<PAGE>
As Filed with the Securities and Exchange Commission on November 7, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
CRA MANAGED CARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------
<TABLE>
<S> <C>
MASSACHUSETTS 8099 04-2658593
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S.
OF CLASSIFICATION CODE NUMBER) EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION
NO.)
</TABLE>
--------------
312 UNION WHARF
BOSTON, MASSACHUSETTS 02109
(617) 367-2163
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------
DONALD J. LARSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CRA MANAGED CARE, INC.
312 UNION WHARF
BOSTON, MASSACHUSETTS 02109
(617) 367-2163
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------
COPIES TO:
JAMES WESTRA, ESQUIRE LESLIE E. DAVIS, ESQUIRE
HUTCHINS, WHEELER & DITTMAR TESTA, HURWITZ & THIBEAULT, LLP
A PROFESSIONAL CORPORATION 125 HIGH STREET
101 FEDERAL STREET BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02110 (617) 248-7000
(617) 951-6600
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in correlation with dividend or
interest reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per 2,300,000
share.............................. shares $50.25 $115,575,000 $35,023
</TABLE>
(1) Includes an aggregate of 300,000 shares which the Underwriters have the
option to purchase from the Company solely to cover over-allotments, if any.
See "Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee based
on the average of the high and low sales prices of the Common Stock as
reported on the Nasdaq National Market on November 1, 1996, in accordance
with Rule 457 under the Securities Act of 1933, as amended.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
NOVEMBER 7, 1996
2,000,000 SHARES
[LOGO]
COMMON STOCK
---------
Of the 2,000,000 shares of Common Stock offered hereby, 500,000 are being
sold by CRA Managed Care, Inc. ("CRA" or the "Company") and 1,500,000 are being
sold by certain stockholders of the Company (the "Selling Stockholders"). The
Company will not receive any of the proceeds from the sale of shares of Common
Stock by the Selling Stockholders. The Company's Common Stock is quoted on the
Nasdaq National Market (the "Nasdaq National Market") under the symbol "CRAA."
On November 6, 1996, the last reported sale price of the Company's Common Stock
was $55.13 per share.
--------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" APPEARING ON PAGES 6 THROUGH 9.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total(2)................ $ $ $ $
</TABLE>
(1) Before deducting expenses of the offering estimated at $600,000 payable by
the Company.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ , and $ , respectively. See "Use of Proceeds" and
"Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland on or about ,
1996.
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
MONTGOMERY SECURITIES
J.P. MORGAN & CO.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
[MAP OF COMPANY OFFICE LOCATIONS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND OTHER SELLING
GROUP MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THE COMPANY
CRA provides field case management and specialized cost containment services
designed to reduce workers' compensation costs. Field case management services
involve working on a one-on-one basis with injured employees and their various
health care professionals, employers and insurance company adjusters to assist
in maximizing medical improvement and, where appropriate, to expedite return to
work. The Company operates one of the largest field case management
organizations in the United States, consisting of 115 field case management
offices with approximately 1,070 field case managers who provide medical
management and return to work services in 49 states and the District of
Columbia. CRA also provides a broad range of higher margin specialized cost
containment services, including utilization management, workers' compensation
network management, telephonic case management and retrospective medical bill
review services. Revenues from specialized cost containment services comprised
approximately 32.2% of revenues for the first nine months of 1996, up from
approximately 27.1% for the corresponding period of the prior year. The Company
markets its services primarily to workers' compensation insurers, third party
administrators, self-insured employers and payors of automobile accident medical
claims through a direct sales and marketing organization consisting of over 125
dedicated personnel. CRA currently has over 1,250 customers nationwide.
Workers' compensation is a state-mandated, comprehensive insurance program
that requires employers to fund medical expenses, lost wages and other costs
resulting from work-related injuries and illnesses. According to statistics
published in the 1994 WORKERS' COMPENSATION YEAR BOOK, total workers'
compensation costs to employers were approximately $60 billion in 1992
(excluding costs associated with productivity losses) and approximately $22.8
billion in 1982. In response to rising workers' compensation costs, insurance
carriers and employers have become increasingly focused on applying managed care
techniques to reduce lost work time, medical costs and other costs associated
with workers' compensation. The Company estimates that the workers' compensation
managed care services industry generated total 1993 revenues of approximately
$2.6 billion. While the industry is fragmented with a large number of
competitors, CRA believes that it is one of only a small number of companies
that offer a comprehensive line of workers' compensation managed care services
on a nationwide basis.
The Company's objective is to expand and capitalize on its presence as a
national provider of comprehensive managed care services to workers'
compensation payors. CRA's strategy is to: (i) maintain its primary focus on the
workers' compensation marketplace where the Company believes that its
specialized skills provide it with a significant competitive advantage; (ii)
leverage its national organization and local market presence to expand its
relationships with national payors who are increasingly seeking national
solutions to their workers' compensation problems; (iii) capitalize on its
traditional customer base by cross-selling specialized cost containment services
to its existing field case management customers; (iv) increase its marketing of
early intervention services to identify cases that have the potential to result
in significant expenses and to take appropriate measures to control these
expenses before they are incurred; (v) take advantage of recent enabling
legislation to apply managed care techniques to the automobile insurance market;
and (vi) expand its product offerings and enhance its opportunities for growth
through strategic acquisitions.
3
<PAGE>
RECENT DEVELOPMENTS
As part of its strategy to expand its product offerings and enhance its
opportunities for growth through strategic acquisitions, the Company has
recently completed three acquisitions. On April 2, 1996 CRA acquired all
outstanding capital stock of FOCUS Healthcare Management, Inc. ("Focus"), which
maintains one of the nation's largest workers' compensation networks of
preferred provider organizations ("PPO"). The acquisition of Focus enables the
Company to offer its customers access to a specialized PPO controlled by the
Company. On May 29, 1996 CRA acquired all the outstanding capital stock of QMC3,
Inc. ("QMC3"), a leading managed care company servicing the automobile insurance
market. This acquisition positions CRA to capitalize on the introduction of
managed care techniques to the automobile insurance market. On October 29, 1996,
CRA acquired all of the outstanding capital stock of Prompt Associates, Inc.
("Prompt"), a leading provider of hospital bill audit services. This acquisition
complements CRA's existing line of bill review services and allows the Company
to offer line-item hospital and outpatient facility bill review services to
health care payors. See "Recent Developments."
The Company's executive office is located at 312 Union Wharf, Boston,
Massachusetts 02109, and its telephone number is (617) 367-2163.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk including,
among others, risks associated with the Company's operations, the market in
which it competes, the implementation of its growth strategy and material
benefits to insiders as a result of this offering. See "Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. 500,000 shares
Common Stock offered by the Selling Stockholders.... 1,500,000 shares
Common Stock to be outstanding after the offering... 9,407,532 shares(1)
Use of proceeds..................................... Repayment of short-term debt and
general corporate purposes, including
acquisitions.
Nasdaq National Market symbol....................... CRAA
</TABLE>
- ---------
(1) Based on the number of shares outstanding as of September 30, 1996. Excludes
options to purchase 629,889 shares at September 30, 1996, with a weighted
average exercise price of $23.87 per share. See Note 10 to the Consolidated
Financial Statements of the Company.
4
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1991 1992 1993 1994 1995 PRO FORMA
------- ------- -------- -------- -------- 1995(1)
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................................... $58,969 $80,851 $100,546 $121,295 $146,055 $165,122
Gross profit................................................. 6,548 11,997 14,464 17,499 23,440 28,187
Operating income(2).......................................... 1,965 4,990 4,533 8,746 12,419 13,182
Interest expense............................................. 78 66 16 4,087 2,484 498
Provision for income taxes(3)................................ 118 307 355 5,302 3,974 5,485
Net income (loss) before extraordinary items(2)(3)........... $ 1,798 $ 4,677 $ 4,178 $ (713) $ 5,961 $ 7,261
Weighted average shares outstanding.......................... 4,815 6,540 8,579
Pro forma and actual earnings per share(4)................... $ 0.57 $ 0.91 $ 0.85
STATISTICAL DATA:
Total number of service locations 93 122 150 160 163
FIELD CASE MANAGEMENT SERVICES:
Revenues..................................................... $67,366 $ 80,948 $ 92,232 $106,462 $106,462
Percentage of total revenue.................................. 83.3% 80.5% 76.0% 72.9% 64.5%
Number of service locations.................................. 78 87 102 110 110
SPECIALIZED COST CONTAINMENT SERVICES:
Revenues..................................................... $13,485 $ 19,598 $ 29,063 $ 39,593 $ 58,660
Percentage of total revenue.................................. 16.7% 19.5% 24.0% 27.1% 35.5%
Number of service locations(5)............................... 15 35 48 50 53
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
PRO FORMA
1995 1996 1996(1)
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................................... $107,881 $131,032 $142,782
Gross profit................................................. 17,281 23,051 26,859
Operating income(2).......................................... 9,101 12,560 13,825
Interest expense............................................. 2,260 658 113
Provision for income taxes(3)................................ 2,736 5,124 6,034
Net income (loss) before extraordinary items(2)(3)........... $ 4,105 $ 7,224 $ 7,781
Weighted average shares outstanding.......................... 6,223 8,261 8,928
Pro forma and actual earnings per share(4)................... $ 0.66 $ 0.87 $ 0.87
STATISTICAL DATA:
Total number of service locations 152 175 177
FIELD CASE MANAGEMENT SERVICES:
Revenues..................................................... $78,604 $88,900 $88,900
Percentage of total revenue.................................. 72.9% 67.8% 62.3%
Number of service locations.................................. 102 115 115
SPECIALIZED COST CONTAINMENT SERVICES:
Revenues..................................................... $29,277 $42,132 $53,882
Percentage of total revenue.................................. 27.1% 32.2% 37.7%
Number of service locations(5)............................... 50 60 62
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED(6)
--------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................................. $ 48,609 $ 18,635 $ 39,335
Total assets................................................................. 94,694 105,946 126,646
Total debt................................................................... 77 5,077 77
Stockholders' equity......................................................... 73,210 73,210 98,910
</TABLE>
- ---------
(1) Pro forma to give effect to the acquisitions of Focus and Prompt, and the
public offerings of the Company's Common Stock in May 1995 and June 1996 and
the application of the proceeds therefrom, as if such transactions had
occurred on January 1, 1995 for the statement of operations data. The
balance sheet data is pro forma as if the acquisition of Prompt had occurred
on September 30, 1996. See "Financial Statements--Consolidated Pro Forma
Financial Statements of CRA Managed Care, Inc., Focus Healthcare Management,
Inc. and Prompt Associates, Inc."
(2) In 1994 the Company completed a recapitalization (the "Recapitalization").
Expenses for the period prior to the Recapitalization include certain
compensation and other expenses, the levels of which are not comparable to
the levels of such expenses for 1994. Expenses for 1994 include increased
investments in management information systems, personnel and certain other
items. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 1 to the Consolidated Financial Statements
of the Company.
(3) In connection with the Recapitalization, the Company was required to change
from an S to a C corporation. This change resulted in the Company recording
an incremental tax provision of $3,772,000 in the first quarter of 1994.
(4) The pro forma earnings per share for the year ended December 31, 1994 and
the Company's pro forma net income for the year ended December 31, 1994 of
$2,753,000 have been computed as if the Company 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.
(5) Most of the Company's specialized cost containment service locations are
located with the Company's field case management offices.
(6) Adjusted to give effect to the application of the net proceeds of this
offering, as described under "Use of Proceeds."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
POTENTIAL ADVERSE IMPACT OF GOVERNMENT REGULATION. Many states, including a
number of those in which the Company transacts business, have licensing and
other regulatory requirements applicable to the Company's business.
Approximately half of the states have enacted laws that require licensing of
businesses which provide medical review services, such as the Company. Some of
these laws apply to medical review of care covered by workers' compensation.
These laws typically establish minimum standards for qualifications of
personnel, confidentiality, internal quality control, and dispute resolution
procedures. These regulatory programs may result in increased costs of operation
for the Company, which may have an adverse impact upon the Company's ability to
compete with other available alternatives for health care cost control. In
addition, new laws regulating the operation of managed care provider networks
have been adopted by a number of states. These laws may apply to managed care
provider networks having contracts with the Company or to provider networks
which the Company has organized and may organize in the future. To the extent
the Company is governed by these regulations, it may be subject to additional
licensing requirements, financial oversight and procedural standards for
beneficiaries and providers. Regulation in the health care and workers'
compensation fields is constantly evolving. The Company is unable to predict
what additional government regulations, if any, affecting its business may be
promulgated in the future. The Company's business may be adversely affected by
failure to comply with existing laws and regulations, failure to obtain
necessary licenses and government approvals or failure to adapt to new or
modified regulatory requirements. In addition, the automobile insurance
industry, like the workers' compensation industry, is regulated on a
state-by-state basis. While regulatory approval is not required for the Company
to offer most of its services to the automobile insurance market, state
regulatory approval is required in order to offer automobile insurers products
that permit them to direct claimants into a network of medical providers. See
"Business-- Government Regulation."
RELIANCE ON DATA PROCESSING AND LICENSED SOFTWARE. Certain aspects of the
Company's business are dependent upon its ability to store, retrieve, process
and manage data and to maintain and upgrade its data processing capabilities.
