospectus. The discussion below is based upon the provisions of the Internal
Revenue Code of 1986, as amended, and regulations, rulings and judicial
decisions thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in federal income tax consequences
different from those discussed below. You should consult your own tax advisors
concerning the federal income tax consequences in light of their particular
situations as well as any consequences arising under the laws of any other
taxing jurisdiction.
The exchange of old notes for new notes pursuant to the exchange offer
should not be treated as an "exchange" for federal income tax purposes, because
the new notes should not be considered to differ materially in kind or extent
from the old notes. Rather, the new notes received by you should be treated as a
continuation of your old notes. As a result, there should be no federal income
tax consequences to you if you exchange notes for new notes pursuant to the
exchange offer.
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. We have agreed that, for a period of 90
days after the expiration date of the exchange offer, we will make this
prospectus available to any broker-dealer for use in connection with any such
resale. In addition, for a period of 90 days after the expiration date, all
dealers effecting transactions in the new notes may be required to deliver a
prospectus.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such new notes. Any broker-dealer
that resells new notes that were received by it for its own account pursuant to
the exchange offer and any broker or dealer that participates in a distribution
of new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of new notes and any
commissions or concessions received by any such person may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act by acknowledging that it
will deliver and by delivering a prospectus. We have no arrangement or
understanding with any broker or dealer to distribute the new notes received in
the exchange offer.
For a period of 90 days after the expiration date we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the letter of
transmittal.
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. We have agreed that, for a period of 90
days after the expiration date of the exchange offer, we will make this
prospectus available to any broker-dealer for use in connection with any such
resale. In addition, for a period of 90 days after the expiration date, all
dealers effecting transactions in the new notes may be required to deliver a
prospectus.
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We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such new notes. Any broker-dealer
that resells new notes that were received by it for its own account pursuant to
the exchange offer and any broker or dealer that participates in a distribution
of new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of new notes and any
commissions or concessions received by any such person may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act by acknowledging that it
will deliver and by delivering a prospectus. We have no arrangement or
understanding with any broker or dealer to distribute the new notes received in
the exchange offer.
For a period of 90 days after the expiration date we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the letter of
transmittal.
LEGAL MATTERS
The validity of the new notes will be passed upon for us by Reboul,
MacMurray, Hewitt, Maynard & Kristol, New York, New York.
EXPERTS
The financial statements and schedules for Concentra for each of the three
years in the period ended December 31, 1998, included in this prospectus and
elsewhere in this registration statement, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
WHERE YOU CAN GET MORE INFORMATION
We and our subsidiary guarantors have filed with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933,
as amended, covering the notes to be issued in the exchange offer. As permitted
by the Commission rules, this prospectus omits certain information included in
the registration statement. For further information pertaining to us, our
subsidiary guarantors, the exchange offer and the notes, we refer you to the
registration statement, including its exhibits. Any statement made in this
prospectus concerning the contents of any contract, agreement or other document
is not necessarily complete. If we have filed any such contract, agreement or
other document as an exhibit to the registration statement, you should read the
exhibit for a more complete understanding of the document or matter involved.
Each statement regarding a contract, agreement or other document made in this
prospectus is not necessarily complete and you should refer to the exhibits
attached to the registration statement for a copy of the actual document.
You may read and copy any of the information we file with the Commission at
the Commission's public reference rooms at 1024, 450 Fifth Street, N.W.,
Washington, D.C., at 7 World Trade Center, 13th Floor, New York, New York 10048.
You can also obtain copies of filed documents by mail from the public reference
section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. You may call the Commission at 1-800-SEC-0330 for
further information on the operation of the public reference rooms. Filed
documents are also available to the public at the Commission's web site at
http://www.sec.gov.
Following the exchange offer, we will be required to file annual, quarterly
and special reports, proxy statements and other information with the Commission
under the Exchange Act. Our obligation to file periodic reports with the
Commission will be suspended if the notes issued in the exchange offer are held
of record by fewer than 300 holders as of the beginning of any year. However, to
the extent permitted, the indenture governing the notes requires us to file with
the Commission financial and other information for public availability. In
addition, the indenture governing
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the notes requires us to deliver to you copies of all reports that we file
with the Commission without any cost to you. We will also furnish such other
reports as we may determine or as the law requires.
Whether or not required by the Commission, so long as any notes are
outstanding, we will furnish the holders of notes, within the time periods
specified in the Commission's rules and regulations:
o all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K
if Concentra Operating were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information
only, a report on the annual financial statements by Concentra
Operating's certified independent accountants; and
o all current reports that would be required to be filed with the
Commission on Form 8-K if Concentra Operating were required to file
such reports.
Anyone who receives this prospectus may obtain a copy of the indenture and
registration rights agreement without charge by writing to Concentra Operating
Corporation, 5080 Spectrum Drive, Suite 400 West Tower, Addison, TX 75001;
Attention: General Counsel.
122
<PAGE>
CONCENTRA OPERATING CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
----
CONCENTRA OPERATING~CORPORATION
Consolidated Financial Statements as of December 31, 1998 and
September 30, 1999 and for the Three and Nine Months Ended
September 30, 1998 and 1999 (Unaudited) ............................. F-2-
F-11
CONCENTRA MANAGED CARE, INC.
Consolidated Financial Statements as of December 31, 1997 and
1998 and for each of the Three Years Ended December 31, 1996,
1997 and 1998, together with the Report of Independent Public
Accountants .......................................................... F-12-
F-39
COMPUTATION OF PRO FORMA RATIOS......................................... F-39
COMPUTATION OF RATIOS................................................... F-40
F-1
<PAGE>
CONCENTRA OPERATING CORPORATION.
Consolidated Financial Statements as of
December 31, 1998 and September 30, 1999 and for the
Three and Nine Months Ended September 30, 1998 and 1999
F-2
<PAGE>
Concentra Operating Corporation
Consolidated Balance Sheets~As of December 31, 1998 and September 30, 1999
December 31, September 30,
ASSETS 1998 1999
------------- --------------
Predecessor (Unaudited)
(Note 2)
CURRENT ASSETS:
Cash and cash equivalents.............. $101,128,000 $ 10,584,000
Marketable securities 5,000,000 --
Accounts receivable, net............... 127,615,000 158,595,000
Prepaid expenses, tax assets and other
current assets ...................... 33,094,000 33,922,000
------------ ------------
Total current assets ................. 266,837,000 203,101,000
PROPERTY AND EQUIPMENT, at cost ......... 138,147,000 166,023,000
Accumulated depreciation and amortization (52,220,000) (65,236,000)
------------ ------------
NET PROPERTY AND EQUIPMENT 85,926,000 100,787,000
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 277,953,000 314,205,000
MARKETABLE SECURITIES 10,583,000 --
OTHER ASSETS 15,495,000 30,711,000
------------ ------------
$656,794,000 $648,804,000
============ ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Revolving credit facilities $ -- $ 1,500,000
Current portion of long-term debt...... 55,000 3,805,000
Accounts payable....................... 13,098,000 12,556,000
Accrued expenses....................... 25,841,000 38,009,000
Accrued payroll and related expenses 25,973,000 33,676,000
------------ ------------
Total current liabilities............ 64,967,000 89,546,000
LONG-TERM DEBT, NET OF CURRENT PORTION
(Note 1 and 5) ........................ 327,870,000 560,664,000
DEFERRED INCOME TAXES AND OTHER
LIABILITIES ........................... 24,082,000 36,039,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' INVESTMENT (Note 1) :
Common stock $.01 par value;
100,000,000 and 10,000 shares
authorized respectively; 47,104,
412 and 1,000 shares issued and
outstanding, respectively............ 471,000 --
Paid-in capital ....................... 270,654,000 4,525,000
Accumulated other comprehensive
income--unrealized gain on marketable
securities .......................... 60,000 --
Retained deficit....................... (31,310,000) (41,970,000)
------------ ------------
Total shareholders' investment ........ 239,875,000 (37,445,000)
------------ ------------
$656,794,000 $648,804,000
============ ============
F-3
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
CONCENTRA OPERATING CORPORATION
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1998 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
1998 1999 1998 1999
----------- ------------ ------------ ------------
Restated Restated
<S> <C> <C> <C> <C>
Revenue:
Health Services....................... $ 69,608,000 $ 89,857,000 $193,690,000 $ 242,421,000
Managed Care Services:
Specialized cost containment........ 45,687,000 50,718,000 137,190,000 151,630,000
Field case management............... 42,067,000 36,083,000 128,265,000 112,106,000
----------- ------------ ----------- -------------
Total Managed Care Services......... 87,754,000 86,801,000 265,455,000 263,736,000
----------- ------------ ----------- -------------
Total revenue..................... 157,362,000 176,658,000 459,145,000 506,157,000
Cost of services:
Health Services....................... 51,202,000 71,371,000 145,203,000 191,757,000
Managed Care Services:
Specialized cost containment........ 30,870,000 33,989,000 91,889,000 101,559,000
Field case management............... 36,588,000 33,628,000 108,099,000 99,613,000
----------- ------------ ----------- -------------
~~Total Managed Care Services........... 67,458,000 67,617,000 199,988,000 201,172,000
----------- ------------ ----------- -------------
~~Total cost of services................ 118,660,000 138,988,000 345,191,000 392,929,000
----------- ------------ ----------- -------------
~~Total gross profit.................... 38,702,000 37,670,000 113,954,000 113,228,000
General and administrative expenses..... 11,851,000 15,957,000 33,724,000 47,218,000
Amortization of intangibles............. 2,051,000 3,342,000 6,102,000 9,495,000
Non-recurring charge.................... -- 54,419,000 12,600,000 54,419,000
----------- ------------ ----------- -------------
~~Operating income (loss)............... 24,800,000 (36,048,000) 61,528,000 2,096,000
Interest expense........................ 4,653,000 10,223,000 13,123,000 19,614,000
Interest income......................... (1,277,000) (598,000) (2,939,000) (2,724,000)
Other, net.............................. (21,000) (427,000) 88,000 (147,000)
----------- ------------ ----------- -------------
~~Income (loss) before income taxes.... 21,445,000 (45,246,000) 51,256,000 (14,647,000)
Provision (benefit) for income taxes.... 9,000,000 (3,176,000) 23,803,000 9,829,000
----------- ------------ ----------- -------------
Net income (loss)....................... $12,445,000 $(42,070,000) $27,453,000 $(24,476,000)
=========== ============= =========== =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
CONCENTRA OPERATING CORPORATION
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30, 1998 and 1999
(Unaudited)
<TABLE>
<CAPTION>
1998 1999
------------- -------------
Restated
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................... $ 27,453,000 $ (24,476,000)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................... 10,625,000 15,798,000
Amortization of intangibles............................................. 6,102,000 9,495,000
Amortization of deferred finance costs.................................. 1,200,000 1,528,000
Earnings of unconsolidated subsidiaries, net of distributions........... (7,000) (61,000)
Write-off of fixed assets............................................... -- 402,000
Merger related deferred compensation expense............................ -- 14,555,000
Change in assets and liabilities:
Accounts receivable..................................................... (20,409,000) (23,686,000)
Prepaid expenses and other assets....................................... (4,160,000) (960,000)
Accounts payable, accrued expenses and income taxes..................... 9,231,000 11,716,000
------------ -------------
Net cash provided by operating activities............................... 30,035,000 4,311,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired........................................ (16,740,000) (43,284,000)
Purchase of property and equipment........................................ (26,243,000) (25,950,000)
Purchase of investments................................................... (14,496,000) --
Sale of investments....................................................... -- 15,523,000
Proceeds from sale of property and equipment and other.................... 440,000 --
------------ -------------
Net cash used in investing activities................................... (57,039,000) (53,711,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under revolving credit facilities, net.............. (49,000,000) 1,500,000
Proceeds from the issuance of long-term debt.............................. 230,000,000 565,426,000
Payment of deferred financing costs....................................... (6,411,000) (18,000,000)
Repayments of long-term debt.............................................. (49,608,000) (1,145,000)
Net proceeds from the issuance of common stock under employee stock
purchase and option plans .............................................. 11,731,000 2,579,000
Payments to dissenting shareholders....................................... (15,047,000) --
Payments to holding company in connection with the recapitalization....... -- (577,077,000)
Merger related stock option and warrant payments.......................... -- (14,427,000)
Dividends and distributions to shareholders............................... (2,809,000) --
------------ -------------
Net cash provided by (used in) financing activities..................... 118,856,000 (41,144,000)
------------ -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS...................................................... 91,852,000 (90,544,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............................. 11,964,000 101,128,000
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................... $103,816,000 $ 10,584,000
============ =============
Interest paid............................................................. $ 7,321,000 $ 12,359,000
Income taxes paid......................................................... $ 13,953,000 $ 4,926,000
Conversion of notes payable into common stock............................. $ 10,000,000 $ --
Liabilities and debt assumed in acquisitions.............................. $ 4,008,000 $ 3,749,000
Net asset contribution from parent (Note 1)............................... $ -- $ 590,156,000
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
CONCENTRA OPERATING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
The accompanying unaudited financial statements have been prepared by
Concentra Operating Corporation (the "Company" or "Concentra"), a wholly-owned
subsidiary of Concentra Managed Care, Inc. (the "Parent Company") pursuant to
the rules and regulations of the Securities and Exchange Commission, and reflect
all adjustments (all of which are of a normal recurring nature) which, in the
opinion of management, are necessary for a fair statement of the results of the
interim periods presented. These financial statements do not include all
disclosures associated with the annual financial statements and, accordingly,
should be read in conjunction with the attached Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and footnotes for the year ended December 31, 1998 included elsewhere
in this prospectus, where certain terms have been defined. See Note (2)
(1) RECAPITALIZATION TRANSACTION
On August 17, 1999, Concentra Managed Care, Inc. (the "Parent Company")
merged (the "Merger") with Yankee Acquisition Corp. ("Yankee"), a corporation
formed by Welsh, Carson, Anderson & Stowe ("WCAS"), a 14.9% stockholder of the
company. As a result of the Merger, 41,056,966 outstanding shares of Concentra
Managed Care, Inc. 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 Concentra Managed Care, Inc., 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 Concentra
Managed Care, Inc., the surviving entity, and Concentra Managed Care, Inc.
contributed all of it operating assets and liabilities with the exception of
$110,000,000 of 14% Senior Discount Debentures due 2010 and $327,750,000 of 6.0%
and 4.5% Convertible Subordinated Notes to Concentra Operating Corporation (the
"Company" or "Concentra"), a wholly-owned subsidiary of Concentra Managed Care,
Inc. The net contribution by Concentra Managed Care, Inc. totaled $590,156,000.