Interruption of data processing capabilities for any extended length of time,
loss of stored data, programming errors or other computer problems could have a
material adverse effect on the Company's business and results of operations. The
software used by the Company within its medical bill review operation is
licensed from an independent third party software company pursuant to a
non-exclusive license with a three-year term expiring February 1998 that may be
terminated by either party upon six months' prior written notice. While the
Company has historically maintained a good relationship with the licensor, there
can be no assurance that this software license will not be terminated or that
the licensor will renew the license upon expiration. Although management
believes that alternative software would be available if the existing license
were terminated, such termination could be disruptive and could have a material
adverse effect on the Company's business and results of operations.
RISKS RELATED TO GROWTH STRATEGY; FLUCTUATIONS IN OPERATING RESULTS. The
Company's strategy is to continue its internal growth and, as strategic
opportunities arise in the workers' compensation managed care industry and other
related industries, to pursue additional acquisitions of, or relationships with,
other companies. As a result, the Company is subject to certain growth-related
risks, including the risk that it will be unable to retain personnel or acquire
other resources necessary to service such growth adequately. Expenses arising
from the Company's efforts to increase its market penetration may have a
negative impact on operating results. In addition, there can be no assurance
that any suitable opportunities for future strategic acquisitions or
relationships will arise or, if they do arise, that the transactions
contemplated thereby could be completed. There can be no assurance that the
Company will be able to integrate effectively into the Company the businesses
that the Company has acquired or those that it may acquire in the future. In
addition, such transactions are subject to various risks generally associated
with the acquisition of businesses,
6
<PAGE>
including the financial impact of expenses associated with the integration of
businesses and the diversion of management resources. There can be no assurance
that any recent or future acquisition or other strategic relationship will not
have an adverse impact on the Company's business or results of operations. If
suitable opportunities arise in the future, the Company anticipates that it
would finance such transactions, as well as its internal growth, through working
capital or, in certain instances, through additional debt or equity financing.
There can be no assurance, however, that such debt or equity financing would be
available to the Company on acceptable terms when, and if, suitable strategic
opportunities arise. In addition, the Company's quarterly and annual results
have varied and may vary significantly in the future due to a number of factors,
including the impact of current or proposed governmental regulations related to
the Company's businesses, expenses associated with the Company's growth
strategy, the Company's ability to integrate strategic acquisitions with
existing operations, competitive pressures, the loss of key management personnel
and customer acceptance of current and new products and services. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Selected Quarterly Operating Results."
POSSIBLE LITIGATION AND LEGAL LIABILITY. The Company, through its
utilization management services, makes recommendations concerning the
appropriateness of providers' proposed medical treatment plans of patients
throughout the country, and it could share in potential liabilities for adverse
medical consequences. The Company does not grant or deny claims for payment of
benefits and the Company does not believe that it engages in the practice of
medicine or the delivery of medical services. There can be no assurance,
however, that the Company will not be subject to claims or litigation related to
the grant or denial of claims for payment of benefits or allegations that the
Company engages in the practice of medicine or the delivery of medical services.
In addition, there can be no assurance that the Company will not be subject to
other litigation that may adversely affect the Company's business or results of
operations. The Company maintains professional liability insurance and such
other coverages as the Company believes are reasonable in light of the Company's
experience to date. There can be no assurance, however, that such insurance will
be sufficient or available at reasonable cost to protect the Company from
liability which might adversely affect the Company's business or results of
operations. See "Business--Legal Matters."
COMPETITION. The Company faces competition from large insurers, health
maintainance organizations ("HMOs"), PPOs, third party administrators ("TPAs")
and other managed health care companies. The Company believes that, as managed
care techniques continue to gain acceptance in the workers' compensation
marketplace, CRA's competitors will increasingly consist of nationally focused
workers' compensation managed care service companies, insurance companies, HMOs
and other significant providers of managed care products. Legislative reforms in
some states permit employers to designate health plans such as HMOs and PPOs to
cover workers' compensation claimants. Because many health plans have the
ability to manage medical costs for worker's compensation claimants, such
legislation may intensify competition in the market served by the Company. Many
of the Company's current and potential competitors are significantly larger and
have greater financial and marketing resources that those of the Company, and
there can be no assurance that the Company will continue to maintain its
existing performance or be successful with any new products or in any new
geographical markets it may enter. See "Business--Competition" and
"Business--Government Regulation."
CHANGES IN MARKET DYNAMICS. Legislative reforms in some states permit
employers to designate health plans such as HMOs and PPOs to cover workers'
compensation claimants. Because many health plans have the capacity to manage
health care for workers' compensation claimants, such legislation may intensify
competition in the market served by the Company. Within the past few years,
several states have experienced decreases in the number of workers' compensation
claims and the average cost per claim which have been reflected in workers'
compensation insurance premium rate reductions in those states. The Company
believes 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. If declines
in workers' compensation costs occur in many states and persist over the
long-term, they may have an adverse impact on the Company's business and results
of operations.
7
<PAGE>
IMPORTANCE OF INTELLECTUAL PROPERTY RIGHTS. The Company has made
significant investments in the development and maintenance of its proprietary
data, including proprietary data base information acquired through the
acquisition of Prompt. The Company does not own any patents or
federally-registered copyrights relating to its databases. The Company relies
largely on its own security systems, confidentiality procedures and employee
nondisclosure agreements to maintain the confidentiality and trade secrecy of
its proprietary data. Misappropriation of the Company's proprietary information
or independent development of similar products may have a material adverse
effect on the Company's competitive position.
POSSIBLE VOLATILITY OF STOCK PRICE. There have been significant
fluctuations in the market price for the Company's Common Stock. Factors such as
variations in the Company's revenues, earnings and cash flow, general market
trends in the workers' compensation managed care market, and announcements of
innovations or acquisitions by the Company or its competitors could cause the
market price of the Common Stock to fluctuate substantially. In addition, the
stock market has experienced price and volume fluctuations that have
particularly affected companies in the health care and managed care markets,
resulting in changes in the market price of the stock of many companies which
may not have been directly related to the operating performance of those
companies. Such broad market fluctuations may adversely affect the market price
of the Common Stock. See "Price Range of Common Stock."
DEPENDENCE UPON KEY PERSONNEL. The Company is dependent to a substantial
extent upon the continuing efforts and abilities of certain key management
personnel. In addition, the Company faces competition for experienced employees
with professional expertise in the workers' compensation managed care area. The
loss of, or the inability to attract, qualified employees could have a material
adverse effect on the Company's business and results of operations.
MATERIAL BENEFIT TO INSIDERS. In connection with the sale of the shares
offered hereby, the Selling Stockholders will receive an aggregate of
$82,695,000 in gross proceeds, based on a public offering price of $55.13 per
share. See "Use of Proceeds" and "Principal and Selling Stockholders."
CONCENTRATION OF OWNERSHIP. Upon completion of this offering, the Company's
officers, directors, principal stockholders and their respective affiliates will
own approximately 11.9% of the outstanding Common Stock (11.5% of the
outstanding Common Stock if the over-allotment option is exercised in full). As
a result, these stockholders, if acting together, would be able to exert
substantial influence over the Company and matters requiring approval by the
stockholders of the Company, including the election of directors. The voting
power of these stockholders under certain circumstances could have the effect of
delaying or preventing a change in control of the Company. See "Management" and
"Principal and Selling Stockholders."
COMPANY DOES NOT ANTICIPATE PAYING DIVIDENDS. The Company does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
Credit Facility limits the payment of dividends. Accordingly, it is not
anticipated that holders of the Common Stock will receive any current income
with respect to their shares of Common Stock for the foreseeable future. See
"Dividends."
ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS, BY-LAWS AND STATE LAWS; POSSIBLE
ADVERSE EFFECTS OF ISSUANCE OF PREFERRED STOCK. The Company's Amended and
Restated Articles of Organization and By-Laws, as well as Massachusetts law,
contain provisions that could discourage a proxy contest, make more difficult
the acquisition of a substantial block of the Company's Common Stock, which
could make the payment of a premium to shareholders in connection with a change
in control less likely, and increase the difficulty of removing incumbent
management and board members. In addition, such provisions could limit the price
that investors might be willing to pay in the future for shares of the Company's
Common Stock. The Board of Directors is authorized to issue, without stockholder
approval, Preferred Stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of Common Stock. Although the Company has no current plans to issue any
shares of Preferred Stock, the issuance of Preferred Stock or rights to purchase
Preferred Stock could be used to discourage an unsolicited acquisition proposal.
The Board of Directors is divided into three "staggered" classes, with each
class serving
8
<PAGE>
for a term of three years. Dividing the Board of Directors in this manner
increases the difficulty of removing incumbent members and could discourage a
proxy contest or the acquisition of a substantial block of the Company's Common
Stock. Massachusetts law contains certain anti-takeover provisions, including a
so-called Business Combination Statute that restricts certain stockholders that
own (together with their affiliates) 5.0% or more of the outstanding voting
stock of a Massachusetts corporation from engaging in certain business
combinations with such corporation and a so-called Control Share Statute that
limits any person or entity that has acquired 20% or more of a corporation's
stock from voting such shares unless the corporation's stockholders, other than
such acquiring person or entity, authorize such voting rights by a vote of the
holders of the majority of stock of the corporation entitled to vote on such
matters. Such provisions of Massachusetts law could have the effect of
discouraging a potential acquiror from making an offer for the Common Stock,
which would make the payment of a premium to stockholders in connection with a
change in control less likely, and could increase the difficulty of removing
incumbent management and board members. See "Description of Capital Stock."
9
<PAGE>
RECENT DEVELOPMENTS
As part of CRA's strategy to expand its product offerings and enhance its
opportunities for growth through strategic acquisitions, the Company has
recently completed three acquisitions.
On April 2, 1996, CRA acquired from United HealthCare Corporation all
outstanding capital stock of Focus for $21,000,000 in cash. This acquisition was
funded with amounts borrowed under the Company's senior revolving credit
facility with First Union National Bank of North Carolina ("First Union Bank").
Focus, based in Brentwood, Tennessee, has built and maintains one of the
nation's largest workers' compensation PPO networks, and last year had annual
revenues of approximately $9,900,000. Focus' national PPO network includes more
than 101,000 individual providers and 2,300 hospitals servicing 32 states and
the District of Columbia. The acquisition of Focus enables the Company to
provide its customers with cost containment services through a specialized PPO
controlled by the Company.
On May 29, 1996, CRA acquired all outstanding capital stock of QMC3 in
exchange for 230,442 shares of the Company's Common Stock, which was valued at
approximately $8,500,000 as of the date of the acquisition agreement. QMC3 is a
leading managed care services company serving the automobile insurance market,
and has been instrumental in helping to obtain the passage of legislation in
Colorado and New York enabling the mandatory direction of medical care for
automobile accident victims. QMC3 had revenues in 1995 of approximately
$2,000,000. The acquisition of QMC3 positions CRA to capitalize on the
introduction of managed care techniques to the automobile insurance market. This
acquisition was accounted for as a pooling of interests and was not material to
the Company from an accounting perspective.
On October 29, 1996, CRA acquired all of the outstanding capital stock of
Prompt for $30,000,000 in cash. This acquisition was funded with the Company's
cash reserves and amounts borrowed under the Company's senior revolving credit
facility with First Union Bank. Prompt, based in Salt Lake City, Utah, is one of
the leading providers of hospital bill audit services to health care payors for
claims that fall outside of the payors' networks of hospitals or outpatient
facilities. Prompt utilizes its group of experienced negotiators, as well as
proprietary data base systems, to reduce its clients' expenses by repricing
inpatient hospital and outpatient facility bills on a line-by-line basis to
either a usual and customary rate, a PPO contract rate or a combination thereof.
In 1995, Prompt had annual revenues of over $10,000,000. CRA believes that the
Prompt acquisition provides the Company with the opportunity to establish
partnerships with large group health carriers for a 24-hour coordinated care
product. Additionally, CRA believes that this acquisition will enable it to
create a data base of statistical benchmarks against which the costs of
prospective procedures can be evaluated.
10
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 500,000 shares of Common Stock offered
by the Company hereby are estimated to be $25,700,000, based upon a public
offering price of $55.13 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company. If the over-allotment option is exercised in full, the total net
proceeds to the Company are estimated to be $41,480,000.
The Company intends to apply the net proceeds it receives from this offering
as follows: (i) repay approximately $5,000,000 of senior debt outstanding under
the $40,000,000 revolving credit facility (the "Credit Facility") between the
Company and First Union Bank, all of which was incurred to fund the acquisition
of Prompt; and (ii) use the balance for working capital and general corporate
purposes. Borrowings under the Credit Facility bear interest at First Union
Bank's prime rate plus an additional percentage of up to 0.375%, or LIBOR plus
an additional percentage of up to 1.875%, depending on certain financial
criteria. The Credit Facility expires by its terms on March 29, 1999. The
Company may from time to time pursue additional strategic acquisitions, and may
use funds held for general corporate purposes to fund such acquisitions in whole
or in part. Pending use of the net proceeds of the offering, the Company will
invest the net proceeds in short-term, investment-grade, interest-bearing
securities.
The Company will not receive any proceeds from the sale of the shares of
Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company has been included for quotation in the
Nasdaq National Market under the symbol "CRAA" since the Company's initial
public offering of Common Stock on May 3, 1995. Prior to that time, there was no
public market for the Common Stock. The following tables set forth the high and
low closing prices for the Common Stock for the periods indicated as reported by
the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1995:
Second Quarter............................................................................... $ 25.00 $ 16.50
Third Quarter................................................................................ $ 24.50 $ 19.00
Fourth Quarter............................................................................... $ 24.50 $ 20.75
1996:
First Quarter................................................................................ $ 36.75 $ 22.13
Second Quarter............................................................................... $ 47.00 $ 34.00
Third Quarter................................................................................ $ 56.75 $ 33.00
Fourth Quarter (through November 6, 1996).................................................... $ 58.38 $ 47.25
</TABLE>
On November 6, 1996, the last reported sale price was $55.13 per share. As
of April 5, 1996, there were 369 holders of record of the Company's Common
Stock. The Company believes that there are approximately 1,050 beneficial owners
of the Company's Common Stock.
DIVIDEND POLICY
The Company made cash distributions in the form of bonuses and dividends to
its stockholders in prior periods when it was an S corporation. The Credit
Facility limits the payment of cash dividends by the Company in any one year to
an aggregate of 25.0% of the prior year's consolidated net income. In addition,
the Company currently intends to retain all of its earnings for use in its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
11
<PAGE>
CAPITALIZATION
The following table sets forth: (i) the capitalization of the Company at
September 30, 1996; (ii) the pro forma capitalization of the Company at
September 30, 1996 giving effect to the consummation of the Prompt acquisition;
and (iii) the adjusted pro forma capitalization of the Company at September 30,
1996 giving effect to the sale of 500,000 shares of Common Stock offered by the
Company hereby, based upon a public offering price of $55.13 per share, after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company and application of the net proceeds as described in "Use
of Proceeds." This table should be read in conjunction with the Unaudited Pro
Forma Combined Financial Statements and the related Notes thereto, the
Consolidated Financial Statements and related Notes thereto of the Company and
the Financial Statements and Notes thereto of Focus included elsewhere in this
Prospectus. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------------------
PRO FORMA
PRO FORMA(1) AS ADJUSTED(2)
------------------------ --------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Revolving credit facility and current portion of
capital leases.................................. $ 5,071 $ 71
Long-term debt:
Capital leases.................................. 6 6
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000
shares
authorized; no shares issued and
outstanding................................... -- --
Common Stock, $.01 par value; 40,000,000 shares
authorized; 8,907,532 shares issued and
outstanding and 9,407,532 shares issued and
outstanding, as adjusted (3).................. 89 94
Additional paid-in capital...................... 90,743 116,438
Retained deficit................................ (17,622) (17,622)
-------- --------------
Total stockholders' equity................ 73,210 98,910
-------- --------------
Total capitalization.................. $ 78,287 $ 98,987
-------- --------------
-------- --------------
</TABLE>
- ---------
(1) Pro forma to give effect to the acquisition of Prompt as if such transaction
had occurred on September 30, 1996. See "Unaudited Pro Forma Combined
Condensed Financial Statements."
(2) Adjusted to give effect to the sale by the Company of 500,000 shares of
Common Stock at an offering price of $55.13 per share and the application of
the estimated net proceeds therefrom, as described under "Use of Proceeds."
(3) Excludes options to purchase 629,889 shares outstanding at September 30,
1996, with a weighted average exercise price of $23.87 per share. See
"Description of Capital Stock" and Note 10 to the Company's Financial
Statements.
12
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
each of the five fiscal years in the period ended December 31, 1995. The
selected financial data below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
Prospectus, which have been audited by Arthur Andersen LLP, independent public
accountants. The statement of operations data set forth below with respect to
years ended December 31, 1993, 1994, and 1995 and the balance sheet data at
December 31, 1994 and 1995 are derived from the financial statements included
elsewhere in this Prospectus. The data presented for the nine months ended
September 30, 1995 and 1996 are derived from unaudited consolidated financial
statements and include, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the data for such periods. The balance sheet data at December 31, 1993 is also
derived from financial statements audited by Arthur Andersen LLP, but are not
included herein. The statement of operations data for the years ended December
31, 1991 and 1992 and the balance sheet data at December 31, 1991 are derived
from financial statements audited by the Company's predecessor accountants not
included herein.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 58,969 $ 80,851 $ 100,546 $ 121,295 $ 146,055 $ 107,881 $ 131,032
Cost of service.......................... 52,421 68,854 86,082 103,796 122,615 90,600 107,981
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................. 6,548 11,997 14,464 17,499 23,440 17,281 23,051
General and administrative
expenses(1)............................ 4,583 7,007 9,931 8,753 11,021 8,180 10,491
--------- --------- --------- --------- --------- --------- ---------
Operating income(1)...................... 1,965 4,990 4,533 8,746 12,419 9,101 12,560
Other expenses:
Interest (income)...................... (32) (5) (11) (62) -- -- (446)
Interest expense....................... 78 66 16 4,087 2,484 2,260 658
Other (income) expense................. 3 (55) (5) 132 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total other (income) expense....... 49 6 -- 4,157 2,484 2,260 212
Income before income taxes(1)............ 1,916 4,984 4,533 4,589 9,935 6,841 12,348
Provision for income taxes(2)
Current year operations................ 118 307 355 1,530 3,974 2,736 5,124
Change in tax status................... -- -- -- 3,772 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total provision for income taxes... 118 307 355 5,302 3,974 2,736 5,124
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before extraordinary
items(1)(2)............................ 1,798 4,677 4,178 (713) 5,961 4,105 7,224
--------- --------- --------- --------- --------- --------- ---------
Loss on retirement of debt, net of
taxes.................................. -- -- -- -- (2,460) (2,460) --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)........................ $ 1,798 $ 4,677 $ 4,178 $ (713) $ 3,501 $ 1,645 $ 7,224
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro Forma and Actual Earnings Per Share:
Net income before extraordinary
items(3)............................... $ 0.57 $ 0.91 $ 0.66 $ 0.87
Loss on retirement of debt, net of tax... -- (0.37) (0.40) --
--------- --------- --------- ---------
Net income............................... $ 0.57 $ 0.54 $ 0.26 $ 0.87
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding...... 4,815 6,540 6,223 8,261
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
BALANCE SHEET DATA: 1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital.......................... $ 5,366 $ 9,114 $ 12,126 $ 5,609 $ 7,493 $ 12,732 $ 48,609
Total assets............................. 11,704 15,894 20,836 31,345 36,556 33,754 94,694
Total debt............................... 453 337 -- 44,716 9,300 4,800 77
Total stockholders' equity (deficit)..... 7,616 11,896 15,856 (28,513) 11,660 9,639 73,210
</TABLE>
- ---------
(1) Expenses for the period prior to the Recapitalization include certain
compensation and other expenses, the levels of which are not comparable to
the levels of such expenses for 1994. Expenses for 1994 include increased
investments in management information systems, personnel and certain other
items. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(2) Prior to the Recapitalization, the Company elected to be taxed as an S
corporation. In connection with the Recapitalization, the Company was
required to change from an S to a C corporation. This change resulted in the
Company recording an incremental net tax provision of $3,772,000 in the
first quarter of 1994.
(3) The pro forma earnings per share for the year ended December 31, 1994 and
the Company's pro forma net income for the year ended December 31, 1994 of
$2,753,000 have been computed as if the Company 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.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
OVERVIEW
CRA provides field case management and specialized cost containment services
designed to reduce worker's compensation costs. Field case management services
involve working on a one-on-one basis with injured employees and their various
health care professionals, employers and insurance company adjusters to assist
in maximizing medical improvement and, where appropriate, to expedite return to
work. Specialized cost containment services include various techniques designed
to reduce the cost of workers' compensation claims and automobile accident
injury claims.
The Company was founded in 1978 to provide field case management services to
workers' compensation payors. In 1990, as part of its strategy to provide a
comprehensive range of managed care services to its customers and to leverage
its national organization and local office network in field case management, CRA
began introducing specialized cost containment services designed to reduce the
cost of workers' compensation claims. The Company believes that specialized cost
containment services represent an important growth opportunity for CRA and that
the majority of such services generate higher gross margins than traditional
field case management services.
Set forth below for each of the three most recent years, and for the nine
months ended September 30, 1995 and 1996, is the percentage of the Company's
revenues generated from its field case management services and its specialized
cost containment services:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Field case management services...................................... 80.5% 76.0% 72.9% 72.9% 67.8%
Specialized cost containment services............................... 19.5% 24.0% 27.1% 27.1% 32.2%
</TABLE>
Historically, the Company's field case management revenue growth has
resulted from both local market share gains as well as geographic office
expansion. The Company opened nine new field case management offices in 1993, 15
in 1994, eight in 1995 and five in the first nine months of 1996. The Company
believes that its field case management office network is of sufficient size to
serve adequately the needs of its customers nationwide. As a result, the Company
expects that it will open only a limited number of new field case management
offices per year to satisfy client needs in selected regions. Revenues from
specialized cost containment services comprised approximately 32.2% of total
revenues for the first nine months of 1996. The Company opened 20 new
specialized cost containment locations in 1993, 13 in 1994, two in 1995 and 10
during the first nine months of 1996.
The Company currently derives most of its revenues on a fee-for-service
basis. Although risk sharing arrangements are not common in today's workers'
compensation managed care services industry, the Company believes that these
arrangements may become more prevalent in the future.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Company's
statements of operations as a percentage of revenues. The Company's past
operating results are not necessarily indicative of future operating results.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
----------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues...................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services.............................................. 85.6 85.6 84.0 84.0 82.4
Gross profit................................................ 14.4 14.4 16.0 16.0 17.6
General and administrative expenses........................... 9.9 7.2 7.5 7.6 8.0
Operating income............................................ 4.5 7.2 8.5 8.4 9.6
Other expenses................................................ -- 3.4 1.7 2.1 0.2
Provision for income taxes.................................... 0.3 4.4 2.7 2.5 3.9
Net income (loss) before extraordinary items.................. 4.2 (0.6) 2.4 3.8 5.5
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
REVENUES
Revenues increased 21.5% for the nine months of 1996 to $131,032,000 from
$107,881,000 for the nine months of 1995. Field case management revenues
increased 13.1% for the nine months of 1996 to $88,900,000 from $78,604,000 for
the nine months of 1995 while specialized cost containment revenues increased
43.9% for the nine months of 1996 to $42,132,000 from $29,277,000 for the nine
months of 1995. The field case management revenue growth is attributable to the
acquisition of Alta Pacific Corporation in the fourth quarter of 1995, the
opening of five offices during the first nine months of 1996 and growth in
revenues from existing service locations. The specialized cost containment
revenue growth is attributable to the acquisition of Focus on April 2, 1996 and
QMC3 on May 29, 1996, the addition of 10 service locations during the first nine
months of 1996, including the service locations associated with the Focus and
QMC3 acquisitions, and continued growth in retrospective bill review and
telephone case management services in existing service locations.
COST OF SERVICES
Cost of services increased 19.2% for the nine months of 1996 to $107,981,000
from $90,600,000 for the nine months of 1995 due to an increase in revenues and
the acquisition of Focus and QMC3. Cost of services as a percentage of revenue
decreased to 82.4% for the nine months of 1996 compared to 84.0% for the nine
months of 1995. This improvement in gross margins is primarily the result of
productivity gains in field case management services coupled with a continued
shift in the Company's revenue mix towards specialized cost containment
services, especially retrospective bill review, which have higher gross profit
margins than field case management services.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 28.3% for the nine months of
1996 to $10,491,000 from $8,180,000 for the nine months of 1995, or 8.0% and
7.6% as a percentage of revenue for the nine months of 1996 and 1995,
respectively. The increase in general and administrative expenses in 1996 was
primarily due to increased expenditures for marketing initiatives, additional
investments in the information technology group and the acquisition of Focus.
15
<PAGE>
INTEREST EXPENSE, NET
Interest expense, net decreased $2,048,000 for the nine months of 1996 to
$212,000 from $2,260,000 for the nine months of 1995. The decrease in interest
expense, net in 1996 was due primarily to the repayment of the Term Loan and
Senior Subordinated Notes with the proceeds from the sale of Common Stock in May
of 1995 and the investment of excess proceeds of the Company's from the sale of
Common Stock in June of 1996, partially offset by interest expense on Credit
Facility borrowings to finance the Focus acquisition in April of 1996 until
these borrowings were repaid with a portion of the proceeds from the Company's
sale of Common Stock in June of 1996.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes for the first nine months of 1996
was $5,124,000, or an effective tax rate of 41.5%, compared to a tax provision
for the first nine months of 1995 of $2,736,000, or an effective tax rate of
40%. The Company expects to continue to provide for its taxes at the higher
effective tax rate for the remainder of the year.
LOSS ON RETIREMENT OF DEBT
The Company used the net proceeds ($36,507,000) from the Company's initial
public offering on May 10, 1995, supplemented by borrowings under the Credit
Facility ($5,000,000) to repay fully the Term Loan ($16,250,000) and the Former
Revolving Credit Facility ($4,226,000) under the former loan agreement with
First Union Bank and the Senior Subordinated Notes ($21,000,000) issued to
Whitney and First Union. The early repayment of this debt resulted in the
Company recording a loss on the retirement of debt of $2,460,000 comprised of
the write-off of associated deferred finance costs ($1,772,000), debt discount
on the Senior Subordinated Notes ($2,140,000) and fees associated with the
termination of the interest rate swaps previously required by the former loan
agreement ($158,000), offset by a tax benefit of $1,610,000.
YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUES
Revenues increased 20.4% in 1995 to $146,055,000 from $121,295,000 in 1994.