The 6.0% and 4.5% Convertible Subordinated Notes were substantially retired
during the quarter as a result of the Merger. The Merger was accounted for as a
recapitalization transaction, with no changes to the basis of assets or
liabilities.
The transaction was valued at approximately $1.2 billion, including the
refinancing of $327,737,000 of the 6.0% and 4.5% Convertible Subordinated Notes
that were tendered during the quarter. To finance the acquisition of Concentra
Managed Care, Inc., WCAS, FFT and other investors invested approximately
$423,679,000 in equity financing, including the value of shares already owned by
Welsh Carson, and $110,000,000 of 14% Senior Discount Debentures due 2010 with
warrants issued by Concentra Managed Care, Inc. exercisable into its common
shares. This additional debt is not guaranteed by Concentra Operating
Corporation. Concentra Operating Corporation received from various lenders
$375,000,000 in term loans, a $100,000,000 revolving credit facility to replace
the pre-merger revolving credit facility and $190,000,000 of 13% Series A Senior
Subordinated Notes due 2009. Concentra's excess cash balances funded merger and
financing related fees and expenses and related employee stock option exercises
and cancellation payments.
Concentra incurred $18,000,000 of deferred financing fees for the issuance
of the Merger related financing, consisting primarily of underwriting fees. In
addition, Concentra recorded a non-recurring charge of $54,419,000 in the third
quarter of 1999 incurred for professional fees and services, including legal,
accounting and regulatory fees of $18,834,000, employee related stock option
exercises and cancellations of $14,598,000, a WCAS transaction fee of
$10,500,000, non-cash charges for deferred compensation expense related to the
accelerated vesting and issuance of 210,000 shares of restricted stock of
$5,493,000, and other non-recurring charges of $4,994,000. Through September 30,
1999, we paid approximately $16,385,000 for professional fees and services,
$13,502,000 for employee related stock option exercises and cancellations,
$10,500,000 for a WCAS transaction fee and $2,418,000 of other non-recurring
charges and used $5,493,000 in non-cash charges for deferred compensation
expense. At September 30, 1999, approximately $6,121,000 of the non-recurring
charge remains for professional fees and services, employee related stock option
exercises and other non-recurring charges.
F-6
<PAGE>
CONCENTRA OPERATING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(2) BASIS OF PRESENTATION
The accompanying consolidated financial statements as of December 31, 1998
and September 30, 1999 and for the three and nine months ended September 30,
1998 and 1999 and related footnotes reflect the operating results of Concentra
Managed Care, Inc. through August 17, 1999 and the operating results of
Concentra Operating Corporation from August 18, 1999 through September 30, 1999.
On August 17, 1999, Concentra Managed Care, Inc. ("Predecessor Concentra")
merged with Yankee and formed Concentra Managed Care, Inc. (the "Parent
Company"). The Parent Company then contributed all of its assets and shares in
its subsidiaries, including Concentra Health Services, Inc. and Concentra
Managed Care Services, Inc. to Concentra, a wholly owned subsidiary of the
Parent Company. Predecessor Concentra and Concentra are presented together since
they represent the same reporting entity. Earnings per share has not been
reported for all periods presented, as Concentra Operating Corporation is a
wholly-owned subsidiary of the Parent Company and has no publicly held shares.
The financial statements have been restated to exclude revenue of two 50%
owned joint ventures which totaled $0, $4,561,000 and $5,724,000 for 1996, 1997
and 1998, respectively, and had no impact on net income.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130")
effective in the second quarter of 1998. SFAS 130 establishes standards for
reporting comprehensive income and its components in the consolidated financial
statements. The Company's reported net income for the three and nine months
ended September 30, 1998 and 1999 does not differ from comprehensive income as
defined in SFAS 130.
(3) CHANGE IN ESTIMATE
The Company has historically amortized goodwill over periods ranging from
30 to 40 years. Effective January 1, 1999, the Company changed its policy, on a
prospective basis, with respect to amortization of goodwill. All existing and
future goodwill will be amortized over a period not to exceed 25 years. Had the
Company adopted this policy at the beginning of 1998, amortization for the three
and nine months ended September 30, 1998 and for the year ended December 31,
1998 would have increased approximately $800,000, $2,400,000 and $3,300,000,
respectively. As of September 30, 1999, net intangible assets consisted of the
following:
Goodwill, amortization period of 25 years............... $311,707,000
Customer lists, amortization period of 7 years ......... 1,168,000
Assembled workforce, amortization period of 5 years .... 1,330,000
-----------
Total intangible assets, weighted average amortization
period of 24.8 years $314,205,000
============
(4) RECENT ACQUISITIONS AND NON-RECURRING CHARGES
Through September 30, 1999, the Company, through its Health Services
division had acquired 64 clinics in 21 acquisitions. The Company paid
approximately $51.0 million and recorded approximately $45,000,000 of goodwill,
$300,000 for assembled workforce and $34,000 for customer lists. No contingent
consideration exists related to these transactions.
On February 24, 1998, the Company acquired all of the outstanding common
stock of Preferred Payment Systems, Inc. ("PPS") of Naperville, Illinois, in
exchange for approximately 7,100,000 shares of Concentra common stock, the
assumption of PPS options totaling approximately 580,000 shares of Concentra
common stock, the payment of $15,047,000 in cash to dissenting PPS shareholders,
and the assumption of approximately $49,000,000 of debt which was repaid at the
time of the merger (see Note 5). This transaction was accounted for as a pooling
of interests. PPS, founded in 1990, is a provider of specialized cost
containment and outsourcing services for healthcare payors.
F-7
<PAGE>
CONCENTRA OPERATING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
In the first quarter of 1998, the Company recorded a non-recurring charge
of $12,600,000 primarily associated with the merger of PPS. The utilization of
this charge through September 30, 1999, was approximately $5,261,000 for
professional fees and services, $2,578,000 in costs associated with personnel
reductions, $1,139,000 in facility consolidations and closings, $1,627,000
associated with the write-off of deferred financing fees on PPS indebtedness
retired and $1,520,000 of other non-recurring costs. At September 30, 1999,
approximately $475,000 of the non-recurring charge remains primarily related to
remaining facility lease obligations.
In the fourth quarter of 1998, the Company recorded a non-recurring charge
of $20,514,000 primarily associated with the reorganization of its Managed Care
Services division to improve efficiency through facility consolidations and
related headcount reductions, an impairment loss on the intangible related to an
acquired contract and costs associated with settling claims on other expired
contracts. The utilization of this charge through September 30, 1999 was
approximately $7,416,000 in charges related to an impairment loss on the
intangible related to an acquired contract, $3,945,000 in costs associated with
personnel reductions, $351,000 in costs associated with settling claims on other
expired contracts and $2,824,000 in facility consolidations and $85,000 of other
non-recurring costs. At September 30, 1999, approximately $5,893,000 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 $54,419,000 primarily for fees, expenses and other non-recurring charges
associated with the Merger. Through September 30, 1999, we paid approximately
$16,385,000 for professional fees and services, including legal, accounting and
regulatory fees $13,502,000 for employee related stock option exercises and
cancellations, $10,500,000 for a WCAS transaction fee, and $2,418,000 of other
non-recurring charges, and used $5,493,000 in non-cash charges for deferred
compensation expense related to the accelerated vesting and issuance of 210,000
shares of restricted stock. At September 30, 1999, approximately $6,121,000 of
the non-recurring charge remains for professional fees and services, employee
related stock option exercises and other non-recurring charges.
The following is a rollforward of the non-recurring charges recorded in
1998 and 1999:
First quarter of 1998 $12,600,000 non-recurring charge:
<TABLE>
<CAPTION>
December 31, 1998 Charged to September 30, 1999
Balance Income Usage Balance
<S> <C> <C> <C> <C>
$1,472,000 $-- $(997,000) $475,000
Fourth quarter of 1998 $20,514,000 non-recurring charge:
December 31, 1998 Charged to September 30, 1999
Balance Income Usage Balance
$9,468,000 $-- $(3,575,000) $5,893,000
Third quarter of 1999 $54,419,000 non-recurring charge:
December 31, 1998 Charged to September 30, 1999
Balance Income Usage Balance
$-- $54,419,000 $(48,298,000) $6,121,000
</TABLE>
(5) REVOLVING CREDIT FACILITIES AND LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
----------- ------------
<S> <C> <C>
Revolving credit borrowings..................................... $ -- $ 1,500,000
Term Facilities:
Tranche B at ABR plus 2.25% due 2006.......................... -- 249,375,000
Tranche C at ABR plus 2.50% due 2007.......................... -- 124,688,000
13.0% Series A Senior Subordinated Notes due 2009............... -- 190,000,000
4.5% Convertible Subordinated Notes due March 2003.............. 230,000,000 --
6.0% Convertible Subordinated Notes due December 2001........... 97,750,000 --
Other........................................................... 175,000 406,000
----------- ------------
327,925,000 565,969,000
Less: Current maturities........................................ (55,000) (5,305,000)
----------- ------------
Long-term debt, net of current maturities....................... $327,870,000 $560,664,000
============ ============
</TABLE>
F-8
<PAGE>
CONCENTRA OPERATING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
On August 17, 1999, the Company entered into a $475,000,000 Credit
Agreement (the "Credit Facility") with a consortium of banks, providing for
$375,000,000 in term loans and a $100,000,000 revolving credit facility (the
"Revolving Credit Facility"). The $375,000,000 in term loans were issued as a
$250,000,000 term loan (the "Tranche B Term Loan") and a $125,000,000 term loan
(the "Tranche C Term Loan") bearing interest at the Applicable Base Rate, as
defined, plus 2.25% and 2.50%, respectively, or the 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 $625,000 through June 30, 2005
and $58,750,000 for each of the remaining four quarters. The Tranche C Term Loan
matures on June 30, 2007 and requires quarterly principal payments of $312,500
through June 30, 2006 and $29,062,500 for each of the remaining four quarters.
The $100,000,000 Revolving Credit Facility matures on August 17, 2005.
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%. Commitment fees on
the unused revolver borrowings are at 0.5% per annum. The Company had borrowings
outstanding under the Revolving Credit Facility of $1,500,000 at September 30,
1999.
The $190,000,000 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 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 all 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's obligations under the Senior Credit Facility are secured by a pledge
of stock in the Company's subsidiaries.
The Company was in compliance with its covenants, including its financial
covenant ratio tests, in the third quarter of 1999.
In December 1996, the Company issued $97,750,000 of 6.0% Convertible
Subordinated Notes due 2001. On September 17, 1997, the Company entered into a
$100,000,000 Senior Credit Facility with a syndicate of five banks. On February
23, 1998, the Company signed an amendment to expand the Company's borrowing
capacity under the Senior Credit Facility to $200,000,000 under similar terms
and conditions in order to finance the repayment of debt associated with its
acquisition of PPS. On February 24, 1998, the Company acquired PPS and retired
$49,000,000 of PPS' outstanding indebtedness. PPS' 5.0% Convertible Subordinated
Notes due August 2006 converted into 2,721,904 shares of Concentra Managed Care,
Inc. common stock. In March and April 1998, the Company issued $230,000,000 4.5%
Convertible Subordinated Notes due 2003 and the Senior Credit Facility borrowing
capacity was reduced to the original $100,000,000 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 quarter in connection with the
Merger.
(6) 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. The following are the reportable segments:
F-9
<PAGE>
CONCENTRA OPERATING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
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, specialized preferred provider
organization ("PPO") network access, independent medical examinations ("IMEs"),
peer reviews and out-of-network bill review services. 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
healthcare 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 Field Case Management and Cost Containment 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 41.6% and 42.5% of total Managed Care Services revenue for the three
and nine months ended September 30, 1999, respectively.
There has not been a material change in the composition of segment
identifiable assets as of September 30, 1999 as compared to December 31, 1998
amounts reported in the Company's financial statements for the year ended
December 31, 1998 included elsewhere in this prospectus. Revenues from
individual customers, revenues between business segments and revenues, operating
profit and identifiable assets of foreign operations are not significant.