Field case management revenue increased 15.4% in 1995 to $106,462,000 from
$92,232,000 in 1994, while specialized cost containment revenue grew by 36.2% in
1995 to $39,593,000 from $29,063,000 in 1994. This growth is attributable to the
opening of 23 new field case management and 15 new specialized cost containment
service locations throughout 1994 and 1995 as well as growth in revenues from
existing service locations. The Company continued to experience significant
revenue growth from its specialized cost containment offerings in 1995, as
revenues from the Company's bill review, telephonic case management and
precertification services increased by over 60% from the prior year.
COST OF SERVICES
Cost of services increased 18.1% in 1995 to $122,615,000 from $103,796,000
in 1994. The Company's cost of services consists primarily of salaries and
related benefits, rent, travel, marketing, telephone expenses and other
office-related costs. Cost of services increased in 1995 primarily due to
expenses associated with the opening of additional service locations and
compensation of related personnel. Cost of services as a percentage of revenue
for 1995 decreased to 84.0% versus 85.6% in 1994. This improvement is the result
of productivity gains in field case management services coupled with a further
shift in the Company's revenue mix towards specialized cost containment
services, especially bill review, which historically have higher gross profit
margins than field case management services.
16
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 25.9% in 1995 to $11,021,000
from $8,753,000 in 1994, or 7.5% and 7.2% as a percentage of revenue for 1995
and 1994, respectively. This increase was due primarily to increased expenses
for additional senior corporate management and to significant investments in
management information systems and personnel, national marketing, preferred
provider network development and other administrative functions. These additions
and investments occurred primarily in the second half of 1994.
OTHER EXPENSES
Other expenses for 1995 consist entirely of interest expense. Interest
expense for 1995 decreased $1,603,000 to $2,484,000 in 1995 from $4,087,000 in
1994 due to the repayment of debt in connection with the Company's initial
public offering on May 10, 1995.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 40.3% for 1995 and resulted in a tax
provision of $3,974,000. In connection with the Recapitalization during 1994,
the Company converted from S to C corporation status and was required to report
income on an accrual basis for tax purposes rather than on a cash basis.
LOSS ON RETIREMENT OF DEBT
The Company used the net proceeds ($36,507,000) from the Company's initial
public offering, supplemented by borrowings under the Credit Facility
($5,000,000) to repay fully the Term Loan ($16,250,000) and the former revolving
credit facility ($4,226,000) with First Union Bank and the Senior Subordinated
Notes ($21,000,000) issued to Whitney and First Union. The early repayment of
this debt resulted in the Company recording a loss on the retirement of debt of
$2,460,000 comprised of the write-off of associated deferred finance costs
($1,772,000), debt discount on the Senior Subordinated Notes ($2,140,000) and
fees associated with the termination of the interest rate swaps previously
required by the former loan agreement ($158,000), offset by a tax benefit of
$1,610,000.
YEARS ENDED DECEMBER 31, 1994 AND 1993
REVENUES
Revenues increased 20.6% in 1994 to $121,295,000 from $100,546,000 in 1993.
Field case management revenue increased 13.9% in 1994 to $92,232,000 from
$80,948,000 in 1993, while specialized cost containment revenue grew by 48.3% in
1994 to $29,063,000 from $19,598,000 in 1993. This growth is attributable to the
opening of 15 new field case management and 13 new specialized cost containment
service locations as well as growth in revenues from existing service locations.
The Company experienced significant revenue growth from its specialized cost
containment offerings in 1994, as revenues from the Company's bill review,
telephonic case management and precertification services more than doubled from
the prior year.
COST OF SERVICES
Cost of services increased 20.6% in 1994 to $103,796,000 from $86,082,000 in
1993. Cost of services as a percentage of revenue remained constant at 85.6% in
1994 and 1993. The Company's cost of services consists primarily of salaries and
related benefits, rent, travel, marketing, telephone expenses and other
office-related costs. Cost of services increased in 1994 primarily due to
expenses associated with the opening of additional service locations and
compensation of related personnel.
17
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased 11.9% in 1994 to $8,753,000
from $9,931,000 in 1993, or 7.2% and 9.9% as a percentage of revenue for 1994
and 1993, respectively. These amounts include discretionary expenses of $163,000
and $6,089,000 for 1994 and 1993, respectively, paid to the Company's
stockholders in the form of bonuses and real estate and equipment rental
payments while the Company was an S corporation. Excluding these amounts,
general and administrative expenses increased 123.6% in 1994 to $8,590,000 from
$3,842,000 in 1993, and were 7.1% and 3.8% as a percentage of revenue for 1994
and 1993, respectively. This increase was due primarily to increased expenses
for additional senior corporate management and to significant investments in
management information systems and personnel, national marketing, preferred
provider network development and other administrative functions to support
future growth. The increase in such expenses occurred primarily in the second
half of 1994.
OTHER EXPENSES
Other expenses consist almost entirely of interest expense. Interest expense
for 1994 increased $4,071,000 to $4,087,000 from $16,000 in 1993 due to the debt
issued in connection with the Recapitalization.
PROVISION FOR INCOME TAXES
In connection with the Recapitalization, the Company converted from S to C
corporation status and was required to report income on an accrual basis for tax
purposes rather than on a cash basis. The conversion to C corporation status
resulted in a total tax liability of approximately $5,100,000. The company will
discharge this liability through annual payments of approximately $1,275,000
through 1997. This conversion resulted in an incremental provision for taxes of
$3,772,000 for 1994. Excluding the effect of being an S corporation prior to the
Recapitalization, the Company's effective tax rate was approximately 41.0%.
18
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters ended September 30, 1996. 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 Prospectus. The operating results for any quarter are not necessarily
indicative of results for any subsequent quarter.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1994 1995 1995 1995 1995 1996 1996 1996
--------- --------- --------- ----------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $ 31,742 $ 34,930 $ 36,125 $ 36,826 $ 38,174 $ 40,225 $ 44,759 $ 46,048
Cost of services......... 26,914 29,545 30,212 30,843 32,015 33,422 36,747 37,812
--------- --------- --------- ----------- --------- --------- --------- ---------
Gross profit........... 4,828 5,385 5,913 5,983 6,159 6,803 8,012 8,236
General and
administrative
expenses................ 2,498 2,677 2,744 2,759 2,841 3,109 3,636 3,746
--------- --------- --------- ----------- --------- --------- --------- ---------
Operating income....... 2,330 2,708 3,169 3,224 3,318 3,694 4,376 4,490
Other (income)
expenses................ 1,300 1,354 655 251 224 194 331 (313)
Provision for income
taxes................... 444 542 1,005 1,189 1,238 1,453 1,678 1,993
--------- --------- --------- ----------- --------- --------- --------- ---------
Net income before
extraordinary items..... 586 812 1,509 1,784 1,856 2,047 2,367 2,810
Loss on retirement of
debt, net taxes......... -- -- (2,460) -- -- -- -- --
--------- --------- --------- ----------- --------- --------- --------- ---------
Net income (loss)........ $ 586 $ 812 $ (951) $ 1,784 $ 1,856 $ 2,047 $ 2,367 $ 2,810
--------- --------- --------- ----------- --------- --------- --------- ---------
--------- --------- --------- ----------- --------- --------- --------- ---------
</TABLE>
The Company's quarterly and annual results have varied and may vary
significantly in the future due to a number of factors, including the impact of
current or proposed governmental regulations related to the Company's
businesses, expenses associated with the Company's growth strategy, the
Company's ability to integrate strategic acquisitions with existing operations,
competitive pressures, the loss of key management personnel and customer
acceptance of current and new products and services.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its working capital requirements and
capital expenditures primarily from cash flow generated from operations
supplemented by short-term borrowings under revolving credit facilities and the
proceeds of its public offerings of Common Stock. Cash flows generated from
operations were $2,961,000, $5,594,000, $4,114,000 and $9,034,000 for the years
ended December 31, 1993, 1994, 1995 and for the first nine months of 1996,
respectively. During the first nine months of 1996, working capital used
$454,000 of cash primarily due to an increase in accounts receivable of
$4,266,000 and an increase in prepaid expenses of $722,000 offset by an increase
in accounts payable and accrued expenses of $4,534,000. Accounts receivable
increased due to continued revenue growth while prepaid income taxes increased
due to the Company recording a tax benefit of approximately $1,082,000 due to
the exercise of options. Accounts payable and accrued expenses increased due to
the timing of payments.
19
<PAGE>
The Company used net cash of $21,080,000 in connection with the acquisition
of Focus and QMC3. The Company also used $1,960,000 of cash to purchase property
and equipment during the first nine months of 1996, the majority of which was
spent on new computers and software packages.
In 1994, the Company completed the Recapitalization, pursuant to which the
Company redeemed an aggregate of 49.0% of the then outstanding shares of the
Company's Common Stock from its founders with the proceeds of securities sold to
third parties and borrowings under the Company's bank credit facility. On May
10, 1995, the Company completed its initial public offering of Common Stock,
generating net proceeds to the Company of $36,507,000. These proceeds,
supplemented by borrowings of $5,000,000 under the Credit Facility with First
Union Bank, were used to repay fully the indebtedness incurred in connection
with the Recapitalization.
On January 16, 1996, the Company retired the $5,000,000 10% junior
subordinated notes issued in connection with the Recapitalization utilizing
borrowings under the Credit Facility.
On April 28, 1995, the Company entered into a $25,000,000 Credit Facility
with First Union Bank. On March 29, 1996, the Company and First Union Bank
signed an amendment to expand the Company's borrowing capacity under the Credit
Facility to $40,000,000 under similar terms and conditions in order to finance
the acquisition of Focus. The Company borrowed $21,000,000 under the Credit
Facility to finance the purchase price of Focus. The Company's obligations under
the Credit Facility are secured by a first priority security interest in
substantially all of the Company's properties and assets.
In June of 1996, the Company sold an aggregate of 1,200,000 shares of its
Common Stock, including the exercise of the underwriters' over-allotment option,
at a price of $46.00 per share generating net proceeds to the Company of
approximately $51,840,000. The Company used approximately $29,000,000 of the net
proceeds to repay all of the outstanding borrowings under the Credit Facility
with First Union Bank.
On October 29, 1996, the Company purchased Prompt for $30,000,000 in cash.
In order to finance this acquisition, the Company utilized approximately
$25,000,000 of its existing cash supplemented by borrowings of approximately
$5,000,000 under the Company's existing $40,000,000 Credit Facility.
The Company's long-term liquidity needs consist of working capital and
capital expenditure requirements, repayment of borrowings under the Credit
Facility and the funding of any future acquisitions. The Company intends to fund
these long-term liquidity needs from cash generated from operations, net
proceeds to the Company from this offering, available borrowings under the
Credit Facility and, if necessary, future debt or equity financings. There can
be no assurance that any future debt or equity financing will be available on
terms favorable to the Company.
20
<PAGE>
BUSINESS
CRA provides field case management and specialized cost containment services
designed to reduce workers' compensation costs. The Company operates one of the
largest field case management organizations in the United States, consisting of
115 field case management offices with approximately 1,070 field case managers
who provide medical management and return to work services in 49 states and the
District of Columbia. CRA also provides a broad range of higher margin
specialized cost containment services, including utilization management,
specialized PPO network management, telephonic case management and retrospective
medical bill review services, that are designed to reduce costs associated with
work-related injuries and automobile accident-related injuries. Revenues from
specialized cost containment services comprised approximately 32.2% of revenues
for the first nine months of 1996, up from approximately 27.1% for the
corresponding period of the prior year. The Company markets its services to
workers' compensation insurers, TPAs, self-insured employers, and payors of
automobile accident medical claims through a direct sales and marketing
organization consisting of over 125 dedicated personnel. CRA currently has over
1,250 customers nationwide.
INDUSTRY OVERVIEW
WORKERS' COMPENSATION
Workers' compensation is a state-mandated, comprehensive insurance program
that requires employers to fund medical expenses, lost wages and other costs
resulting from work-related injuries and illnesses. Since their introduction in
the early 1900s, these programs have been expanded to all fifty states and the
District of Columbia. 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 plans generally require employers to fund all of an
employee's costs of medical treatment and a significant portion of lost wages,
legal fees and other associated costs. Typically, work-related injuries are
broadly defined, and injured or ill employees are entitled to extensive
benefits. Employers are required 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 by the
relevant state statute. In most states, the extensive benefits coverage (for
both medical costs and lost wages) is provided through the purchase of
commercial insurance from private insurance companies, participation in
state-run insurance funds or employer self-insurance.
Provider reimbursement methods vary on a state-by-state basis. A majority of
states have adopted fee schedules pursuant to which all health care 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, health care providers are reimbursed based on
usual, customary and reasonable ("UCR") fees charged in the particular state in
which the services are provided.
According to statistics published in the 1994 WORKERS' COMPENSATION YEAR
BOOK, employers in the United States incurred approximately $60 billion in total
costs of workers' compensation in 1992 (excluding costs associated with
productivity losses) and approximately $22.8 billion in 1982. Based upon a
combination of statistics published in the 1994 WORKERS' COMPENSATION YEAR BOOK
AND THE FACT BOOK 1994--PROPERTY/ CASUALTY INSURANCE FACTS, the Company
estimates that 1992 total workers' compensation costs to employers was comprised
of approximately $22 billion related to medical costs, approximately $24 billion
related to indemnity costs, including temporary wage replacement and permanent
disability payments, and the balance related to other costs, such as legal
services and claims administration. Despite various state reforms and employers'
increasing attention to workers' compensation costs, total workers' compensation
costs have increased substantially from 1982 to 1992.