F-10
<PAGE>
CONCENTRA OPERATING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
The Company's Statements of Operations on a segment basis for the three and
nine months ended September 30, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Health Services $ 69,608,000 $ 89,857,000 $193,690,000 $242,421,000
Managed Care Services:
Specialized cost containment 45,687,000 50,718,000 137,190,000 151,630,000
Field case management 42,067,000 36,083,000 128,265,000 112,106,000
------------ ------------ ------------ ------------
Total Managed Care Services 87,754,000 86,801,000 265,455,000 263,736,000
------------ ------------ ------------ ------------
157,362,000 176,658,000 459,145,000 506,157,000
Gross profit margins:
Health Services $ 18,406,000 $18,486,000 $ 48,487,000 $50,664,000
Managed Care Services:
Specialized cost containment 14,817,000 16,729,000 45,301,000 50,071,000
Field case management 2,455,000 5,479,000 20,166,000 12,493,000
------------ ------------ ------------ ------------
Total Managed Care Services 20,296,000 19,184,000 65,467,000 62,564,000
------------ ------------ ------------ ------------
38,702,000 37,670,000 113,954,000 113,228,000
Operating income (1) (2):
Health Services $ 11,295,000 $11,037,000 $ 27,081,000 $ 29,263,000
Managed Care Services:
Specialized cost containment -- 11,532,000 -- 35,268,000
Field case management
-- 34,000 -- 5,334,000
------------ ------------ ------------ ------------
Total Managed Care Services 13,505,000 11,566,000 34,447,000 40,602,000
------------ ------------ ------------ ------------
Corporate General & Administrative -- (4,232,000) -- (13,350,000)
Non-recurring charge -- -- (54,419,000) (54,419,000)
------------ ------------ ------------ ------------
$ 24,800,000 $(36,048,000) $ 61,528,000 $ 2,096,000
============ ============ ============ ============
(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 budgeted. In addition,
general and administrative expenses for the Managed Care Groups was not
separately reported prior to 1999. Therefore, the Company did not make
allocations of corporate level and managed care level general and
administrative expenses. Beginning in 1999, the corporate function has been
separately disclosed.
(2) The third quarter of 1999 non-recurring charge of $54,419,000 for Merger
related fees and expenses consists of professional fees and services,
including legal, accounting and regulatory fees of $18,834,000 employee
related stock option exercises and cancellations of $14,598,000 a WCAS
transaction fee of $10,500,000, non-cash charges for deferred compensation
expense related to accelerated vesting and issuance of 210,000 shares of
restricted stock of $5,493,000, and other non-recurring charges of
$4,994,000.
</TABLE>
F-11
<PAGE>
CONCENTRA MANAGED CARE, INC.
Consolidated Financial Statements as of December 31, 1997 and 1998
and for the Three Years Ended December 31, 1998,
together with the Report of Independent Public Accountants.
F-12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Concentra Managed Care, Inc.:
We have audited the accompanying consolidated balance sheets of Concentra
Managed Care, Inc. (a Delaware corporation) as of December 31, 1997 and 1998,
and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Concentra Managed Care, Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 9, 1999
F-13
<PAGE>
CONCENTRA MANAGED CARE, INC.
Consolidated Balance Sheets
December 31,
-----------------------------
ASSETS 1997 1998
------------- -------------
Current Assets:
Cash and cash equivalents ..................... $ 11,964,000 $ 101,128,000
Marketable securities.......................... -- 5,000,000
Accounts receivable, net of allowances
of $16,723,000 and $17,210,000, respectively 106,284,000 127,615,000
Prepaid expenses and other current assets ..... 14,605,000 19,075,000
Prepaid and deferred income taxes.............. 12,096,000 14,019,000
------------ ------------
Total current assets ...................... 144,949,000 266,837,000
============ ============
Land 2,525,000 2,775,000
Buildings and improvements 5,747,000 6,814,000
Leasehold improvements......................... 21,704,000 31,280,000
Computer hardware and software ................ 39,512,000 56,838,000
Furniture and equipment........................ 33,486,000 40,439,000
------------ ------------
Property and equipment, at cost 102,974,000 138,146,000
Accumulated depreciation and amortization...... (38,255,000) (52,220,000)
------------ -------------
Property and equipment, net.................. 64,719,000 85,926,000
Other assets:
Goodwill, net.................................. 256,580,000 275,172,000
Assembled workforce and customer lists, net.... 3,524,000 2,781,000
Marketable securities.......................... -- 10,583,000
Other assets................................... 12,761,000 15,495,000
------------ ------------
$482,533,000 $656,794,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving credit facilities.................... $ 49,000,000 $ --
Current portion of long-term debt.............. 7,497,000 55,000
Accounts payable............................... 12,137,000 13,098,000
Accrued expenses............................... 14,950,000 22,276,000
Accrued payroll and related expenses........... 20,022,000 25,973,000
Accrued and deferred income taxes.............. 4,589,000 3,565,000
------------ ------------
Total current liabilities.................. 108,195,000 64,967,000
Long-term debt, net of current portion......... 150,103,000 327,870,000
Deferred income taxes.......................... 7,713,000 13,575,000
Other liabilities.............................. 10,081,000 10,507,000
Commitments and Contingencies (see Note 10)
Stockholders' Equity:
Preferred stock--$.01 par value; 20,000,000
authorized; none issued and outstanding...... -- --
Common stock--$.01 par value; 100,000,000
authorized; 43,567,686 and 47,104,412
shares issued and outstanding, respectively 436,000 471,000
Paid-in capital................................ 257,022,000 270,654,000
Accumulated other comprehensive income--
unrealized gain on marketable securities .... -- 60,000
Retained deficit............................... (51,017,000) (31,310,000)
------------ ------------
Total stockholders' equity................. 206,441,000 239,875,000
------------ ------------
$482,533,000 $656,794,000
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-14
<PAGE>
CONCENTRA MANAGED CARE, INC.
Consolidated Statements Of Operations
Years Ended December 31,
-----------------------------------------------
1996 1997 1998
------------ ------------ -------------
REVENUE:
Health Services ............. $170,035,000 $207,676,000 $259,481,000
------------ ------------ ------------
Managed Care Services:
Specialized cost containment 83,784,000 142,919,000 183,734,000
Field case management ...... 118,864,000 138,723,000 167,841,000
------------ ------------ ------------
Total Managed Care Services 202,648,000 281,642,000 351,575,000
------------ ------------ ------------
Total revenue ............. 372,683,000 489,318,000 611,056,000
COST OF SERVICES:
Health Services ............. 130,754,000 155,376,000 201,181,000
Managed Care Services:
Specialized cost containment 60,154,000 100,012,000 123,294,000
Field case management ...... 99,020,000 117,251,000 144,822,000
------------ ------------ ------------
Total Managed Care Services 159,174,000 217,263,000 268,116,000
------------ ------------ ------------
Total cost of services ..... 289,928,000 372,639,000 469,297,000
------------ ------------ ------------
Total gross profit ........ 82,755,000 116,679,000 141,759,000
General and administrative
expenses ................... 33,155,000 39,831,000 45,326,000
Amortization of intangibles .. 3,442,000 5,908,000 8,119,000
Non-recurring charge ......... 964,000 38,625,000 33,114,000
------------ ------------ ------------
Operating income .......... 45,194,000 32,315,000 55,200,000
Interest expense ............. 3,741,000 12,667,000 18,021,000
Interest income .............. (859,000) (2,297,000) (4,659,000)
Other, net ................... 836,000 883,000 44,000
------------ ------------ ------------
Income before income taxes 41,476,000 21,062,000 41,794,000
Provision for income taxes ... 13,437,000 11,062,000 19,308,000
------------ ------------ ------------
Net income ................... $ 28,039,000 $ 10,000,000 $ 22,486,000
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-15
<PAGE>
CONCENTRA MANAGED CARE, INC.
Consolidated Statements Of Cash Flows
Years Ended December 31,
----------------------------------------------
1996 1997 1998
------------- ------------- -------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income .................. $ 28,039,000 $ 10,000,000 $ 22,486,000
------------- ------------- -------------
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation of
property and equipment .... 6,706,000 10,630,000 14,805,000
Amortization and
write-off of intangibles .. 3,442,000 5,908,000 8,119,000
Amortization of deferred
compensation -- 562,000 805,000
Amortization and write-off
of start-up costs ......... 322,000 2,845,000 --
Earnings in unconsolidated
subsidiaries, net of
distributions ............. -- (192,000) (98,000)
Amortization of deferred
finance costs and debt
discount .................. 58,000 777,000 1,699,000
Write-off of contract
intangibles -- -- 7,416,000
Change in assets and
liabilities:
Accounts receivable ......... (14,967,000) (27,003,000) (19,765,000)
Prepaid expenses and other
assets .................... (5,330,000) (16,326,000) (1,480,000)
Accounts payable, accrued
expenses and income taxes . (2,675,000) 12,283,000 962,000
------------ ------------- -------------
Net cash provided by (used in)
operating activities ...... 15,595,000 (487,000) 34,949,000
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisitions, net of cash
acquired .................. (68,805,000) (103,291,000) (18,070,000)
Purchase of property and
equipment ................. (24,024,000) (25,535,000) (34,187,000)
Purchase of investments ..... (12,045,000) -- (15,523,000)
Sale of investments -- 12,045,000 --
Proceeds from sale of
property and equipment
and other ................. 21,000 626,000 440,000
------------ ------------- -------------
Net cash used in investing
activities .............. (104,853,000) (116,155,000) (67,340,000)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings (payments) under
revolving credit
facilities, net ........... 1,400,000 43,300,000 (49,000,000)
Proceeds from the issuance
of long-term debt ......... 158,739,000 26,489,000 230,000,000
Payment of deferred
financing costs ........... (1,226,000) (596,000) (6,411,000)
Repayments of long-term debt (37,220,000) (5,071,000) (49,581,000)
Net proceeds from the
issuance of common stock
under employee stock
purchase and option plans . 57,082,000 10,023,000 14,403,000
Payments to dissenting
shareholders -- -- (15,047,000)
Dividends and distributions
to shareholders ........... (42,671,000) (3,760,000) (2,809,000)
------------ ------------- -------------
Net cash provided by
financing activities .... 136,104,000 70,385,000 121,555,000
------------ ------------- -------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS ... 46,846,000 (46,257,000) 89,164,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR ........... 11,375,000 58,221,000 11,964,000
------------ ------------- -------------
CASH AND CASH EQUIVALENTS,
END OF YEAR ................. $ 58,221,000 $ 11,964,000 $ 101,128,000
============ ============== =============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest paid ............... $ 3,316,000 $ 11,941,000 $ 13,912,000
Income taxes paid ........... $ 8,557,000 $ 12,305,000 $ 15,961,000
Conversion of notes payable
into common stock ......... $ 825,000 $ 691,000 $ 10,094,000
Liabilities and debt assumed
in acquisitions ........... $ 9,030,000 $ 13,242,000 $ 8,386,000
F-16
<PAGE>
CONCENTRA MANAGED CARE, INC.
Consolidated Statements Of Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Other
$0.01 Par Value Paid-in Comprehensive Retained Stockholders'
Common Stock Capital Income Deficit Equity
------------------- ----------- ---------- ------------- ------------
Number
of Shares Value
--------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 34,772,833 $347,000 $151,385,000 $ -- ($42,349,000) $109,383,000
Sale of Common Stock 2,143,200 21,000 51,819,000 -- -- 51,840,000
Common Stock issued in connection
with acquisitions 715,246 7,000 6,725,000 -- 407,000 7,139,000
Common Stock issued under employee
stock purchase and option plans and
related tax benefit 683,076 7,000 7,735,000 -- -- 7,742,000
Exercise of Common Stock
warrants 151,111 2,000 1,062,000 -- -- 1,064,000
Conversion of notes payable into
Common Stock 105,983 1,000 824,000 -- -- 825,000
Conversion of debenture payable into
Common Stock 1,854,141 19,000 14,766,000 -- -- 14,785,000
Dividends and shareholder distributions
by pooled companies -- -- -- -- (42,671,000) (42,671,000)
Net income -- -- -- -- 28,039,000 28,039,000
---------- -------- ----------- ---------- ------------- ------------
BALANCE, DECEMBER 31, 1996 40,425,590 404,000 234,316,000 -- (56,574,000) 178,146,000
Common Stock issued in connection
with acquisitions 2,162,995 22,000 11,441,000 -- (969,000) 10,494,000
Common Stock issued under employee
stock purchase and option plans and
related tax benefit 897,530 9,000 10,013,000 -- -- 10,022,000
Amortization of deferred compensation -- -- 562,000 -- -- 562,000
Conversion of notes payable into
Common Stock 81,571 1,000 690,000 -- -- 691,000
Dividends and shareholder distributions
by pooled companies -- -- -- -- (3,474,000) (3,474,000)
Net income -- -- -- -- 10,000,000 10,000,000
---------- -------- ----------- ---------- -------------- ------------
BALANCE, DECEMBER 31, 1997 43,567,686 436,000 257,022,000 -- (51,017,000) 206,441,000
Comprehensive net income:
Net income -- -- -- -- 22,486,000 22,486,000
Unrealized gain on marketable
securities -- -- -- 60,000 -- 60,000
Comprehensive net income -- -- -- 60,000 22,486,000 22,546,000
---------- -------- ----------- ---------- -------------- ------------
Common Stock issued in connection
with acquisitions 430,750 4,000 3,408,000 -- 30,000 3,442,000
Common Stock issued under employee
stock purchase and option plans and
related tax benefit 841,260 9,000 14,394,000 -- -- 14,403,000
Amortization of deferred compensation -- -- 805,000 -- -- 805,000
Conversion of notes payable into
Common Stock 2,735,387 27,000 10,067,000 -- -- 10,094,000
Dividends and shareholder distributions
by pooled companies -- -- -- -- (2,809,000) (2,809,000)
Payments to dissenting shareholders (470,671) (5,000) (15,042,000) -- -- (15,047,000)
---------- -------- ----------- ---------- ------------ ------------
BALANCE, DECEMBER 31, 1998 47,104,412 $471,000 $270,654,000 $60,000 ($31,310,000) $239,875,000
========== ======== =========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-17
<PAGE>
CONCENTRA MANAGED CARE, INC.