21
<PAGE>
The medical cost component of workers' compensation costs has increased at a
faster rate than the average annual increase in total workers' compensation
costs. Based upon statistics published in the sources named above, the Company
estimates that workers' compensation medical costs increased at a compound
annual rate of 15.9%, and that the medical cost component represented
approximately $5 billion in 1982 and accounted for an estimated 34% of total
workers' compensation medical and indemnity costs. Based upon statistics
published in the sources named above and statistics published in HEALTH CARE
FINANCING REVIEW (Fall 1994), the Company estimates that by 1992, the estimated
$22 billion medical cost component of workers' compensation costs accounted for
approximately 47.8% of total workers' compensation medical and indemnity costs,
or 2.7% of total U.S. health care expenditures.
The Company believes that workers' compensation costs will continue to rise
primarily because of: (i) broader definitions of work-related injuries and
illnesses covered by workers' compensation laws; (ii) the shifting of medical
costs from health insurance plans to the workers' compensation system; (iii) an
aging work force; (iv) the continued requirement that employers pay all of an
employee's cost of medical treatment, without any employee co-payment or
deductible, and a significant portion of lost wages and non-medical costs; (v)
the overall inflation of medical costs; and (vi) the relatively low utilization
to date of comprehensive cost containment programs in the workers' compensation
system. As workers' compensation costs escalate, the Company expects that
employers will continue to seek and implement strategies and programs to reduce
workers' compensation costs.
WORKERS' COMPENSATION MANAGED CARE SERVICES
The Company estimates that the workers' compensation managed care services
industry generated approximately $2.6 billion in revenues during 1993, comprised
of field case management and specialized cost containment services. The workers'
compensation managed care services market is served by the Company and a small
number of other competitors that offer a comprehensive line of workers'
compensation managed care services on a nationwide basis. A large number of
additional companies offer some managed care services on a limited geographic
basis. The result is a fragmented market with what the Company believes is only
a small number of companies offering a fully integrated and comprehensive
approach to managing workers' compensation costs on a nationwide basis.
Workers' compensation managed care services broadly fall into two
categories: field case management services and specialized cost containment
services. Field case management services involve working on a one-on-one basis
with injured employees and their various health care professionals, employers
and insurance company adjusters. Field case management services are designed
both to assist in maximizing medical improvement and, where appropriate, to
expedite return to work. Specialized cost containment services are designed to
reduce the cost of workers' compensation claims through a variety of techniques
such as first report of injury services, utilization management
(precertification, concurrent review and retrospective bill review), telephonic
case management, PPO network access, independent medical examinations ("IMEs"),
peer reviews and hospital bill auditing.
Managed care techniques are intended to control the cost of health care
services and to measure the performance of providers through intervention and
on-going review of services proposed and actually provided. Managed care
techniques were originally developed to stem the rising costs of group health
medical care. Historically, employers were slow to apply managed care techniques
to workers' compensation costs primarily because the aggregate costs are
relatively small compared to costs associated with group health benefits and
because state-by-state regulations related to workers' compensation are far more
complex than those related to group health. However, in recent years, employers
and insurance carriers have been increasing their focus on applying managed care
techniques to control their workers' compensation costs.
Since 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
22
<PAGE>
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.
Many states do not permit employers to restrict a claimant's choice of provider,
making it difficult for employers to utilize managed care approaches
characteristic of the group health insurance market. However, employers in
nineteen states currently have the right to direct employees to a specific
primary health care provider during the onset of a workers' compensation case,
subject to the right of the employee to change physicians after a specific
period. Recently, an increasing number of states have adopted legislation
encouraging the use of workers' compensation managed care organizations ("MCOs")
in an effort to allow employers to control their workers' compensation costs.
MCO laws generally provide employers an opportunity to channel injured employees
into provider networks. In certain states, MCO laws require licensed MCOs to
offer certain specified services, such as utilization management, case
management, peer review and provider bill review. Most of the MCO laws adopted
to date establish a framework within which a company such as CRA can provide its
customers a full range of managed care services for greater cost control.
CRA'S BUSINESS STRATEGY
The Company's objective is to expand and capitalize on its presence as a
national provider of comprehensive managed care services to workers'
compensation payors. The Company's strategy for achieving this objective is as
follows:
FOCUS ON WORKERS' COMPENSATION MANAGED CARE. The Company intends to
continue its primary focus on providing workers' compensation managed care
services to workers' compensation insurers, TPAs and self-insured employers. The
Company believes that to serve this complex market, a core understanding of
medical-related issues, a thorough understanding of return to work issues and
techniques, and an in-depth understanding of the state-by-state regulatory
environment is required. CRA has developed such expertise through its years of
serving this market. CRA believes it can leverage its expertise as a highly
skilled provider of workers' compensation managed care services to further
expand its national market presence and increase its market share.
INCREASE NATIONAL ACCOUNTS PENETRATION. The Company intends to increase its
penetration of large, national payors by leveraging its broad-based workers'
compensation expertise and its experience with its existing base of national
accounts. Many large, national insurance carriers and self-insured employers are
seeking workers' compensation managed care service providers that have the
ability to provide services on a nationwide basis. These large payors want a
comprehensive solution to their workers' compensation needs from a service
provider that is adept at understanding and working with many different and
complex state legislative environments. The Company's national organization of
local service locations enables the Company to meet the needs of these large,
national payors while maintaining the local market presence necessary to monitor
changes in state-specific regulations and to facilitate case resolution through
locally provided managed care services.
CROSS-SELL COMPREHENSIVE PRODUCT OFFERING. The Company intends to
capitalize on the relationships developed through its 115-office field case
management network by aggressively cross-selling its specialized cost
containment services to its existing customer base. CRA believes that it is one
of a small number of companies with a comprehensive offering of workers'
compensation managed care services. The Company complements its extensive field
case management network with 60 service locations nationwide that provide one or
more specialized cost containment services. Of the Company's approximately 1,250
case management customers, only a small percentage are also utilizing the
Company's specialized cost containment services. The Company believes that this
low utilization rate among CRA's existing customers provides a significant
opportunity to expand CRA's specialized cost containment business.
23
<PAGE>
EMPHASIZE EARLY INTERVENTION. The Company intends to increase its marketing
of early intervention services, such as first report of injury,
precertification, telephonic case management and access to PPO networks. Early
intervention enables the Company to promptly identify cases that have the
potential to result in significant expenses and to take appropriate measures to
control these expenses before they are incurred. In addition, the Company
believes that providing early intervention services generally results in the
Company obtaining earlier access to claims files, thereby improving the
Company's opportunity to provide the full range of its managed care services.
LEVERAGE MANAGED CARE EXPERTISE TO AUTOMOBILE INSURANCE MARKET. The Company
intends to capitalize on the recent introduction of managed care techniques to
the automobile insurance market through the recent acquisition of QMC3, a
leading provider of managed care services to the automobile insurance market.
CRA intends to leverage its existing presence in the automobile insurance market
and its existing office infrastructure to efficiently expand the geographic
coverage of automobile managed care services.
EXECUTE STRATEGIC ACQUISITIONS. The Company will continue to seek
complementary strategic acquisitions, such as Prompt and QMC3, to further expand
its product offerings and enhance its opportunities for growth. While the
Company currently maintains a broad offering of services, the evolution of the
marketplace may give rise to opportunities in the workers' compensation and
related industries.
SERVICES
CRA's services include both field case management services and specialized
cost containment services.
FIELD CASE MANAGEMENT SERVICES
CRA provides field case management services to the workers' compensation
insurance industry through case managers working at the local level on a
one-on-one basis with injured employees and their various health care
professionals, employers and insurance company adjusters. The Company's services
are designed to assist in maximizing medical improvement and, where appropriate,
to expedite the employees' return to work through medical management and
vocational rehabilitation services.
CRA's field case management services consist of one-on-one management of a
work-related injury by the Company's approximately 1,070 field case managers
serving 49 states and the District of Columbia from CRA's 115 local field case
management offices. This service typically involves a case with a significant
potential or actual amount of lost work time or a catastrophic injury that
requires detailed management and therefore is referred out by the local adjuster
to the local CRA marketer calling on that office. CRA field case managers
specialize in expediting the injured employee's return to work through both
medical management and vocational rehabilitation by working with all the
interested parties in a work-related injury. Medical management services
provided by CRA's field case managers include coordinating the efforts of all
the health care 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. Field case management services
represented approximately 80.5%, 76.0%, 72.9% and 67.8% of the Company's
revenues for the years ended December 31, 1993, 1994, 1995, and the first nine
months of 1996, respectively.
The Company believes that the following factors will contribute to the
continued growth of its field case management services: (i) increased employer
acceptance of field case management techniques due to greater exposure to the
workers' compensation managed care market; (ii) earlier identification of
individuals in need of field case management services due to increased
utilization of the Company's specialized cost containment services, particularly
early intervention services; and (iii) increased market share at the expense of
smaller, undercapitalized competitors.
24
<PAGE>
SPECIALIZED COST CONTAINMENT SERVICES
In 1990, as part of the Company's strategy of providing a comprehensive
range of services, CRA began broadening its business by providing a number of
additional services focused directly on helping to reduce the medical costs
associated with workers' compensation for its clients. Today, these specialized
cost containment services include first report of injury service, utilization
management (precertification, concurrent review and retrospective bill review),
telephonic case management, PPO network access, IMEs, peer reviews and hospital
bill auditing. By adding these services to CRA's traditional strength and
national breadth in field case management, the Company now offers its clients an
integrated workers' compensation managed care program. CRA is able to offer its
services on a combined basis as a full service managed care program, beginning
with the first report of injury and including all managed care services needed
to manage aggressively the medical costs, temporary wage replacement payments
and permanent disability payments associated with a work-related injury. CRA
also offers each of its services on an unbundled basis. CRA's comprehensive
approach to managing workers' compensation costs serves the needs of a broad
range of clients, from local adjusters to national accounts. In addition to
providing specialized cost containment services for work-related injuries and
illnesses, the Company also provides similar services to payors of automobile
accident medical claims and social security disability advocacy services to
payors of long term disability. Specialized cost containment services
collectively represented approximately 19.5%, 24.0%, 27.1% and 32.2% of the
Company's revenues for the fiscal years ending December 31, 1993, 1994, 1995 and
the first nine months of 1996, respectively.
The Company believes that the demand for specialized cost containment
services will continue to increase due to a number of factors, including: (i)
the increasing payor awareness of the availability of these techniques for
managing workers' compensation costs; (ii) the perceived effectiveness of
managed care techniques at reducing costs for group health insurance plans;
(iii) the verifiable nature of the savings that can be obtained by application
of specialized cost containment techniques applicable to workers' compensation;
and (iv) the broad applicability of these techniques to all injured employees,
not just severely injured employees likely to be absent from work.
FIRST REPORT OF INJURY SERVICE. The Company provides a computerized first
report of injury reporting service in which an employer or claims adjuster
phones in all injuries as soon as they occur to the Company's centralized
service center. Each report is electronically transferred or mailed to the state
agency, the employer and the insurance company. This service assists in the
timely preparation and distribution of state-mandated injury reports and also
provides CRA and its customers with an early intervention tool to maximize
control over workers' compensation claims.
UTILIZATION MANAGEMENT: PRECERTIFICATION AND CONCURRENT REVIEW. CRA's
precertification and concurrent review services are used by clients to ensure
that certain medical procedures are precertified by a CRA registered nurse
and/or physician for medical necessity and appropriateness of treatment before
the medical procedure can be performed. CRA's determinations represent only
recommendations to the customer, the ultimate decision to approve or disapprove
the request is made by the claims adjuster. Precertification calls are made by
either the claimant or the provider to one of CRA's national utilization
management reporting units. Once a treatment plan has been precertified, a CRA
employee performs a follow-up call (concurrent review) at the end of an approved
time period to evaluate compliance and/or discuss alternative plans.
UTILIZATION MANAGEMENT: RETROSPECTIVE BILL REVIEW. Through a sophisticated
software program, CRA reviews and reduces its customers' medical bills
(including hospital bills) to either the various state-mandated fee schedules
for workers' compensation claims or a percentage of the UCR rates that exist in
non-fee schedule states. Additionally, this automated retrospective bill review
service enables clients to access certain PPO pricing schedules that represent
additional savings below the fee schedules or UCR rates. The savings that accrue
to CRA's clients for this service can be significant. Retrospective bill review
also creates an
25
<PAGE>
important historical database for provider practice patterns and managed care
provider compliance requirements. CRA provides retrospective bill review service
from 33 service locations throughout the country, 11 of which are operated at a
client location using CRA employees. The Company also establishes arrangements
that enable customers to run the retrospective bill review service in-house by
their own employees.
ACCESS TO PREFERRED PROVIDER NETWORKS. CRA provides its clients with access
to PPO networks within all the markets CRA serves through one of its own PPOs,
including its recently acquired Focus subsidiary, or by contracting with
existing national or regional PPOs. These PPOs provide injured workers with
access to quality medical care and pre-negotiated volume discounts, thereby
offering CRA's clients the ability to influence, or in certain states to direct,
their employees into the PPO network as a means of managing their work-related
claims. In addition to providing a vehicle for managing the workers'
compensation process, the discounts associated with these PPO arrangements
generate additional savings through the retrospective bill review program
described above. Focus' national network includes over 101,000 individual
providers and 2,300 hospitals covering 32 states and the District of Columbia.