Notes To Consolidated Financial Statements
(1) Basis of Presentation
On August 29, 1997, Concentra Managed Care, Inc. ("Concentra" or the
"Company"), a Delaware corporation, was formed by the merger (the "1997 Merger")
of CRA Managed Care, Inc. ("CRA") and OccuSystems, Inc. ("OccuSystems"). As a
result of the 1997 Merger, CRA changed its name to Concentra Managed Care
Services, Inc. ("Managed Care Services") and OccuCenters, Inc., the operating
subsidiary of OccuSystems, changed its name to Concentra Health Services, Inc.
("Health Services"). The 1997 Merger was a tax-free stock for stock exchange
accounted for as a pooling of interests. The Company recorded a non-recurring
charge of $38,625,000 in the third quarter of 1997 associated with the 1997
Merger. The utilization of this charge through December 31, 1998, was
approximately $11,569,000 for professional fees and services, $16,216,000 in
costs associated with personnel reductions and the consolidation of CRA's and
OccuSystems' employee benefits, $5,945,000 in facility consolidations and
closings, $2,541,000 for the write-off of start-up costs and $2,354,000 of other
charges. At December 31, 1997, approximately $7,527,000 of the non-recurring
charge remains primarily related to personnel related charges and facility
consolidations and closings.
On February 24, 1998, the Company acquired all of the outstanding common stock
of Preferred Payment Systems, Inc. ("PPS") of Naperville, Illinois, in exchange
for approximately 7,100,000 shares of Concentra common stock, the assumption of
PPS options totaling approximately 580,000 shares of Concentra common stock, the
payment of approximately $15,047,000 in cash to dissenting PPS shareholders and
the assumption of approximately $49,000,000 of debt which was repaid at the time
of the merger. This merger was accounted for as a pooling of interests. In the
first quarter of 1998, the Company recorded a non-recurring charge of
$12,600,000 primarily associated with the merger of PPS. The utilization of this
charge through December 31, 1998, was approximately $5,136,000 for professional
fees and services, $2,355,000 in costs associated with personnel reductions,
$746,000 in facility consolidations and closings, $1,627,000 associated with the
write-off of deferred financing fees on PPS indebtedness retired and $1,264,000
of other non-recurring costs. At December 31, 1998, approximately $1,472,000 of
the non-recurring charge remains primarily related to remaining facility lease
obligations. PPS, founded in 1990, is a provider of retrospective bill review
services for the group healthcare market.
In the fourth quarter of 1998, the Company recorded a non-recurring charge of
$20,514,000 primarily associated with the reorganization of its Managed Care
Services division to improve efficiency through facility consolidations and
related headcount reductions, to recognize an impairment loss on the intangible
related to an acquired contract and costs associated with settling claims on
other expired contracts. The utilization of this charge through December 31,
1998, was approximately $7,416,000 in charges related to the recognition of an
impairment loss on the intangible related to an acquired contract, $2,490,000 in
costs associated with personnel reductions and $1,140,000 in facility
consolidations. At December 31, 1998, approximately $9,468,000 of the
nonrecurring charge remains primarily related to remaining facility lease
obligations and costs associated with settling claims on other expired
contracts.
The financial statements as of December 31, 1997 and for the years ended
December 31, 1996 and 1997 have been restated to reflect the merger of PPS in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16").
(2) Significant Acquisitions
Managed Care Services has experienced a significant amount of its growth by
virtue of the acquisitions of FOCUS HealthCare Management, Inc. ("FOCUS"),
Prompt Associates, Inc. ("PROMPT"), First Notice Systems, Inc. ("FNS"), About
Health, Inc. ("ABOUT HEALTH") and several other smaller acquisitions. Health
Services has also experienced a significant amount of its growth from the
acquisition of practices, including the acquisition of 16 occupational medical
centers and contracts to manage four additional medical centers from Vencor,
Inc. ("VMC").
F-18
<PAGE>
On April 2, 1996, the Company purchased FOCUS for $21,000,000 in cash.
FOCUS, based in Brentwood, Tennessee, has built and maintains one of the
nation's largest workers' compensation preferred provider organization ("PPO")
networks and had annual revenues of approximately $9,900,000 for the year ended
December 31, 1995.
On October 29, 1996, the Company purchased PROMPT for $30,000,000 in cash.
PROMPT, which is based in Salt Lake City, Utah, is one of the leading providers
of hospital bill audit services to the group health payor community for claims
that fall outside of an indemnity carrier's, third-party administrator's ("TPA")
or health maintenance organization's ("HMO") network of hospital or outpatient
facilities and had annual revenues of approximately $10,000,000 for the year
ended December 31, 1995.
On June 4, 1997, the Company purchased FNS for $40,000,000 in cash. FNS,
based in Boston, Massachusetts, is a leading provider of outsourced call
reporting for first notice of loss/injury to the automobile insurance and
workers' compensation industries and had annual revenues of approximately
$9,000,000 for the year ended December 31, 1996.
PPS acquired ABOUT HEALTH in a two-step transaction on August 1, 1997 and
October 31, 1997 for $25,800,000 in cash and $9,733,000 in equity. ABOUT HEALTH,
based in Rockville, Maryland, is a provider of specialized cost containment and
outsourcing services for healthcare payors and had annual revenues of
approximately $10,000,000 for the year ended December 31, 1996.
On September 30, 1997, the Company purchased 16 occupational medical
centers and the management of four additional medical centers from VMC for
approximately $27,000,000 in cash. These medical centers had annual revenues of
approximately $23,000,000 for the year ended December 31, 1996.
The acquisitions of FOCUS, PROMPT, FNS, ABOUT HEALTH and VMC have been
accounted for by the Company as purchases whereby the basis for accounting for
their assets and liabilities are based upon their fair values at the dates of
acquisition. The excess of the purchase price over fair value of net assets
acquired (goodwill and assembled workforce and customer lists, if applicable)
for the FOCUS, PROMPT, FNS, ABOUT HEALTH and VMC acquisitions was $19,900,000,
$29,550,000, $37,001,000, $34,291,000 and $29,585,000, respectively. None of
these acquisitions were significant in relation to the Company's consolidated
financial statements and, therefore pro forma financial information has not been
presented. Goodwill is being amortized over thirty to forty year periods and
assembled workforce and customer lists are being amortized over five and
seven-year periods, respectively.
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.
(3) Summary of Significant Accounting Policies
(a) Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Investments in certain joint ventures with
less than a 51% ownership interest are accounted for on a equity basis and,
accordingly, consolidated income includes the Company's share of their income.
All significant intercompany accounts and transactions are eliminated in
consolidation.
Physician and physical therapy services are provided at the Health Services
centers under management agreements with affiliated physician associations (the
"Physician Groups"), which are organized professional corporations that hire
licensed physicians and physical therapists to provide medical services to the
centers' patients. Health Services has a nominee shareholder relationship with
the Physician Groups as defined in EITF 97-2, Application of APB Opinion No. 16
and FASB Statement No. 94 to Physician Practice Entities, and as a result, the
financial statements of the Physician Groups are consolidated. Specifically:
o Health Services can at all times establish or effect change in the
nominee shareholder;
o Health Services can cause a change in the nominee shareholder an
unlimited number of times;
F-19
<PAGE>
o Health Services has sole discretion as to the choice of a new nominee
shareholder;
o Health Services has sole discretion without cause to establish or
change the nominee shareholders;
o Health Services and the Physician Groups would incur no more than a
nominal cost to cause a change in the nominee shareholder; and,
o Neither Health Services nor the Physician Groups are subject to any
significant adverse impact upon a change in the nominee shareholder.
The Company's management fees from the Physician Groups are calculated as
collected revenue net of compensation, benefits and other expenses incurred by
the Physician Groups.
(b) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents. The carrying
amount approximates fair value due to the short maturity of those instruments.
(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 two primary
components : (i) workers' compensation injury care and related services; and
(ii) non-injury healthcare services related to employer needs or statutory
requirements. The workers' compensation injury care and related services'
provider reimbursement methods vary on a state-by-state basis. Of the 25 states
in which the Company currently operates occupational healthcare centers, 21 have
fee schedules pursuant to which all healthcare providers are uniformly
reimbursed. The fee schedules are set by each state and generally prescribe the
maximum amounts that may be reimbursed for a designated procedure In the four
states without fee schedules, healthcare providers are reimbursed based on
usual, customary and reasonable ("UCR") fees charged in the particular state in
which the services are provided. Billing for services in states with fee
schedules are included in revenues net of allowance for estimated differences
between list prices and allowable fee schedule rates. Adjustments to the
allowance based on final payment from the states are recorded upon settlement.
The Company records the net revenue amount as accounts receivable.
The Company's total contractual allowances offset against revenues during
the years ended December 31, 1998, 1997 and 1996 were $16,095,000, $14,718,000
and $3,680,000, respectively.
Insurance claims are screened by PPS and PROMPT prior to the insurance
company's internal review procedures to determine if the claims should be
further negotiated or are payable by the insurance company. During the insurance
company's review process, some claims have pre-existing PPO or HMO arrangements,
or other pre-existing conditions and disqualifying situations. When these
situations occur, a refund (chargeback) is requested for the amounts paid
(invoiced) on these claims. PPS and PROMPT's policies are to record a sales
allowance as an offset to revenues and accounts receivable based upon the
historical tracking of discounts and chargebacks at the time the claims are
modeled. A portion of the allowance for doubtful accounts attributable to PPS
and PROMPT is based on historical experience of ineligible claims which are
either charged back or given a negotiated discount. PPS and PROMPT utilize
several methods to project unpresented discounts and chargebacks including a
tracking of the
F-20
<PAGE>
actual experience of contractual discounts. Other factors that affect
collectability and bad debts for each service line are also evaluated and
additional allowance amounts are provided as necessary.
Accounts receivable at December 31, 1997 and 1998 include $4,500,000 of
unbilled accounts receivable relating to services rendered during the period but
not invoiced until after the period-end. These unbilled accounts receivable
relate primarily to field case management services, which are billed on an
hourly basis, whereby the Company has not yet provided a sufficient amount of
services to warrant the generation of an invoice. The customers are obligated to
pay for the services once performed. The Company estimates unbilled accounts
receivable by tracking and monitoring its historical experience.
(d) Depreciation
The Company provides for depreciation on property and equipment using
straight-line and accelerated methods by charges to operations in amounts that
allocate the cost of depreciable assets over their estimated lives as follows:
Asset Classification Estimated Useful Life
- -------------------- ---------------------
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
(e) Intangible Assets
The value of goodwill, assembled workforces and customer lists are recorded
at cost at the date of acquisition. Through December 31, 1998 goodwill,
including any excess arising from earn-out payments, was being amortized on a
straight-line basis over 30 to 40-year periods in accordance with Accounting
Principles Board Opinion No. 17 ("APB No. 17"), "Intangible Assets". Effective
January 1, 1999, the Company changed its policy, on a prospective basis, with
respect to the amortization of goodwill. All existing and future goodwill will
be amortized over a period not to exceed 25 years, Had the Company adopted this
policy at the beginning of 1998, amortization for 1998 would have increased by
approximately $3,300,000 and diluted earnings per share would have been $0.42.
As of December 31, 1998, net intangible assets consisted of goodwill, customer
lists and assembled workforce. The Company believes that the life of the core
businesses acquired and the delivery of occupational healthcare services is
indeterminate and likely to exceed 25 years. The assembled workforces and
customer lists are being amortized over five- and seven-year periods,
respectively. As of December 31, 1997 and 1998, the Company has recorded
accumulated amortization on intangible assets of $29,834,000 and $37,938,000
respectively.
Subsequent to an acquisition, the Company continually evaluates whether
later events and circumstances have occurred that indicate that the remaining
balance of goodwill may not be recoverable or that the remaining useful life may
warrant revision. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related operating
unit's undiscounted cash flows over the remaining life of the goodwill and
compares it to the operating unit's goodwill balance to determine whether the
goodwill is recoverable or if impairment exists, in which case an adjustment is
made to the carrying value of the asset to reduce it to its fair value based
upon the present value of the future cash flows. When an adjustment is required
the Company evaluates the remaining goodwill amortization using the factors
outlined in APB No. 17.
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.