TELEPHONIC CASE MANAGEMENT. This service provides for short-duration (30 to
60 days) telephonic management of workers' compensation claims. The telephonic
case management units accept first reports of injury, negotiate discounts with
hospitals and other providers, identify care alternatives and work with injured
employees to minimize lost time on the job. Each of the telephonic case
management units is staffed with 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 CRA's local field case management offices. This service is offered from
four locations across the country.
INDEPENDENT MEDICAL EXAMS. IMEs are provided to assess independently the
extent and nature of an employee's injury or illness. CRA provides its clients
with access to independent physicians who perform the IMEs from 15 of the
Company's service locations and, upon completion, prepare reports describing
their findings.
PEER REVIEWS. This service is 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.
HOSPITAL BILL AUDITS. This service is provided by the Company's registered
nurses who review hospital bills for appropriateness, relatedness and medical
necessity. The nurse may subsequently negotiate fees and obtain discounts for
prompt payment or inappropriate charges. Through its recently announced
acquisition of Prompt, the Company has expanded its client base for hospital
bill audits to include the group health payor community. Prompt is a leading
provider of out-of-network bill review services to the group health payor
community. These services reduce clients' costs by utilizing the Company's team
of negotiators and proprietary data base systems to reprice inpatient hospital
and outpatient facility bills on a line-by-line basis. Such bills are repriced
to either a usual and customary rate, a PPO contract rate, or a combination
thereof. Prompt operates offices in Frederick, Maryland and Salt Lake City,
Utah, with 107 full time employees. Prompt has created a data base over the past
seven years from the details of inpatient hospital and outpatient facility bills
from across the country which has allowed it to standardize a high percentage of
hospital charge codes for a significant number of such institutions.
AUTOMOBILE INSURANCE MANAGED CARE. The Company, through the acquisition of
QMC3, has expanded its product line to offer an integrated service to the
automobile insurance market that permits insurers to direct automobile accident
victims into networks of medical providers. QMC3 currently provides this
integrated service in Colorado and has produced significant savings for its
insurance company clients since the initiation of its services. QMC3, in
cooperation with a third party PPO, has been in discussions for more than a year
with the State of New York Insurance Department regarding approval of this PPO
as a certified provider of fully integrated managed care services to the New
York automobile insurance market using QMC3 as its exclusive utilization review
agent. The State of New York Insurance Department has
26
<PAGE>
approved this arrangement for the New York City metropolitan area and Long
Island, effective as of June 1, 1996. Such an arrangement is the first to offer
automobile insurance managed care services in New York. The Company and QMC3, in
cooperation with the third party PPO, are continuing their discussions with the
State of New York Insurance Department regarding further approvals for offerings
of managed care services to automobile insurers in the balance of the State of
New York. Services offered to the automobile insurance market include
precertification, telephonic case management, direction of injured persons into
specialized PPO networks, medical bill review and field case management. See
"Risk Factors--Potential Adverse Impact of Governmental Regulation."
CUSTOMERS
CRA has over 1,250 customers across the country, including most of the major
underwriters of workers' compensation insurance, large TPAs and self-insured
employers. During fiscal year 1995 and the first nine months of 1996, no
customer represented more than 8% of total revenues. The Company is compensated
primarily on a fee-for-service basis. Although the Company has entered into
written agreements with certain of its customers from time to time, it has not
been the Company's historical practice to enter into written agreements with its
customers. Accordingly, the Company's customers generally can elect to terminate
their relationships with the Company on short notice.
SALES AND MARKETING
The Company actively markets its services primarily to workers' compensation
insurance companies, TPAs and self-insured employers and groups. The Company
also markets to the automobile insurance market, group health and long-term
disability marketplaces, but to a significantly lesser degree. The Company's
marketing organization includes over 125 full-time sales and marketing
personnel. While the majority of CRA's current business is generated from
workers' compensation insurance companies, self-insured employers (often in
connection with a TPA) also have been an important source of business and will
likely become more important in the future as larger corporations continue to
evaluate self-insuring their workers' compensation programs.
Marketing of CRA's services occurs at both the local insurance company
adjuster level for much of the field case management business as well as the
corporate level for national managed care accounts and self-insured corporations
where a more sophisticated sales presentation is required. The local marketing
to insurance company adjusters for field case management referrals has been a
critically important component of the Company's marketing strategy because of
the decision-making authority that resides at the adjuster level and the
relationship-driven nature of that portion of the business. However, with the
advent of comprehensive managed care legislation, a more proactive environment
for workers' compensation change and a more sophisticated product offered by
CRA, the Company's marketing of national headquarters offices of insurance
companies and self-insured companies likely will increase. CRA has a dedicated
staff of national accounts salespeople responsible for marketing and
coordinating a full selection of services to corporate offices.
QUALITY ASSURANCE
The Company regularly evaluates its quality of service delivery by means of
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 health care providers and the
effectiveness of the Company's services. Audits are conducted on a nationwide
basis for a particular customer 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, follow-up audits are conducted to ensure that recommendations from
the initial audit have been implemented.
27
<PAGE>
COMPETITION
The workers' compensation managed care services market is fragmented, with a
large number of competitors. CRA competes with numerous companies, including
national managed care providers, insurance companies and HMOs. CRA's primary
competitors are companies that offer one more workers' compensation managed care
services on a national basis. The Company also competes with numerous smaller
companies which generally provide unbundled services on a local level where such
companies often have a relationship with a local adjuster. Several large
workers' compensation insurance carriers offer managed care services for their
insurance customers either through the insurance carrier's own personnel or by
outsourcing various services to providers such as CRA. The Company also competes
to some degree with large HMOs, which, CRA believes, have historically focused
their networks primarily on controlling health care costs rather than managing
the process of returning an injured employee to work.
The Company believes that, as managed care techniques continue to gain
acceptance in the workers' compensation marketplace, CRA's competitors will
increasingly consist of nationally focused workers' compensation managed care
service companies, insurance companies, HMOs and other significant providers of
managed care products. Many of the Company's current and potential competitors
are significantly larger and have greater financial and marketing resources than
those of the Company.
Within the past few years, several states have experienced decreases in
workers' compensation insurance premium rates. To date, the Company's business
has continued to grow in those states which have experienced declines in
workers' compensation premium rates. The Company believes that managed care and
return to work services will continue to be necessary in the future to sustain
and increase workers' compensation cost savings.
The Company competes on the basis of its specialized knowledge and expertise
in the workers' compensation managed care services industry, effectiveness of
services, ability to offer a range of services in multiple markets, information
systems and price.
DATA PROCESSING
The Company uses computer systems to provide certain of its services and to
provide accounting statements and financial reports. The Company uses licensed
software from national vendors to maintain its financial records and perform
other general business. The software used by the Company within its
retrospective bill review operation is licensed from an independent third party
software company pursuant to a non-exclusive license with a three-year term
expiring February 1998, that may be terminated by either party upon six months'
prior written notice.
GOVERNMENT REGULATION
GENERAL
The Company's business is conducted within a regulated environment. The
Company's activities are regulated principally at the state level, which means
that the Company must comply with regulatory requirements which differ from
state to state. Although the laws affecting the Company's operations vary widely
from state to state, these laws fall into four principal categories: (i)
workers' compensation laws that restrict the methods and procedures that the
Company may employ in its workers' compensation managed care programs; (ii) laws
that require licensing of businesses, such as the Company, that provide medical
review services; (iii) laws regulating the operation of managed care provider
networks; and (iv) proposed laws which, if adopted, would have as their
objective the reform of the health care system as a whole, such as proposals to
implement 24-hour health coverage using a single insurance plan for work-related
and non-work-related health problems. Laws and regulations affecting the
Company's operations change frequently. The Company believes that it is in
material compliance with regulatory requirements applicable to its business.
28
<PAGE>
WORKERS' COMPENSATION LEGISLATION
In performing workers' compensation managed care services, the Company 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. The workers' compensation laws also regulate the methods and procedures
which the Company may employ in its workers' compensation managed care programs.
For example, workers' compensation laws prohibit medical copayments and
deductibles by employees. In addition, certain states restrict employers' rights
to select health care providers and establish maximum fee levels for treatment
of injured workers. See "--Industry Overview."
In several states, recent workers' compensation reform legislation has eased
to some degree these regulatory restraints on managed care for injured workers.
Legislative reforms in some states permit employers to designate health plans
such as HMOs and PPOs to cover workers' compensation claimants. Because many
health plans have the capacity to manage health care for workers' compensation
claimants, such legislation may intensify competition in the market served by
the Company.
Within the past few years, several states have experienced decreases in the
number of workers' compensation claims and the cost per claim, which have been
reflected in workers' compensation insurance premium rate reductions in those
states. The Company believes that these declines in workers' compensation costs
are due principally to intensified efforts by payors to manage and control
claims costs, to improve risk management by employers and to legislative
reforms. If declines in workers' compensation costs occur in many states and
persist over the long-term, such declines may have an adverse impact upon the
Company's business and results of operations.
SPECIALIZED COST CONTAINMENT SERVICES
Many of the Company's specialized cost containment services include review
of requests for medical care or therapy. Approximately half of the states have
enacted laws that require licensing of businesses, such as the Company, 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 the Company, which may have an adverse
impact upon the Company's ability to compete with other available alternatives
for health care cost control.
USE OF PROVIDER NETWORKS
The Company's ability to provide comprehensive workers' compensation managed
care services depends in part on its ability to contract with or create networks
of health care providers which share the Company's objectives. For some of its
clients, the Company offers injured workers access to networks of providers who
are selected by the Company for quality of care and pricing. New laws regulating
the operation of managed care provider networks have been adopted by a number of
states. These laws may apply to managed care provider networks having contracts
with the Company or to provider networks which the Company may organize or
acquire. To the extent the Company is governed by these regulations, it may be
subject to additional licensing requirements, financial oversight and procedural
standards for beneficiaries and providers.
AUTOMOBILE INSURANCE LEGISLATION
The automobile insurance industry, like the workers' compensation industry,
is regulated on a state-by-state basis. While regulatory approval is not
required for the Company to offer most of its services to the automobile
insurance market, state regulatory approval is required in order to offer
automobile insurers products that permit them to direct claimants into a network
of medical providers. To date, only Colorado
29
<PAGE>
and New York have legislation that permits such direction of care and QMC3
offers this managed care service to automobile insurers in Colorado. QMC3, in
cooperation with a third party PPO, has been in discussions for more than a year
with the State of New York Insurance Department regarding approval of this PPO
as a certified provider of fully integrated managed care services to the New
York automobile insurance market using QMC3 as its exclusive utilization review
agent. The State of New York Insurance Department has approved this arrangement
for the New York City metropolitan area and Long Island, effective as of June 1,
1996. Such an arrangement is the first to offer automobile insurance managed
care services in New York. The Company and QMC3, in cooperation with the third
party PPO, are continuing their discussions with the State of New York Insurance
Department regarding further approvals for offerings of managed care services to
automobile insurers in the balance of the State of New York. While the Company
believes that approval from the State of New York Insurance Department will be
forthcoming with respect to the remaining portions of the state, there can be no
assurance that New York will issue such approval. In addition, no assurance can
be given that other states will adopt legislation permitting such direction of
care for automobile accident victims or, if such legislation is adopted, that
the Company will be able to obtain regulatory approval to provide such services.
HEALTH CARE REFORM
Increasing health care costs have caused the federal government and many
states to advance health care reform proposals. One of the proposals being
considered is 24-hour health coverage, in which the coverage of traditional
employer-sponsored health plans is combined with workers' compensation coverage
to provide a single insurance plan for work-related and non-work-related health
problems. Incorporating workers' compensation coverage into conventional health
plans may adversely affect the market for the Company's services.
EMPLOYEES
As of September 30, 1996, the Company had approximately 2,450 employees.
None of CRA's employees is represented by a labor union. The Company has
experienced no work stoppages and believes that its employee relations are good.
PROPERTIES
The Company's principal corporate office is located in Boston,
Massachusetts. The Company leases the 11,000 square feet of space in this site
pursuant to a lease agreement expiring in 2003. The Company also leases all of
its offices located in 43 states and three Canadian provinces. Thirteen of the
Company's offices are leased from Colonial Realty Trust, of which Ms. Silverman
and Mr. Larson are the trustees and beneficiaries. The Company believes that its
facilities are adequate for its current needs and that suitable additional space
will be available as required.
LEGAL MATTERS
The Company is party to certain claims and litigation 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.
30
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS
Donald J. Larson(1).................................. 46 President, Chief Executive Officer and Director
Joseph F. Pesce...................................... 47 Senior Vice President--Finance and Administration,
Chief Financial Officer and Treasurer
John A. McCarthy, Jr................................. 37 Senior Vice President--Cost Containment Services and
Corporate Development
Peter R. Gates....................................... 45 Senior Vice President--Marketing and Sales
Anne E. Kirby........................................ 43 Vice President--Marketing and Product Development
DIRECTORS
Lois E. Silverman.................................... 56 Chairman of the Board
George H. Conrades(2)................................ 57 Director
Jeffrey R. Jay, M.D.(1).............................. 38 Director
William Laverack, Jr.(1)(2).......................... 39 Director
Mitchell T. Rabkin, M.D.............................. 65 Director
</TABLE>
- ---------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
EXECUTIVE OFFICERS
Mr. Larson, a founder of the Company, has served as President and Chief
Executive Officer of the Company since January 1, 1996 and as President and
Chief Operating Officer of the Company since 1988. Prior to founding the
Company, Mr. Larson held the position of New England Regional Manager at
IntraCorp. Inc., a division of Cigna Corporation. Mr. Larson is a graduate of
Boston College and Boston University.