(f) Deferred Finance Costs
The Company has capitalized costs associated primarily with the 6% and 4.5%
Convertible Subordinated Notes and the PPS indebtedness (written-off at the time
of the merger and retirement of PPS indebtedness) and is amortizing these as
interest expense over the life of the notes. Included in other assets at
December 31, 1997 and 1998 were deferred finance costs, net of accumulated
amortization, of $4,515,000 and $7,592,000, respectively.
F-21
<PAGE>
(g) Non-recurring Charges
The following are rollforwards of the non-recurring charges recorded by the
Company in 1997 and 1998. See Note 1, "Basis of Presentation" for a description
of the non-recurring charges and the breakout of the deductions from revenue by
major category:
Third quarter of 1997 $38,625,000 non-recurring charge:
<TABLE>
<CAPTION>
Beginning Charged Ending
of Year to Income Usage of Year
--------- --------- ----- -------
<S> <C> <C> <C> <C> <C>
1997 $ -- $38,625,000 $(31,098,000) $7,527,000
1998 7,527,000 -- (7,527,000) --
First quarter of 1998 $12,600,000 non-recurring charge:
Beginning Charged Ending
of Year to Income Usage of Year
--------- --------- ----- -------
1998 $ -- $12,600,000 $(11,128,000) $1,472,000
Fourth quarter of 1998 $20,514,000 non-recurring charge:
Beginning Charged Ending
of Year to Income Usage of Year
--------- --------- ----- -------
1998 $ -- $20,514,000 $(11,046,000) $9,468,000
The following is a rollforward of all non-recurring charges for the three years
ended December 31, 1996, 1997 and 1998:
Beginning Charged Ending
of Year to Income Usage of Year
--------- --------- ----- -------
1996 $ -- $ 964,000 $ (964,000) $ --
1997 -- 38,625,000 (31,098,000) 7,527,000
1998 7,527,000 33,114,000 (29,701,000) 10,940,000
</TABLE>
(h) Investments in Joint Ventures
Investments in the net assets of joint ventures accounted for under the
equity method amounted to $3,937,000 and $3,839,000 at December 31, 1997 and
1998, respectively. For the year ending December 31, 1997 and 1998, revenue for
these entities was $4,561,000 and $5,724,000, gross profit was $950,000 and
$919,000 and net income was $287,000 and $338,000, respectively. Total assets
for the joint ventures were $4,277,000 and $4,306,000 as of December 31, 1997
and 1998, respectively.
(i) Self Insurance
Company is partially insured for workers' compensation, physician medical
malpractice, automobile and certain employee health benefits. The Company's
self-insurance retention liability on a per claim basis ranges from $100,000 to
$250,000. Liabilities in excess of these amounts are the responsibility of the
insurer. The Company's policy is to accrue amounts up to the insurance carriers'
reserve requirements on a claim-by-claim basis and an estimate for claims
incurred but not yet reported.
(j) Deferred Start-up Costs
Prior to the 1997 Merger, Health Services capitalized the start-up costs
associated with the internal development of its medical centers until
operational and would amortize these costs over a three-year period. The
American Institute of Certified Public Accountants issued Statement of Opinion
98-5, "Accounting for Start Up Costs" in April 1998, to change the accounting
and reporting treatment of start-up costs to require start-up costs to be
expensed as
F-22
<PAGE>
incurred. As a result of this pending change in accounting principle, the
Company wrote-off deferred start-up costs of approximately $2,541,000 and
included this in the third quarter of 1997 non-recurring charge.
(k) Foreign Currency Translation
All assets and liabilities of the Company's Canadian offices are translated
at the year-end exchange rate, while revenues and expenses are translated at the
average exchange rate for the year. Cumulative translation adjustments were
immaterial for the years ended December 31, 1996, 1997 and 1998.
(l) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(m) Reclassifications
Certain amounts previously reported in CRA's and OccuSystems' 1996
consolidated financial statements and PPS' 1996 and 1997 consolidated financial
statements have been reclassified to conform to the presentation in the 1998
consolidated financial statements.
(n) New Accounting Pronouncements
In the first quarter of 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). Comprehensive income for the Company includes unrealized
gains on marketable securities in addition to net income as reported in the
Company's Consolidated Statements of Stockholders' Equity and in the
Stockholders' Equity section of the Company's Consolidated Balance Sheets.
In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 requires the reporting of financial
and descriptive information about a company's reportable operating segments.
Operating segments are components of an enterprise's separate financial
information that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance of that
component. The statement requires reporting segment profit or loss, certain
specific revenue and expense items, and segment assets. See Note 13--Segment
Information for disclosure
(4) Earnings Per Share
As a result of the Company going private in the merger transaction on
August 17, 1999, there are no longer publicly held shares outstanding.
Therefore, historical earnings per share information is not meaningful.
(5) Revolving Credit Facilities
On September 17, 1997, the Company entered into the $100,000,000 Senior
Credit Facility with a syndicate of five banks ("Senior Credit Facility"),
replacing the $60,000,000 Managed Care Services Credit Facility, ("MCS Credit
Facility") and the $60,000,000 Health Services Credit Facility, ("HS Credit
Facility"). The Senior Credit Facility matures on September 17, 2002. Interest
on borrowings under the Senior Credit Facility is payable, at the Company's
option, at the higher of the bank's prime rate of interest or the federal funds
rate plus an additional percentage of 0.5%, or LIBOR plus an additional
percentage of up to 1.25%, depending on certain financial criteria. The Company
is required to pay a commitment fee of 0.125% to 0.25% per annum, depending on
certain financial criteria, on the unused portion of the Senior Credit Facility.
F-23
<PAGE>
On February 23, 1998, the Company signed an amendment to expand the
Company's borrowing capacity under the Senior Credit Facility to $200,000,000
under similar terms and conditions in order to finance the repayment of
$49,000,000 of PPS outstanding indebtedness (the PPS Credit Facility and 10%
Subordinated Notes). On March 11, 1998, the Senior Credit Facility borrowing
capacity was reduced to the original $100,000,000 amount.
The Senior Credit Facility contains customary covenants, including, without
limitation, restrictions on the incurrence of indebtedness, the sale of assets,
certain mergers and acquisitions, the payment of dividends on the Company's
capital stock, the repurchase or redemption of capital stock, transactions with
affiliates, investments, capital expenditures and changes in control of the
Company. Under the Senior Credit Facility, the Company is also required to
satisfy certain financial covenants, such as cash flow, capital expenditures and
other financial ratio tests including fixed charge coverage ratios. The
Company's obligations under the Senior Credit Facility are secured by a pledge
of stock in the Company's subsidiaries.
As a result of the fourth quarter 1998 non-recurring charge, the Company
was not in compliance with certain leverage ratio covenants under the Senior
Credit Facility in the fourth quarter of 1998 and the Company expects it will
not be in compliance with those covenants in the first quarter of 1999. The
Company received a waiver on all financial covenants through the first quarter
of 1999. The Company does not have any borrowings outstanding under the Senior
Credit Facility and does not anticipate the need to borrow under the Senior
Credit Facility for the next twelve months.
At December 31, 1997, the Company had borrowings under the Senior Credit
Facility of $49,000,000, at an average rate of interest of 6.94%. At December
31, 1998, the Company had no borrowings and $3,050,000 of letters of credit
outstanding under the Senior Credit Facility. For the years ended December 31,
1996, 1997 and 1998, the weighted average borrowings under these revolving
credit facilities were $8,184,000, $9,615,000 and $14,205,000, respectively, and
the weighted average interest rates were 6.94%, 7.31% and 7.69%, respectively.
(6) Long-term Debt
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
4.5% Convertible Subordinated Notes, interest at 4.5%,
due March 2003 ............................................. $ -- $230,000,000
6% Convertible Subordinated Notes, interest at 6%,
due December 2001 .......................................... 97,750,000 97,750,000
Notes payable to various holders, interest ranging
from 8.8% to 10%, payable in installments through 2005 ..... 308,000 119,000
Obligations under capital leases.............................. 542,000 56,000
PPS indebtedness:
PPS Term Loan.............................................. 42,000,000 --
5% Convertible Subordinated Notes due August 2006.......... 10,000,000 --
10% Subordinated Notes due August 2003..................... 7,000,000 --
------------ ------------
157,600,000 327,925,000
Less: Current maturities...................................... (7,497,000) (55,000)
------------ ------------
Long-term debt, net of current maturities..................... $150,103,000 $327,870,000
============ ============
</TABLE>
As of December 31, 1998 and 1997, accrued interest was $3,276,000 and $
867,000 respectively.
On March 11, 1998, the Company issued a new issue of $200,000,000 aggregate
principal amount of 4.5% Convertible Subordinated Notes due March 15, 2003 (the
"4.5% Convertible Subordinated Notes"). On April 6, 1998, the underwriters
exercised the $30,000,000 overallotment provision. The 4.5% Convertible
Subordinated Notes will be convertible into 5,575,758 shares of Common Stock, at
the option of the holder, at a conversion price of $41.25 per share,
representing a conversion premium of 25% over the previous day's closing price.
The 4.5% Convertible Subordinated Notes are general unsecured obligations of the
Company ranking equal in right of payment with the 6% Convertible Subordinated
Notes and all other unsecured indebtedness of the Company. In addition, the
Company is a holding company that conducts all of its operations through
subsidiaries, and the 4.5% Convertible Subordinated Notes and the 6% Convertible
Subordinated Notes are structurally subordinate to all obligations of the
Company's subsidiaries. The 4.5% Convertible Subordinated Notes were sold
through a private placement under Rule 144A of the Securities Act of 1933, as
amended and have similar terms and conditions as the 6% Convertible Subordinated
Notes.
F-24
<PAGE>
In December 1996, Health Services issued an aggregate of up to $97,750,000
in principal amount of 6% Convertible Subordinated Notes ("6% Convertible
Subordinated Notes"). The 6% Convertible Subordinated Notes will be convertible
into 3,291,243 shares of Common Stock at the initial conversion price of $29.70
per share (equivalent to a conversion rate of 33.67 shares per $1,000 principal
amount of 6% Convertible Subordinated Notes), subject to adjustment in certain
events. The notes are convertible into Common Stock at the option of the holder
on or after February through December 2001. The 6% Convertible Subordinated
Notes will mature on December 15, 2001 with interest being payable semi-annually
on June 15 and December 15 of each year, commencing on June 15, 1997.
On August 31, 1996, PPS completed a series of transactions involving funds
managed by a private equity firm and senior officers of PPS (the "1996
Transaction"). In connection with the 1996 Transaction, the private equity firm
invested $17,000,000 to acquire $10,000,000 in 5% Convertible Subordinated Notes
due August 2006 (the "5% Convertible Subordinated Notes") and $7,000,000 of 10%
Subordinated Notes due August 2003 (the "10% Subordinated Notes"). PPS also
entered into a credit facility with a syndicate of two banks, which provided for
$25,000,000 of senior debt, $20,000,000 of which was in the form of a term loan
and $5,000,000 of which was available pursuant to a line of credit. PPS, in
turn, used the net proceeds from these financing transactions to make
distributions to its stockholders in an aggregate amount of approximately
$36,000,000.
On July 31, 1997, in connection with the acquisition of ABOUT HEALTH (see
Note 2), PPS entered into an amended and restated credit facility (as so amended
and restated, the "PPS Term Loan") to increase the term loan portion by $26.5
million. The Company is obligated to make quarterly principal and interest
payments on the term loan (bearing interest of 8.0% and 7.8% at December 31,
1996 and 1997, respectively) and quarterly interest payments on the line of
credit (bearing interest at 9.25% and 9.0% at December 31, 1996 and 1997,
respectively).
The 10% Subordinated Notes bear interest at 10% per annum, payable
quarterly. Beginning February 2002, the Company is required to make semiannual
principal payments on the 10% Subordinated Notes of $1.7 million. Under the 10%
Subordinated Loan Agreement, the Company is required to prepay the 10%
Subordinated Notes in whole upon a qualifying public offering, sale of the
Company, or other change in control, as defined.
The 5% Convertible Subordinated Notes are convertible at any time by the
holder into 10,000 shares of PPS Redeemable Preferred Stock and 10,000 shares of
PPS Convertible Preferred Stock. The 5% Convertible Subordinated Notes mature in
August 2006, subject to the right of the holders to accelerate the maturity of
the 5% Convertible Subordinated Notes upon a public equity offering, a
qualifying sale of the Company, or a merger resulting in a change in majority
ownership of the Company. The 5% Convertible Subordinated Notes bear interest at
5%, 2% being payable quarterly and 3% being deferred and payable upon redemption
or maturity.
On February 24, 1998, in connection with the merger of PPS, Concentra
repaid $49,000,000 of PPS indebtedness (the PPS Term Loan and 10% Subordinated
Notes) and the 5% Convertible Subordinated Notes were converted into 2,721,904
shares of Concentra Common Stock.
(7) Financial Instruments
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments". This statement requires entities to disclose the fair value of
their financial instruments, both assets and liabilities, and off- balance
sheet, for which it is practicable to estimate fair value. The following
describes the methods and assumptions that were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
The Company's marketable securities are held as available for sale in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
F-25
<PAGE>
The following is a summary of marketable securities with a maturity of
greater than 90 days as of December 31, 1998:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. government securities ....... $10,523,000 $62,000 ($2,000) $10,583,000
Corporate debt securities ........ 3,000,000 -- -- 3,000,000
Other debt securities ............ 2,000,000 -- -- 2,000,000
----------- ------- ------- -----------
$15,523,000 $62,000 ($2,000) $15,583,000
=========== ======= ======= ===========
Marketable securities, noncurrent $10,523,000 $62,000 ($2,000) $10,583,000
=========== ======= ======= ===========
</TABLE>
The average maturity of the Company's marketable securities as of December
31, 1998 was approximately 20 months.
Financial instruments that potentially subject the Company to
concentrations of credit risk are accounts receivable and marketable securities.
Mitigating factors related to the Company's accounts receivable are that they
are spread over a large customer base and various product lines the Company
offers. Further, the Company does monitor the financial performance and credit
worthiness of its large customers. Mitigating factors related to the Company's
marketable securities are that they are primarily U.S. government securities and
corporate bonds and notes, with strong credit ratings. The Company limits the
amount of its investment exposure as to institution, maturity and investment
type.
The carrying amounts of cash and cash equivalents, accounts receivable,
other current assets, accounts payable, and accrued expenses approximate fair
value because of the short maturity of those instruments. The credit facilities
approximate fair value primarily due to the floating interest rates associated
with those debt instruments.
The fair value of the Company's 6% Convertible Subordinated Notes was
$125,120,000 and $83,088,000 as of December 31, 1997 and 1998 and the Company's
4.5% Convertible Subordinated Notes was $173,650,000 as of December 31, 1998.
The fair market values of the convertible subordinated notes are the average of
the NASDAQ's bid and ask amounts as of the respective year end. As of December
31, 1997, the approximate fair value of the 5% Convertible Subordinated Notes is
$15,700,000. Although the interest rate on the 10% Subordinated Notes is fixed,
the carrying value reasonably approximates the fair value at December 31, 1997.
(8) Income Taxes
The provision for income taxes consists of the following for the years
ended December 31: of the following for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal................. $11,429,000 $15,112,000 $11,252,000
State................... 2,473,000 3,968,000 1,369,000
---------- ---------- ----------
13,902,000 19,080,000 12,621,000
Deferred:
Federal................. (214,000) (6,873,000) 5,961,000
State................... (251,000) (1,145,000) 726,000
---------- ---------- ----------
(465,000) (8,018,000) 6,687,000
---------- ---------- ----------
Total...................... $13,437,000 $11,062,000 $19,308,000
=========== =========== ===========
</TABLE>
F-26
<PAGE>
Significant items making up deferred tax liabilities and deferred tax
assets were as follows at December 31:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts............................... $4,624,000 $5,752,000
Accrued vacation........................................... 1,760,000 1,117,000
Accrued self insurance..................................... 580,000 1,220,000
Acquired goodwill.......................................... 1,678,000 1,310,000
Non-recurring accruals and reserves........................ 5,107,000 5,255,000
Net operating losses....................................... 506,000 --
Other...................................................... 109,000 1,446,000
----------- -----------
Deferred tax assets....................................... $14,364,000 $16,100,000
Deferred tax liabilities:
Book to tax depreciation................................... $1,716,000 $2,307,000
Joint venture deferred liabilities......................... -- 1,280,000
Goodwill, principally due to differences in
amortization periods .................................... 4,400,000 4,758,000
Accounts receivable mark-to-market......................... -- 1,596,000
Research and development expense........................... 1,520,000 4,864,000
Other...................................................... 77,000 1,331,000
----------- -----------
Deferred tax liabilities.................................. $7,713,000 $16,136,000
=========== ===========
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
tax rate was as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 % 1997 % 1998 %
----------- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Tax provision at federal
statutory rate .................................. $14,309,000 34.5% $ 7,372,000 35.0% $14,628,000 35.0%
State taxes, net of federal income
tax benefit ..................................... 1,488,000 3.6 925,000 4.4 1,766,000 4.2
PPS S corporation status .......................... (2,441,000) (5.9) (2,582,000) (12.3) -- --
Non-deductible goodwill 367,000 0.9 1,003,000 4.8 1,149,000 2.8
Non-deductible non-recurring
charges and acquisition costs ................... -- -- 4,064,000 19.3 1,815,000 4.3
Other items, net .................................. (286,000) (0.7) 280,000 1.3 (50,000) (0.1)
----------- ---- ----------- ---- ----------- ----
$13,437,000 32.4% $11,062,000 52.5% $19,308,000 46.2%
=========== ==== =========== ==== =========== ====
</TABLE>
PPS' shareholders had elected S Corporation taxing status. Thus, PPS'
taxable income was taxed directly to its shareholders. PPS did pay state taxes
in Illinois, Pennsylvania, California and Utah based on its taxable income.
Effective with the merger with Concentra, PPS' taxable income is included in
Concentra's consolidated income tax returns.
(9) Stockholders' Equity
(a) Preferred Stock
The Board of Directors is authorized to issue shares of Preferred Stock, in one
or more series, and to fix for each such series the number of shares thereof and
voting powers and such preferences and relative, participating, optional or
other special rights and such qualifications, limitations or restrictions as are
permitted by the Delaware General Corporation Law. The Board of Directors could
authorize the issuance of shares of Preferred Stock with terms and conditions
that could discourage a takeover or other transaction that holders of some or a
majority of shares of Common Stock might believe to be in their best interests
or in which such holders might receive a pre-
F-27
<PAGE>
mium for their shares of stock over the then market price of such shares. As of
the date hereof, no shares of Preferred Stock are outstanding and the Board of
Directors has no present intention to issue any shares of Preferred Stock. See
Note 14 "Subsequent Events" for related disclosure.
(b) Stockholder Rights Plan
Shortly after the 1997 Merger, on September 17, 1997, the Board of
Directors declared, pursuant to a rights agreement (the "Rights Agreement"), a
dividend distribution of one common share purchase right ("Right") for each
outstanding share of Common Stock. Each Right will entitle the registered holder
to purchase from Concentra one thousandth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share (the "Junior Preferred
Shares"), of Concentra at a price per share to be determined by the Board of
Directors with the advice of its financial advisor about the long-term prospects
for the Company's value (the "Purchase Price"), subject to adjustment. Each
thousandth of a Junior Preferred Share will be economically equivalent to one
share of Concentra Common Stock. The Purchase Price is expected to be
significantly higher than the trading price of the Common Stock. Therefore, the
dividend will have no initial value and no impact on the consolidated financial
statements of the Company. See Note 14, "Subsequent Events" for related
disclosure.
(c) Common Stock
At December 31, 1998, the Company has reserved approximately 16,839,000
unissued shares of its Common Stock for possible issuance under the Company's
stock option or stock purchase plans and for the issuance upon possible
conversion of the Company's 6% and 4.5% Convertible Subordinated Notes.
(10) Commitments and Contingencies
The Company leases certain corporate office space, operating and medical
facilities, and office and medical equipment under various non-cancellable
operating and capital lease agreements. Certain facility leases require the
Company to pay increases in operating costs and real estate taxes. In addition,
the Company leases certain office facilities from related parties under
operating lease agreements that expire on various dates through December 31,
2003. The Company made rental payments of $726,000 to Colonial Realty Trust, a
real estate company owned by a shareholder and board member of the Company for
each of the years ended December 31, 1996, 1997 and 1998.
The following is a schedule of rent expense by major category for the years
ended December 31:
1996 1997 1998
----------- ----------- ------------
Facilities .................. $13,009,000 $17,179,000 $22,307,000
Office equipment ............ 1,166,000 2,029,000 3,091,000
Automobiles ................. 2,729,000 2,976,000 3,647,000
----------- ----------- --=--------
Total rent expense .......... $16,904,000 $22,184,000 $29,045,000
=========== =========== ===========
The following is a schedule of future minimum lease payments under
non-cancellable operating and capital leases for the years ending December 31:
<TABLE>
<CAPTION>
Operating Leases
------------------------------------------------
Capital Related Unrelated
Leases Parties Parties Total
--------- -------- -------- -------------
<S> <C> <C> <C> <C>
Year Ending December 31,
1999................................ $34,000 $700,000 $22,464,324 $23,164,324
2000................................ 22,000 700,000 18,051,724 18,751,724
2001................................ -- 700,000 14,319,611 15,019,611
2002................................ -- 700,000 12,399,364 13,099,364
2003................................ -- 700,000 9,068,364 9,768,364
Thereafter.......................... -- -- 8,083,018 8,083,018
------- --------- ---------- ----------
$56,000 $3,500,000 $84,386,405 $87,886,405
======= ========= ========== ==========
</TABLE>
F-28
<PAGE>
A wholly-owned subsidiary of Health Services has committed to guarantee
$21,408,000 in senior discount notes, plus interest, issued by four development
corporations (Concentra Development Corporation, Concentra Development
Corporation II, Concentra/Sherrer Development Corporation and Concentra/RDA,
Inc.). The stated principal amount of the notes total $42,768,000, which will be
their accreted value at their stated maturity (two to five years after the date
of issuance of each note). These corporations have been organized and
capitalized by a third party to develop occupational healthcare centers in
selected markets in the United States. Health Services also has the right to
acquire the developed centers at fair market value in the future. Health
Services has entered into a management agreement with the development
corporations to manage the healthcare centers' daily operations.
The Company is party to certain claims and litigation initiated in the
ordinary course of business. The Company is not involved in any legal proceeding
that it believes will result, individually or in the aggregate, in a material
adverse effect upon its financial condition or results of operations. See Note
14, "Subsequent Events" for further claims and litigation disclosures.
(11) Employee Benefit Plans
(a) Concentra 401(k) Plan
The Company has a defined contribution plan (the "Concentra 401(k) Plan"),
formerly the Managed Care Services 401(k) Plan (the "MCS Concentra 401(k)
Plan"), pursuant to which employees who are at least 21 years of age and who
have completed at least six months of service are eligible to participate.
Participants in the Concentra 401(k) Plan may not contribute more than the
lesser of a specified statutory amount or 15% of his or her pretax total
compensation. The Concentra 401(k) Plan permits, but does not require,
additional matching contributions of up to 50% of participants' pretax
contributions up to a maximum of 6% of compensation by the Company. Employees
are 100% vested in their own contributions while Company contributions vest 20%
per year with employees being fully vested after five years. For 1998, the
Company is making a matching contribution of 50% of participant's pretax
contributions up to 4% of compensation.
(b) Health Services 401(k) Plan
Health Services' defined contribution plan (the "HS 401(k) Plan") merged
into the Concentra 401(k) Plan as of July 1, 1998. The HS 401(k) Plan had
similar terms to those of the Concentra 401(k) Plan. There were no matching
contributions under the plan in 1996, 1997 and 1998.
(c) PPS 401(k) Plan
PPS' defined contribution plan (the "PPS 401(k) Plan") merged into the
Concentra 401(k) Plan as of August 1, 1998. The PPS 401(k) Plan had similar
terms to those of the Concentra 401(k) Plan. For the years ended December 31,
1996 and 1997 and the seven-month period in 1998, PPS elected to match 25% of
employee contributions up to 7% of gross earnings.
The Company has expensed $910,000, $1,053,000 and $1,508,000 for the years
ended December 31, 1996, 1997 and 1998, respectively, for matching contributions
to the Concentra 401(k), the MCS 401(k) and the PPS 401(k) Plans.
(12) Stock Purchase Plan and Stock Option Plans
(a) Concentra 1997 Employee Stock Purchase Plan
The Concentra 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
for employees of the Company authorizes the issuance of up to 500,000 shares of
Common Stock pursuant to the exercise of nontransferable options granted to
participating employees. The 1997 Purchase Plan is administered by the
Compensation Committee of the Board of Directors.
F-29
<PAGE>
Under the terms of the 1997 Purchase Plan, an employee must authorize the
Company in writing to deduct an amount (not less than 1% nor more than 15% of a
participant's base compensation and in any event not more than $25,000) from his
or her pay during six month periods commencing on January 1 and July 1 of each
year (each a "Purchase Period"). The exercise price for shares purchased under
the 1997 Purchase Plan for each Purchase Period is the lesser of 85% of the fair
market value of the Common Stock on the first or last business day of the
Purchase Period. The fair market value will be the closing selling price of the
Common Stock as quoted.
(b) Managed Care Services and Health Services Employee Stock Purchase Plans
Managed Care Services and Health Services each had employee stock purchase
plans under similar terms and conditions as those under the 1997 Purchase Plan.
The Company issued the following shares of Common Stock under the employee
stock purchase plans for each of the following purchase periods:
Weighted
Average
Price
Purchase Periods Ended of Shares Per Share
--------- ---------
December 31, 1995 ................... 32,682 $10.49
June 30, 1996 ....................... 29,089 $10.59
December 31, 1996 ................... 44,606 $22.18
June 30, 1997 ....................... 50,056 $21.38
December 31, 1997 ................... 47,245 $24.86
June 30, 1998 ....................... 64,587 $22.10
December 31, 1998 ................... 160,512 $ 9.08
(c) Concentra 1997 Long-Term Incentive Plan
Concentra may grant awards with respect to shares under the Company's
Long-term Incentive Plan (the "Concentra Incentive Plan"). The awards under the
Concentra Incentive Plan include: (i) incentive stock options qualified as such
under U.S. federal income tax laws, (ii) stock options that do not qualify as
incentive stock options, (iii) stock appreciation rights ("SARs"), (iv)
restricted stock awards and (v) performance units.