Mr. Pesce has served as Senior Vice President--Finance and Administration
since August, 1996 and Chief Financial Officer and Treasurer of the Company
since October 1994. Mr. Pesce served as Vice President-- Finance and
Administration of the Company from October 1994 to August 1996. From October
1981 to September 1994, Mr. Pesce held various financial positions with
Computervision Corporation and its predecessor Prime Computer, Inc., including
Director of Corporate Planning and Analysis, Director of Leasing, Corporate
Controller, Treasurer and, most recently, Vice President--Finance and Chief
Financial Officer. Prior to October 1981, Mr. Pesce held various financial
positions with Compugraphic Corporation and GCA Corporation. Mr. Pesce is a
graduate of Boston College and the Wharton School of Finance at the University
of Pennsylvania.
Mr. McCarthy has served as Senior Vice President--Cost Containment Services
and Corporate Development since August 1996. He previously served as Vice
President--Cost Containment Services and Corporate Development since August
1994. From June 1992 to July 1994, Mr. McCarthy was Senior Vice President and
Chief Financial Officer of MedChem Products, Inc., a manufacturer of specialty
medical products. From March 1989 to June 1992, Mr. McCarthy was a Partner at
Kaufman & Company, an investment banking firm. From August 1987 to February
1989, Mr. McCarthy was an Associate at Morgan Stanley & Co. Incorporated, an
investment banking firm. Mr. McCarthy is a graduate of Lehigh University and
Harvard Business School.
Mr. Gates has served as Senior Vice President--Marketing and Sales since
August 1996. From May 1995 to July 1996, Mr. Gates was Vice President of Mercer
Management Consulting. From January 1990 to January
31
<PAGE>
1995, Mr. Gates was Manager of Business Development, and later General Manager
of the X-Ray business of GE Medical Systems. From April 1988 to December 1989,
Mr. Gates was an independent management consultant and from July 1978 to April
1988, Mr. Gates was a Consultant and Vice President with Bain & Company, a
management consulting firm. Mr. Gates is a graduate of Princeton University and
Harvard Business School.
Ms. Kirby joined the Company in July 1979 and has served as Vice
President--Marketing and Product Development since March 1990. From 1979 to
1990, Ms. Kirby served the Company in a variety of roles on a local and regional
level, including Regional Vice President for the New England area. Prior to
joining the Company, Ms. Kirby worked as a clinical nurse for Massachusetts
General Hospital and managed a group medical practice in two different specialty
areas. Ms. Kirby is a graduate of Boston College and the St. Louis University
Accelerated Curriculum in Nursing.
DIRECTORS
Ms. Silverman, a founder of the Company, has served as the Chairman of the
Board since March 1994 and served as its Chief Executive Officer from 1988
through January 1, 1996. Prior to founding the Company, Ms. Silverman held the
position of Northeast Regional Manager at IntraCorp., a division of Cigna
Corporation. Ms. Silverman also serves as Trustee and Officer of Beth Israel
Hospital and Overseer of Tufts Medical School. Ms. Silverman is a graduate of
Beth Israel School of Nursing. Ms. Silverman is also a director of Sun
Healthcare Group, Inc.
Mr. Conrades has served as a Director of the Company since June 1994. Mr.
Conrades has been President and Chief Executive Officer of BBN Corporation since
1994 and has been Chairman of the Board of BBN Corporation since November 1995.
From 1992 to 1994, Mr. Conrades was a partner in Conrades/Reilly Associates, a
business consulting company. From 1961 to 1992, Mr. Conrades held a number of
management positions with International Business Machines Corp., most recently
as Senior Vice President for Corporate Marketing and Services. Mr. Conrades is
also a director of BBN Corporation, Westinghouse Electric Corp. and Cubist
Pharmaceuticals.
Dr. Jay has served as a Director of the Company since March 1994. Dr. Jay
has been a General Partner of J. H. Whitney & Co., a private investment firm,
since September 1993. From 1988 to 1993, Dr. Jay worked for Canaan Partners, a
venture capital firm. Dr. Jay is a graduate of Harvard Business School and
received his M.D. from the Boston University School of Medicine. Dr. Jay also
serves as a director of Advance Paradigm, Inc., and Nitinol Medical
Technologies, Inc.
Mr. Laverack has served as a Director of the Company since March 1994. Mr.
Laverack has been a General Partner of J. H. Whitney & Co., a private investment
firm, since May 1993. From 1991 to 1993, Mr. Laverack served as a Managing
Director of Gleacher & Co., Inc., an investment banking firm. From 1985 to 1991,
Mr. Laverack served as a Principal in the merchant banking department of Morgan
Stanley & Co. Incorporated, an investment banking firm. Mr. Laverack is a
graduate of Harvard College and Harvard Business School.
Dr. Rabkin has served as a Director of the Company since February 1995. From
1966 to September 1996, Dr. Rabkin served as Chief Executive Officer of Boston's
Beth Israel Hospital, where he currently holds the
rank of Professor of Medicine. Dr. Rabkin is a graduate of Harvard College and
received his M.D. from Harvard Medical School.
Mr. Larson, Whitney, the Whitney Equity Fund and the Whitney Debt Fund have
agreed to vote their shares in favor of the reelection of Ms. Silverman as a
director of the Company for so long as Ms. Silverman continues to hold, directly
or indirectly, at least 407,490 shares.
It is expected that upon consummation of the sale of Common Stock offered
hereby, Mr. Laverack will resign as a director of the Company.
32
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1996 (except as
noted below) and as adjusted to reflect the sale by the Company of the shares of
Common Stock offered hereby (assuming no exercise of the Underwriters' over-
allotment option), (i) by each person (or group of affiliated persons) known by
the Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, (ii) each Director, (iii) the Company's Chief Executive Officer and the
Company's other named executive officers (as determined in accordance with the
rules of the Securities and Exchange Commission), (iv) all Selling Stockholders,
and (v) all of the Company's executive officers and Directors as a group. Except
as indicated in the footnotes to this table, the Company believes that the
persons named in this table have sole voting and investment power with respect
to all the shares of Common Stock indicated.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED PRIOR BENEFICIALLY OWNED AFTER
TO THE OFFERING(1) THE OFFERING(1)
---------------------------- ----------------------------
NUMBER PERCENTAGE OF NUMBER PERCENTAGE OF
OF OUTSTANDING SHARES TO OF OUTSTANDING
NAME SHARES SHARES BE OFFERED SHARES SHARES
- ------------------------------------------- ----------- --------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Lois E. Silverman(2)....................... 272,470 3.1% -- 272,470 2.9%
Donald J. Larson(3)........................ 974,530 10.9% 158,634 815,896 8.7%
Joseph F. Pesce............................ 1,996 * -- 1,996 *
John A. McCarthy, Jr....................... 417 * -- 417 *
Anne E. Kirby.............................. 1,384 * -- 1,384 *
George H. Conrades(4)...................... 15,666 * -- 15,666 *
Jeffrey R. Jay, M.D.(5).................... 1,074,296 12.1% 1,074,296 -- --
William Laverack, Jr.(5)................... 1,074,296 12.1% 1,074,296 -- --
Mitchell T. Rabkin, M.D.(6)................ 15,866 * -- 15,866 *
J. H. Whitney & Co.(7)..................... 1,074,296 12.1% 1,074,296 -- --
Arlene Osoff, Trustee(8)................... 647,000 7.3% 175,000 472,000 5.0%
Morgan Stanley Group, Inc.(9).............. 467,400 5.3% -- 467,400 5.0%
Morgan Stanley Asset Management,
Inc.(10).................................. 467,400 5.3% -- 467,400 5.0%
Henry J. Roth, M.D......................... 70,717 * 35,000 35,717 *
Kimberly A. Sutphin(11).................... 73,647 * 25,000 48,647 *
Howard J. Entin, M.D....................... 35,588 * 10,000 25,588 *
Ryan J. Conlon............................. 15,318 * 7,000 8,318 *
Paul M. Baker.............................. 11,459 * 5,729 5,730 *
John Eric Griffiths, D.C................... 15,318 * 5,000 10,318 *
John Sbarbaro, M.D......................... 7,659 * 2,500 5,159 *
Nick Hilger................................ 3,682 * 1,841 1,841 *
All executive officers and directors as a
group (9 persons)(12)..................... 2,356,625 26.4% 1,232,930 1,123,695 11.9%
</TABLE>
- ---------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes general voting power and/or
investment power with respect to securities. Shares of Common Stock subject
to options and warrants currently exercisable or exercisable within 60 days
of September 30, 1996 are deemed outstanding for computing the percentage of
any other person. Except as otherwise specified below, the persons named in
the table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them.
(2) The address of this stockholder is c/o CRA Managed Care, Inc., 312 Union
Wharf, Boston, Massachusetts 02109. Includes 23,500 shares held of record by
The Michael E. Silverman 1995 Irrevocable Trust dated March 13, 1995 and
23,500 shares held of record by The Susan E. Bender 1995 Irrevocable Trust
dated March 13, 1995. Does not include 600,000 shares held by the Silverman
1996 Grantor Retained Annuity Trust. Ms. Silverman disclaims beneficial
ownership of such shares.
33
<PAGE>
(3) The address of this stockholder is c/o CRA Managed Care, Inc., 312 Union
Wharf, Boston, Massachusetts 02109. Includes 18,750 shares held of record by
trusts created for the benefit of Mr. Larson's children.
(4) Includes 15,666 shares of Common Stock issuable pursuant to stock options
that are exercisable currently or within 60 days.
(5) The address of these directors is c/o J. H. Whitney & Co., 177 Broad Street,
Stamford, Connecticut 06901. Consists of 1,074,296 shares held of record by
J. H. Whitney & Co. ("Whitney"), Whitney Subordinated Debt Fund, L.P. (the
"Whitney Debt Fund") and Whitney 1990 Equity Fund, L.P. (the "Whitney Equity
Fund") that Dr. Jay and Mr. Laverack may be deemed to beneficially own due
to their relationship with such entities. Such beneficial ownership is
disclaimed by both Dr. Jay and Mr. Laverack.
(6) Includes 15,666 shares of Common Stock issuable pursuant to currently
exercisable stock options.
(7) The address of this stockholder is 177 Broad Street, Stamford, Connecticut
06901, Attention: Jeffrey R. Jay, M.D. These shares are held of record by
Whitney and its affiliates as follows: (i) Whitney--158,537 shares of Common
Stock; (ii) the Whitney Equity Fund--633,136 shares of Common Stock; and
(iii) the Whitney Debt Fund--282,623 shares of Common Stock.
(8) The address of this stockholder is c/o Jansson, 411 Waverly Oak Drive,
Waltham, Massachusetts 02154. Consists of 600,000 shares held of record by
the Silverman 1996 Grantor Retained Annuity Trust, 23,500 shares held of
record by The Michael E. Silverman 1996 Irrevocable Trust dated March 13,
1995 and 23,500 shares held of record by The Susan E. Bender 1995
Irrevocable Trust dated March 13, 1995.
(9) The address of this stockholder is 1585 Broadway, New York, New York 10036.
Ownership based upon Schedule 13G filed on or before February 14, 1996.
(10) The address of this stockholder is 1221 Avenue of the Americas, New York,
New York 10020. Ownership based upon Schedule 13G filed on or before
February 14, 1996.
(11) Includes 2,946 shares of Common Stock issuable pursuant to currently
exercisable stock options.
(12) Includes 34,278 shares of Common Stock issuable pursuant to currently
exercisable stock options. Includes 1,074,296 shares held of record by
Whitney, the Whitney Equity Fund and the Whitney Debt Fund that Dr. Jay and
Mr. Laverack may be deemed to beneficially own due to their relationship
with such entities. Such beneficial ownership is disclaimed by both Dr. Jay
and Mr. Laverack.
Each of Ms. Sutphin and Messrs. Baker, Conlon, Entin, Griffiths, Hilger,
Roth and Sbarbaro acquired their shares of Common Stock of the Company on May 6,
1996, pursuant to an Agreement and Plan of Merger, dated as of May 6, 1996,
entered into by and among the Company, QMC3 Acquisition Corp., QMC3 and the
shareholders of QMC3 in connection with the acquisition of QMC3 by the Company.
In addition, Ms. Sutphin entered into an Employment and Non-Competition
Agreement with QMC3 in connection with the QMC3 acquisition.
34
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The description of the capital stock below is qualified in its entirety by
reference to the Company's Articles of Organization, as amended (the
"Articles"), and the By-Laws of the Company, as amended (the "By-Laws"), copies
of which are on file with the Securities and Exchange Commission.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The Company is authorized to issue up to 40,000,000 shares of Common Stock,
$.01 par value per share and 1,000,000 shares of Preferred Stock, $.01 par value
per share. Immediately prior to this Offering, the Company had 8,907,532 shares
of Common Stock, and no shares of Preferred Stock, issued and outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share of Common
Stock held of record by such holder on all matters on which stockholders
generally are entitled to vote under Massachusetts law. Voting rights are not
cumulative, so that the holders of a majority of the voting power of the Company
could elect all the directors standing for election at any annual or special
meeting of the stockholders, and the holders of the remaining shares may not be
able to elect any director.