The number of shares of Common Stock that may be subject to outstanding
awards under the Concentra Incentive Plan at any one time is equal to ten
percent of the total number of outstanding shares of Concentra Common Stock
(treating as outstanding all shares of Common Stock issuable within 60 days upon
exercise of stock options or conversion or exchange of outstanding,
publicly-traded convertible or exchangeable securities of Concentra) minus the
total number of shares of Common Stock subject to outstanding awards under the
Concentra Incentive Plan and any future stock-based plan for employees or
directors of Company. At December 31, 1998, the Company was authorized to award
grants of approximately 5,019,000 shares under the Concentra Incentive Plan. The
number of shares authorized under the Concentra Incentive Plan and the number of
shares subject to an award under the Concentra Incentive Plan will be adjusted
for stock splits, stock dividends, recapitalizations, mergers and other changes
affecting the capital stock of Concentra.
During 1997, the Company granted restricted stock for 357,000 shares of
Common Stock under the 1997 Incentive Plan which were valued at approximately
$9,903,000 based upon the market value of the shares at the time of issuance. As
of December 31, 1998, 93,000 shares of the restricted stock granted in 1997,
valued at $2,806,000, have been canceled due to forfeiture. During 1998, the
Company granted restricted stock for 48,000 shares of Common Stock under the
1997 Incentive Plan which were valued at $1,413,000 based upon the market value
of the shares at the time of issuance. The restricted stock grants vest 25% per
year beginning January 1, 2002. If the Company's financial performance exceeds
certain established performance goals, however, the vesting of these shares
could accelerate whereby 33-1/3% of the shares could become vested on January 1,
2000 and each year thereafter. For the years ended December 31, 1997 and 1998,
the Company recorded amortization of $562,000 and $805,000, respectively, in
connection with the deferred compensation associated with the restricted stock
grants.
F-30
<PAGE>
During 1997 and 1998, the Company also granted 2,754 and 3,570 shares of
restricted stock to outside directors that vest over one year.
After the 1997 Merger, no additional awards were made under the former CRA
and OccuSystems stock option plans and only that number of shares of Common
Stock issuable upon exercise of awards granted under the former CRA and
OccuSystems stock option plans as of the 1997 Merger were reserved for issuance
by the Company.
In connection with the 1996 Transaction, PPS canceled all outstanding stock
options and terminated all existing stock option plans. In return for the
cancellation of outstanding options, PPS made a cash payment to the holders of
these options, which resulted in a compensation charge of approximately
$484,000. Upon the cancellation of the options, PPS adopted the 1996 PPS
Replacement Stock Option Plan and the 1996 PPS Incentive Stock Option Plan for
its key employees. The plan provided for the issuance of up to 325,000 shares of
PPS common stock. The exercise price for the incentive stock options could not
be less than the fair market value of the underlying PPS common stock on the
date of grant. After the merger, no additional awards were made under the former
PPS stock option plans and outstanding PPS options were assumed by the Concentra
Incentive Plan totaling approximately 580,000 shares of Concentra common stock.
A summary of the status for all outstanding options at December 31, 1996,
1997 and 1998 and changes during the years then ended is presented in the table
below:
Weighted
Number Average Price
of Shares Per Share
--------- ------------
Balance December 31, 1995 2,697,593 $ 8.18
Granted................................ 1,959,777 18.07
Exercised.............................. (633,143) 4.41
Canceled............................... (158,485) 13.79
--------- ------
Balance December 31, 1996................. 3,865,742 13.59
Granted................................ 2,925,655 22.51
Exercised.............................. (801,593) 9.02
Canceled............................... (268,017) 20.71
--------- ------
Balance December 31, 1997................. 5,721,787 18.46
Granted................................ 2,945,570 21.43
Exercised.............................. (696,473) 6.77
Canceled............................... (1,277,335) 24.53
--------- ------
Balance December 31, 1998................. 6,693,549 $20.21
========= ======
The weighted average fair market value of options granted in 1997 and 1998
were $25.89 and $21.95, respectively. A further breakdown of the outstanding
options at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average Exercisable Weighted
Range of Number of Average Contractual Number of Average
Exercise Prices Options Price Life (Years) Options Price
-------------- ---------- -------- ---------- --------- ------
<S> <C> <C> <C> <C> <C>
$ 0.00--$12.39............................. 2,357,919 $ 6.00 8.06 840,105 $ 5.61
$12.74--$23.13............................. 1,065,591 20.43 7.60 408,339 19.50
$23.17--$27.88............................. 521,789 26.24 8.15 198,800 26.30
$29.44--$32.63............................. 2,479,250 30.88 9.15 153,250 32.63
$32.75--$33.88............................. 269,000 33.75 8.87 81,000 33.46
--------- ------ ---- --------- ------
6,693,549 $20.21 8.43 1,681,494 $15.23
========= ====== ==== ========= ======
</TABLE>
F-31
<PAGE>
(d) SFAS 123 Disclosures
The Company accounts for these plans under APB No. 25, under which no
compensation cost has been recognized related to stock option grants. Had
compensation cost for these plans been determined consistent with Statement of
Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation"
("SFAS 123"), the Company's net income and pro forma net income would have been
reduced to the following supplemental pro forma amounts:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net Income:
As reported ....................... $28,039,000 $10,000,000 $22,486,000
Supplemental pro forma............. $22,555,000 $3,612,000 $8,864,000
Pro forma as reported (1) ......... $25,309,000 $7,189,000
Supplemental pro forma (1).............. $19,825,000 $801,000
</TABLE>
(1) Pro forma net income for the years ended December 31, 1996 and 1997 have
been calculated as if PPS had been subject to federal and state income
taxes for the entire period, based upon an effective tax rate indicative of
the statutory rates in effect. Prior to its merger with the Company, PPS
elected to be taxed as an S corporation, and accordingly, was not subject
to federal and state income taxes in certain jurisdictions.
Because the method of accounting under SFAS 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Additionally, the 1996, 1997 and 1998 pro forma amounts include $229,000,
$396,000 and $509,000, respectively, related to purchase discounts offered on
employee stock purchase plans. The fair value of each option granted is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in 1996, 1997 and 1998, respectively:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rates................ 5.25% 5.50% 5.18%
Expected volatility..................... 45.29% 45.29% 78.91%
Expected dividend yield................. -- -- --
Expected weighted average life
of options in years .................. 3.4 3.7 3.0
</TABLE>
(13) Segment Information
Operating segments represent components of the Company's business that are
evaluated regularly by key management in assessing performance and resource
allocation. The Company has determined that its reportable segments consist of
its Health Services, Specialized Cost Containment and Field Case Management
Groups.
Health Services manages occupational healthcare centers at which it
provides support personnel, marketing, information systems and management
services to its affiliated physicians. Health Services owns all the operating
assets of the occupational healthcare centers, including leasehold interests and
medical equipment.
Specialized Cost Containment services include first report of injury,
utilization management (precertification and concurrent review) retrospective
medical bill review, telephonic case management, preferred provider organization
("PPO") network access, independent medical examinations ("IMEs"), peer reviews
and hospital bill auditing. These services are designed to reduce the cost of
workers' compensation claims, automobile accident injury claims and group health
claims.
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.
F-32
<PAGE>
The Health Services Group is managed separately and has different economic
characteristics from the Specialized Cost Containment and Field Case Management
groups, and is therefore shown as a separate reportable segment.The Field Case
Management Group and certain operating segments included in the Specialized Cost
Containment Group have similar economic characteristics and may share the same
management and/or locations. However, the Field Case Management Group is
reported as a separate segment for management reporting purposes and it
represents 58.7%, 49.3% and 47.7% of total Managed Care Services revenue for the
years ended December 31, 1996, 1997 and 1998, respectively.
Revenues from individual customers, revenues between business segments and
revenues, operating profit and identifiable assets of foreign operations are not
significant.
The Company's Statements of Operations on a segment basis for the years
ended December 31, 1996, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Health Services ...................... $170,035,000 $207,676,000 $259,481,000
Managed Care Services:
Specialized cost containment ....... 83,784,000 142,919,000 183,734,000
Field case management .............. 118,864,000 138,723,000 167,841,000
------------ ------------ ------------
Total Managed Care Services ........ 202,648,000 281,642,000 351,575,000
------------ ------------ ------------
372,683,000 489,318,000 611,056,000
Gross profit margins:
Health Services ...................... 39,281,000 52,300,000 58,300,000
Managed Care Services:
Specialized cost containment ....... 23,630,000 42,907,000 60,440,000
Field case management .............. 19,844,000 21,472,000 23,019,000
------------ ------------ ------------
Total Managed Care Services ........ 43,474,000 64,379,000 83,459,000
------------ ------------ ------------
82,755,000 116,679,000 141,759,000
Operating income (1):
Health Services ...................... 19,742,000 12,273,000 34,415,000
Managed Care Services ................ 25,452,000 20,042,000 20,785,000
------------ ------------ ------------
45,194,000 32,315,000 55,200,000
Interest expense ........................ 3,741,000 12,667,000 18,021,000
Interest income ......................... (859,000) (2,297,000) (4,659,000)
Other expense, net ...................... 836,000 883,000 44,000
------------ ------------ ------------
Income before income taxes ........... 41,476,000 21,062,000 41,794,000
Provision for income taxes .............. 13,437,000 11,062,000 19,308,000
------------ ------------ ------------
Net income ........................... $ 28,039,000 $ 22,486,000 $ 10,000,000
============ ============ ============
</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 budgeted. In addition,
general and administrative expenses for the Managed Care Groups was not
separately reported prior to 1999. Therefore, the Company did not make
allocations of corporate level and managed care level general and
administrative expenses. Beginning in 1999, the corporate function will be
separately disclosed.
The Company's segment depreciation and amortization, capital expenditures
and identifiable assets for the years ended December 31, 1996, 1997 and 1998 are
as follows:
F-33
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Depreciation and amortization:
Health Services.................. $ 6,827,000 $ 9,162,000 $ 11,372,000
Managed Care Services(2)......... 3,321,000 7,376,000 11,552,000
----------- ----------- -----------
$ 10,148,000 $ 16,538,000 $ 22,924,000
=========== =========== ===========
Capital expenditures:
Health Services.................. $ 19,296,000 $ 16,862,000 $ 19,235,000
Managed Care Services(2)......... 4,728,000 8,673,000 14,952,000
----------- ----------- -----------
$ 24,024,000 $ 25,535,000 $ 34,187,000
=========== =========== ===========
Identifiable assets:
Health Services.................. $260,619,000 $261,521,000 $309,419,000
Managed Care Services(2)......... 107,281,000 221,012,000 347,375,000
----------- ----------- -----------
$367,900,000 $482,533,000 $656,794,000
=========== =========== ===========
</TABLE>
(2) Depreciation and amortization, capital expenditures and identifiable assets
is not separately reported for the Managed Care groups.
(14) Subsequent Events
On March 2, 1999, Concentra entered into a definitive agreement to merge
(the "Merger") with Yankee Acquisition Corp. ("Yankee"), a corporation formed by
Welsh, Carson, Anderson & Stowe ("WCAS"), a 14.9% stockholder of the Company.
Concentra's Board of Directors unanimously approved the transaction based upon
the recommendation of its special committee of the Board of Directors, which was
formed on October 29, 1998 to evaluate strategic alternatives in response to
several unsolicited expressions of interest regarding the possible acquisition
of some or all of the Company's Common Stock. On March 24, 1999, Concentra
entered into an Amended and Restated Agreement and Plan of Merger with Yankee
(the "Amended Merger Agreement"). Pursuant to the Amended Merger Agreement, WCAS
will acquire approximately 87%, funds managed by Ferrer Freeman Thompson & Co.
("FFT") will acquire approximately 7% and other investors will acquire
approximately 6% of the post-merger shares of common stock of the Company for
$16.50 per share. As a result of the Merger, each outstanding share of Concentra
Common Stock will be converted into the right to receive $16.50 in cash.
In connection with the Merger, effective March 2, 1999, Concentra amended
its Rights Agreement. The amendment provides, among other things, that Yankee
and its affiliates will not be deemed an Acquiring Person (as such term is
defined in the Rights Agreement) and that the Rights Agreement will expire
immediately prior to the effective time of the Merger.
The transaction is valued at approximately $1,100,000,000, including the
refinancing of $327,750,000 of the 6% and 4.5% Convertible Subordinated Notes
which contain change in control provisions in the related indentures. The
transaction is structured to be accounted for as a recapitalization and is
expected to be completed in the third quarter of 1999. The transaction is
conditioned upon, among other things, approval of the shareholders of Concentra,
receipt of financing and certain regulatory approvals.
To finance the acquisition of the Company, WCAS will invest approximately
$369,432,000 in equity financing, including the value of shares and convertible
notes already owned by WCAS, and up to $110,000,000 in subordinated
indebtedness. Additionally, FFT will invest approximately $30,600,000 and other
investors will invest approximately $23,000,000 in equity. WCAS has also
received commitments from various lenders to provide Yankee with $190,000,000 in
senior subordinated notes, a $375,000,000 term loan and a $100,000,000 revolving
credit facility to replace the Company's existing Senior Credit Facility.
Additionally, Concentra would also utilize excess cash on hand at the time of
the merger to help finance the purchase of the Concentra Common Stock.
Simultaneous with the right to receive cash for shares, Yankee would merge with
Concentra with Concentra surviving.
As of March 26, 1999, Concentra is aware of three lawsuits that have been filed
by alleged stockholders of Concentra relating to the Merger. All three lawsuits
were filed in the Chancery Court for New Castle County, Delaware. Each of the
lawsuits names Concentra, its directors and Yankee as defendants. The plaintiff
in each lawsuit seeks to represent a putative class of all public holders of
Concentra common stock. The lawsuits allege, among other things, that the
directors of Concentra breached their fiduciary duties to Concentra's
stockholders by approving
F-34
<PAGE>
the Merger. The lawsuits seek, among other things, preliminary and permanent
injunctive relief prohibiting consummation of the Merger, unspecified damages,
attorneys' fees and other relief. Concentra expects that these lawsuits will be
consolidated into a single action. The Company intends to contest these lawsuits
vigorously.
(15) Selected Financial Data
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ............................ $223,499,000 $305,355,000 $372,683,000 $489,318,000 $611,056,000
Gross profit ....................... 37,093,000 62,435,000 82,755,000 116,679,000 141,759,000
Non-recurring charges .............. -- 898,000 964,000 38,625,000 33,114,000
Operating income ................... 15,928,000 29,446,000 45,194,000 32,315,000 55,200,000
Income before taxes ................ 10,088,000 24,246,000 41,476,000 21,062,000 41,794,000
Provision for income taxes (1) ..... 6,802,000 7,771,000 13,437,000 11,062,000 19,308,000
Net income before extraordinary
items (1) ........................ 3,286,000 16,475,000 28,039,000 10,000,000 22,486,000
Pro forma net income before
extraordinary items (2) .......... 13,845,000 25,309,000 7,189,000
Balance Sheet:
Working capital .................... $ 19,117,000 $ 21,971,000 $116,439,000 $ 36,754,000 $201,870,000
Total assets ....................... 113,672,000 188,530,000 367,900,000 482,533,000 656,794,000
Total debt ......................... 83,785,000 34,639,000 142,229,000 206,600,000 327,925,000
Total stockholders' equity (deficit) (5,820,000) 109,383,000 178,146,000 206,441,000 239,875,000
</TABLE>
- ------------------
(1) Prior to its recapitalization in March of 1994, CRA had elected to be taxed
as an S corporation. In connection with its recapitalization, CRA was
required to change from an S to a C corporation. This change resulted in
CRA recording an incremental tax provision of $3,772,000 in the first
quarter of 1994. The Company's pro forma net income for 1994 would have
been $3,466,000 higher had CRA had been subject to federal and state income
taxes during the entire period based upon an effective tax rate indicative
of the statutory rate in effect during the period.
(2) Pro forma net income for the years ended December 31, 1994, 1995, 1996 and
1997 have been calculated as if PPS had been subject to federal and state
income taxes for the entire period, based upon an effective tax rate
indicative of the statutory rates in effect. Prior to its merger with the
Company, PPS elected to be taxed as an S corporation, and accordingly, was
not subject to federal and state income taxes in certain jurisdictions.
(16) Selected Quarterly Operating Results (Unaudited)
The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters ended December 31, 1998. In
management's opinion, this unaudited information has been prepared on the same
basis as the annual financial statements and includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the quarters presented, when read in
conjunction with the financial statements and notes thereto included elsewhere
in this document. The operating results for any quarter are not necessarily
indicative of results for any subsequent quarter.
F-35
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
-------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenue ....................... $144,282,000 $157,501,000 $157,362,000 $151,911,000
Cost of services .............. 109,898,000 116,633,000 118,660,000 124,106,000
------------ ------------ ------------ ------------
Gross profit .................. 34,384,000 40,868,000 38,702,000 27,805,000
General and administrative
expenses .................... 10,645,000 11,228,000 11,851,000 11,602,000
Amortization .................. 2,015,000 2,036,000 2,051,000 2,017,000
Non-recurring charge .......... 12,600,000 -- -- 20,514,000
------------ ------------ ------------ ------------
Operating income .............. 9,124,000 27,604,000 24,800,000 (6,328,000)
Other expense, net ............ 3,710,000 3,207,000 3,355,000 3,134,000
Provision (benefit for
income taxes ................ 4,567,000 10,236,000 9,000,000 (4,495,000)
------------ ------------ ------------ ------------
Net income (loss) ............. $ 847,000 $ 14,161,000 $ 12,445,000 (4,967,000)
============ ============ ============ ============
Quarter Ended
-----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
-------------- ------------- ------------- ---------------
Revenue ....................... $106,307,000 $119,633,000 $129,890,000 $133,488,000
Cost of services .............. 82,640,000 90,736,000 96,024,000 103,239,000
------------ ------------ ------------ ------------
Gross profit .................. 23,667,000 28,897,000 33,866,000 30,249,000
General and administrative
expenses .................... 9,025,000 9,948,000 10,251,000 10,607,000
Amortization .................. 1,235,000 1,160,000 1,560,000 1,953,000
Non-recurring charge .......... -- -- 38,625,000 --
------------ ------------ ------------ ------------
Operating income (loss) ....... 13,407,000 17,789,000 (16,570,000) 17,689,000
Other expense, net ............ 1,598,000 2,272,000 3,200,000 4,183,000
Provision for income taxes .... 4,106,000 5,395,000 (3,342,000) 4,903,000
------------ ------------ ------------ ------------
Net income (loss) ............. $ 7,703,000 $ 10,122,000 $(16,428,000) $8,603,000
============ ============ ============ ============
Pro forma net income (loss) (1) $ 7,080,000 $ 9,440,000 $(17,548,000) $ 8,217,000
============ ============ ============ ============
</TABLE>
- ----------------
(1) Pro forma net income (loss) for the four quarters ended December 31, 1997
have been calculated as if PPS had been subject to federal and state income
taxes for the entire period, based upon an effective tax rate indicative of
the statutory rates in effect. Prior to its merger with the Company, PPS
elected to be taxed as an S corporation, and accordingly, was not subject
to federal and state income taxes in certain jurisdictions.
F-36
<PAGE>
Supplemental Schedule II
CONCENTRA MANAGED CARE, INC.
Valuation and Qualifying Accounts
For the Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Beginning Charged Net Deductions Ending
Balance To Income Acquisitions From Reserves Balance
------------ ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
1996 $ 6,917,000 $ 5,298,000 $4,289,000 $ 6,526,000 $ 9,978,000
1997 9,978,000 8,890,000 7,797,000 9,942,000 16,723,000
1998 16,723,000 12,869,000 1,968,000 14,350,000 17,210,000
Contractual Allowance
1996 $ 660,000 $ 3,680,000 $ 800,000 $ 3,427,000 $ 1,653,000
1997 1,653,000 14,718,000 -- 12,743,000 3,628,000
1998 3,628,000 16,095,000 -- 15,073,000 4,650,000
- -------------
Non-recurring Charges(1)
Beginning Charged Ending
Balance To Income Usage Balance
------------ ----------- ------------ -------------
1996 $ -- $ 964,000 $ (964,000) $ --
1997 -- 38,625,000 (31,098,000) 7,527,000
1998 7,527,000 33,114,000 (29,701,000) 10,940,000
- -------------
(1) Non-recurring charge breakout by major category:
Professional Facility Personnel
Fees Consolidation Related Other Total
------------ ------------- ----------- ---------- -------------
Balance 12/31/96 ................ $ -- $ -- $ -- $ -- $ --
Provision-Q3 97 Charge ........ 11,569,000 5,945,000 16,216,000 4,895,000 38,625,000
Usage-Q3 97 Charge ............ (9,155,000) (5,476,000) (11,803,000) (4,664,000) (31,098,000)
----------- ----------- ----------- ---------- ------------
Balance 12/31/97 ................ $ 2,414,000 $ 469,000 $ 4,413,000 $ 231,000 $ 7,527,000
1988 Provision:
Q3 97 Charge .................. $ -- $ -- $ -- $ -- $ --
Q1 98 Charge .................. 5,200,000 2,100,000 2,400,000 2,900,000 12,600,000
Q4 98 Charge .................. -- 5,836,000 3,817,000 10,861,000 20,514,000
----------- ----------- ----------- ---------- ------------
Total 1998 Provision ............ $ 5,200,000 $ 7,936,000 $ 6,217,000 $ 13,761,000 $ 33,114,000
1988 Usage:
Q3 97 Charge .................. $(2,414,000) $ (469,000) $(4,413,000) $ (231,000) $ (7,527,000)
Q1 98 Charge .................. (5,136,000) (746,000) (2,355,000) (2,891,000) (11,128,000)
Q4 98 Charge .................. -- (1,140,000) (2,490,000) (7,416,000) (11,016,000)
----------- ----------- ----------- ---------- ------------
Total 1998 Usage ................ $(7,550,000) $(2,355,000) $(9,258,000) $(10,538,000) $(29,701,000)
----------- ----------- ----------- ---------- ------------
Balance 12/31/98 ................ $ 64,000 $ 6,050,000 $ 1,372,000 $ 3,454,000 $ 10,940,000
=========== =========== =========== ============ ============
</TABLE>
F-37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Stockholders and Board of
Directors of Concentra Managed Care, Inc.
We have audited in accordance with generally accepted auditing standards, the
financial statements of Concentra Managed Care, Inc. and have issued our report
thereon dated June 9, 1999. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the index of the financial statement schedules is presented for the purpose
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
- -----------------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 9, 1999
F-38
<PAGE>
COMPUTATION OF PRO FORMA RATIOS
Ratio of Pro Forma Earnings to Fixed Charges
(Unaudited)
Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
----------------- ------------------
Pro Forma Earnings:
Income (loss) before income taxes ......... $(4,989) $(43,150)
Less: Equity in earnings of
unconsolidated subsidiaries, net of
related distributions ................... (218) (61)
Fixed charges ............................. 67,406 51,341
------- --------
Total Pro Forma Earnings (1) ............. $62,199 $ 8,130
======= ========
Fixed Charges:
Interest expense .......................... $60,145 45,393
Interest portion of rent expense .......... 7,261 5,948
------- --------
Total Fixed Charges ...................... $67,406 51,341
======= ========
- ----------------
(1) The ratio of earnings to fixed charges is computed by dividing the sum of
net earnings, before deducting provisions for income taxes and fixed
charges less equity in earnings of unconsolidated subsidiaries, net of
related distributions, by fixed charges. Fixed charges consist of interest
on debt, including amortization of debt issuance costs, and one-fourth of
rent expenses, estimated by management to be the interest component of such
rentals. The ratio of earnings to fixed charges is not adequate to cover
fixed charges for the pro forma year ended December 31, 1998 and the pro
forma nine month period ended September 30, 1999, by $5,207,000, and
$43,211,000, respectively.
F-39
<PAGE>
COMPUTATION OF RATIOS
Ratio of Earnings to Fixed Charges ~(Unaudited)
<TABLE>
<CAPTION>
Nine Nine
Months Months
Ended Ended
Year ended December 31, September 30, September 30,
-----------------------------------------------------------------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes.. $ 10,088 $ 24,246 $ 41,476 $ 21,062 $ 41,794 $ 51,256 $ (14,647)
-------- -------- -------- -------- -------- -------- ---------
Less: Equity in earnings of
unconsolidated~subsidiaries
net of related distributions .... -- -- -- (237) (218) (7) (61)
Fixed charges...................... 8,730 9,223 7,967 18,213 25,282 18,516 25,562
-------- -------- -------- -------- -------- -------- ---------
Total Earnings (1).............. $ 18,818 $ 33,469 $ 49,443 $ 39,038 $ 66,858 $ 69,765 $ 10,854
========= ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense................... $ 5,956 $ 5,499 $ 3,741 $ 12,667 $ 18,021 $ 13,123 $ 19,614
Interest portion of rent expense... 2,774 3,724 4,226 5,546 7,261 5,393 5,948
-------- -------- -------- -------- -------- -------- ---------
Total Fixed Charges.............$ 8,730 $ 9,223 $ 7,967 $ 18,213 $ 25,282 $ 18,516 $ 25,562
========= ======== ======== ======== ======== ======== ========
</TABLE>
- -------------------
(1) The ratio of earnings to fixed charges is computed by dividing the sum of
net earnings, before deducting provisions for income taxes and fixed
charges less equity in earnings of unconsolidated subsidiaries, net of
related distributions, by fixed charges. Fixed charges consist of interest
on debt, including amortization of debt issuance costs, and one-fourth of
rent expenses, estimated by management to be the interest component of such
rentals. The ratio of earnings to fixed charges is not adequate to cover
fixed charges for the nine months ended September 30, 1999 by $43,211,000.,
2000
F-40
<PAGE>
================================================================================
February 14, 2000
Concentra Operating Corporation
$190,000,000
13% Series B Senior Subordinated Notes due 2009
---------------------------------
P R O S P E C T U S
---------------------------------
Until June 5, 2000, all dealers that effect transactions in these
securities, whether or not participating in this exchange offer, may be required
to deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. The information in this prospectus is current
as of February 14, 2000.
- --------------------------------------------------------------------------------