The holders of the Common Stock are entitled to receive ratably dividends
only when and if declared by the Board of Directors of the Company out of funds
legally available for payment thereof. The ability of the Board of Directors to
declare or pay dividends on Common Stock or to cause the Company to repurchase
shares of its capital stock may be subject to restrictions or limitations
contained in the provisions of any series of Preferred Stock which may hereafter
be issued by the Company.
Upon the liquidation, dissolution or winding up of the Company, or any
distribution of its assets, the holders of the Common Stock will be entitled to
receive ratably the assets of the Company available after the payment of all
debts and other liabilities and after the holders of any series of Preferred
Stock which may be issued have received the preferential amount fixed by the
Board of Directors for such shares.
The holders of Common Stock will have no preemptive rights to purchase
shares of capital stock of the Company. Shares of Common Stock will not be
subject to any redemption provisions and will not be convertible into any other
securities or property. The rights, preferences and privileges of the holder of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of the shares of any series of Preferred Stock which the Company may
designate and issue in the future. All outstanding shares of Common Stock are
fully-paid and non-assessable and the shares of Common Stock offered by the
Company in the offering, when issued, will be fully-paid and non-assessable.
PREFERRED STOCK
Pursuant to the Articles, the Board of Directors is authorized, subject to
any limitations prescribed by law, without further stockholder approval, to
issue shares of Preferred Stock in one or more classes or one or more series
within each class. Each such series of Preferred Stock shall have such rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights and redemption privileges and liquidation preferences,
as shall be determined by the Board of Directors.
The Company has granted the Board of Directors authority to designate and
issue Preferred Stock and to determine its rights and preferences to eliminate
delays associated with a stockholder vote on specific issues. The issuances of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of the outstanding voting stock of the
Company.
35
<PAGE>
MASSACHUSETTS LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER
EFFECTS
The Company is subject to Chapter 110F of the Massachusetts General Laws, an
anti-takeover law. Under Chapter 110F, a Massachusetts corporation with more
than 200 stockholders may not engage in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless (i)
the interested stockholder obtains the approval of the Board of Directors prior
to becoming an interested stockholder, (ii) the interested stockholder acquires
90.0% of the outstanding voting stock of the corporation (excluding shares held
by certain affiliates of the corporation) at the time it becomes an interested
stockholder or (iii) the business combination is approved by both the Board of
Directors and the holders of two-thirds of the outstanding voting stock of the
corporation (excluding shares held by the interested stockholder). An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or, in certain cases, at any time within the prior three years
did own) 5.0% or more of the outstanding voting stock of the corporation. A
"business combination" includes a merger, certain stock or asset sales, and
certain other specified transactions resulting in a financial benefit to the
interested stockholder.
The By-Laws include a provision excluding the Company from the applicability
of Chapter 110D of the Massachusetts General Laws, which regulates the
acquisition of so-called "control shares." A control share acquisition is the
acquisition of shares which, when added to shares already owned, would (but for
the statute) entitle the acquiring person to vote at least 20% of a
corporation's stock. Shares acquired in such a transaction would, under the
statute, have no voting rights unless a majority of non-interested stockholders
voted to grant such voting rights. In general, the person acquiring such shares,
officers of the Company and those directors of the Company who are also
employees, are not permitted to vote on whether such voting rights shall be
granted. The Board of Directors may amend the By-Laws at any time to subject the
Company to this statute prospectively.
Massachusetts General Laws Chapter 156B, Section 50A requires that a
publicly held Massachusetts corporation have a classified board of directors
consisting of three classes as nearly equal in size as possible, unless the
corporation elects not to be covered by Section 50A. The Company's By-Laws
contain provisions which give effect to Section 50A. See "Management--Executive
Officers and Directors."
The By-Laws provide that the directors and officers of the Company generally
shall be indemnified by the Company to the fullest extent authorized by
Massachusetts law, as it now exists or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with service for or
on behalf of the Company. In addition, the Articles provide that the directors
of the Company will not be personally liable to the Company or its stockholders
for monetary damages for certain breaches of their fiduciary duty as directors,
unless they violated their duty of loyalty to the Company or its stockholders,
acted in bad faith, knowingly or intentionally violated the law, authorized
illegal dividends or redemptions, approved certain loans to insiders or derived
an improper benefit from their action as directors.
The Company's By-Laws provide that special meetings of stockholders may be
called only by the Chief Executive Officer or President, by a majority of the
Board of Directors or by the Clerk upon the written request of the holders of at
least 40% of the Company's outstanding Common Stock.
In addition, the Articles provide that shares of the Company's Preferred
Stock may be issued in the future without stockholder approval and upon such
terms and conditions, and having such rights, privileges and preferences, as the
Board of Directors may determine. See "--Preferred Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Union
National Bank of North Carolina.
36
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Dean Witter Reynolds Inc., Montgomery
Securities and J.P. Morgan Securities Inc. have severally agreed to purchase
from the Company the following respective numbers of shares of Common Stock at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------- ---------
Alex. Brown & Sons Incorporated..................................
<S> <C>
Dean Witter Reynolds Inc.........................................
Montgomery Securities............................................
J.P. Morgan Securities Inc.......................................
---------
Total............................................................ 2,000,000
---------
---------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares are
purchased.
The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
other dealers. After the public offering, the offering price and other selling
terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 2,000,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,000,000 shares are being offered.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
The Company and holders of approximately 1,651,838 shares of Common Stock
have agreed not to offer, sell or otherwise dispose of any shares of such Common
Stock for a period of 90 days after the date of this Prospectus without the
prior written consent of Alex. Brown & Sons Incorporated on behalf of the
Representatives of the Underwriters.
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market making
on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange
Act during the two business day period before the commencement of the offers or
sales of the Common Stock. The passive market making transactions must comply
with applicable volume and price limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the highest
independent bid for such security; if all independent bids are lowered before
the passive market maker's bid, however, such bid must then be lowered when
certain purchase limits are exceeded.
37
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Hutchins, Wheeler &
Dittmar, A Professional Corporation, Boston, Massachusetts. James Westra, who is
a stockholder of Hutchins, Wheeler & Dittmar, is Assistant Clerk of the Company.
Attorneys at Hutchins, Wheeler & Dittmar, A Professional Corporation, own an
aggregate of 1,500 shares of the Company's Common Stock. Certain legal matters
in connection with this offering will be passed upon for the Underwriters by
Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The financial statements of the Company and Focus as of December 31, 1993,
1994 and 1995 and for the years then ended included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as set forth in
their report thereon appearing elsewhere herein, and have been so included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Prompt at December 31, 1994 and 1995, and for
each of the three years in the period ended December 31, 1995 appearing in this
Prospectus have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
Upon the recommendation of the Company's Board of Directors, effective
December 5, 1994, the Company engaged Arthur Andersen LLP to serve as the
Company's independent accountants, dismissing KPMG Peat Marwick LLP. KPMG Peat
Marwick LLP's report on the Company's financial statements for the years ended
December 31, 1992 and 1993 did not contain an adverse opinion or disclaimer of
opinion nor were any reports qualified or modified as to uncertainty, audit
scope or accounting principles. The change in independent accountants did not
result from any disagreement between the Company and KPMG Peat Marwick LLP on
any manner of accounting principles or practices, financial statement disclosure
or auditing scope or procedure.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C. 20549, and at
the Commission's Regional Offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, NW, Room 1024, Judiciary Plaza,
Washington, D.C. 20549, at prescribed rates. The Company's Common Stock is
listed on the Nasdaq National Market and such reports, proxy statements and
other information concerning the Company may be inspected at the offices of the
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006-1506. In
addition, the Company is required to file electronic versions of these documents
with the Commission through the Commission's Electronic Data Gathering,
Analysis, and Retrieval (EDGAR) system. The Commission maintains a World Wide
Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended, with respect to the Common
Stock offered hereby. This prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which have been
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and such Common Stock, reference
is hereby made to the Registration Statement
38
<PAGE>
and the exhibits and schedules thereto. Statements contained in this Prospectus
as to the contents of any contract or any other document are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference to such exhibit.
Copies of the Registration Statement and the exhibits may be inspected, without
charge at the offices of the Commission, or obtained at prescribed rates from
the Public Reference Section of the Commission at the address set forth above.
INCORPORATION BY REFERENCE
The Company hereby incorporates by reference the documents listed in (a)
through (i) below. In addition, all documents subsequently filed by the Company
pursuant to Section 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the
termination of the offering shall be deemed to be incorporated by reference into
this Prospectus and to be a part hereof from the date of filing of such
documents.
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, as filed with the Commission (Commission File No.
0-25856).
(b) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1996 (Commission File No. 0-25856).
(c) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996 (Commission File No. 0-25856).
(d) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996 (Commission File No. 0-25856).
(e) The Company's Current Report on Form 8-K filed on April 18, 1996
(Commission File No. 0-25856).
(f) The Company's Current Report on Form 8-K/A filed on May 8, 1996
(Commission File No. 0-25856).
(g) The Company's Current Report on Form 8-K filed on June 27, 1996
(Commission File No. 0-25856).
(h) The Company's Proxy Statement filed with the Commission pursuant to
Section 14(a) of the Exchange Act of 1934, as amended, with respect to the
Company's Special Meeting of Stockholders in lieu of its 1996 Annual
Meeting.
(i) The description of the Company's Common Stock which is contained in
the Registration Statement filed by the Company under the Exchange Act,
including any amendment or report filed for the purpose of updating such
description.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or on any other subsequently filed document which is incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will furnish without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request, a copy of any and all of the information that has been incorporated by
reference in this Prospectus, other than exhibits to such information, unless
such exhibits are specifically incorporated by reference into the information
that this Prospectus incorporates. Requests should be submitted in writing to
CRA Managed Care, Inc., 312 Union Wharf, Boston, Massachusetts 02109, Attention:
Martha Kuppens, Telephone Number: (617) 367-2163.
39
<PAGE>
CRA MANAGED CARE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS......................... F-2
CONSOLIDATED FINANCIAL STATEMENTS OF CRA MANAGED CARE, INC.
Balance Sheets............................................... F-3
Statements of Operations..................................... F-4
Statements of Cash Flows..................................... F-5
Statements of Stockholders' Equity (Deficit)................. F-6
Notes to Financial Statements................................ F-7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS......................... F-20
FINANCIAL STATEMENTS OF FOCUS HEALTHCARE MANAGEMENT, INC.
Balance Sheets............................................... F-21
Statements of Operations..................................... F-22
Statements of Shareholder's Equity (Deficit)................. F-23
Statements of Cash Flows..................................... F-24
Notes to Financial Statements................................ F-25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS......................... F-29
FINANCIAL STATEMENTS OF PROMPT ASSOCIATES, INC.
Balance Sheets............................................... F-30
Statement of Operations...................................... F-31
Statement of Cash Flows...................................... F-32
Statement of Shareholder's Equity (Deficit).................. F-33
Notes to Financial Statements................................ F-34
CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS OF CRA MANAGED CARE,
INC.,
FOCUS HEALTHCARE MANAGEMENT, INC. AND PROMPT ASSOCIATES, INC.
(UNAUDITED):
Consolidated Pro Forma Balance Sheet......................... F-39
Consolidated Pro Forma Statement of Operations............... F-40
Notes to Pro Forma Financial Statements...................... F-41
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
CRA Managed Care, Inc.:
We have audited the accompanying balance sheets of CRA Managed Care, Inc. (a
Massachusetts corporation) as of December 31, 1994 and 1995, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1995. 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 CRA Managed Care, Inc. as of
December 31, 1994 and 1995 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 23, 1996
F-2
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------ SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 2,197,000 $ 3,005,000 $ 33,585,000
Accounts receivable, less allowance for doubtful accounts of
$380,000, $430,000 and $1,119,000 respectively.................. 20,654,000 26,380,000 32,395,000
Prepaid expenses.................................................. 394,000 629,000 512,000
Prepaid taxes..................................................... 1,084,000 319,000 1,173,000
------------ ------------ -------------
Total current assets.......................................... 24,329,000 30,333,000 67,665,000
Property and equipment, at cost....................................... 8,890,000 11,732,000 17,714,000
Less: Accumulated depreciation and amortization....................... 4,071,000 5,864,000 10,639,000
------------ ------------ -------------
Net property and equipment.................................... 4,819,000 5,868,000 7,075,000
Other assets:
Deferred finance costs, net of accumulated amortization........... 1,890,000 -- --
Excess of cost over fair value of net assets acquired............. -- -- 19,568,000
Other assets...................................................... 307,000 355,000 386,000
------------ ------------ -------------
Total other assets............................................ 2,197,000 355,000 19,954,000
------------ ------------ -------------
$ 31,345,000 $ 36,556,000 $ 94,694,000
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving credit facilities....................................... $ 4,716,000 $ 4,300,000 $ --
Current portion of long-term debt................................. 2,500,000 5,000,000 71,000
Accrued interest expense.......................................... 627,000 18,000 --
Accounts payable and accrued expenses............................. 5,074,000 5,927,000 9,582,000
Accrued payroll and related expenses.............................. 5,803,000 7,595,000 9,403,000
Accrued income taxes.............................................. -- -- --
------------ ------------ -------------
Total current liabilities..................................... 18,720,000 22,840,000 19,056,000
Long-term debt........................................................ 37,500,000 -- 6,000
Long-term deferred tax liabilities.................................... 3,638,000 2,056,000 2,422,000
Commitments and contingencies (Notes 8 and 12)
Stockholders' equity (deficit):
Preferred Stock--$.01 par value, none, none and 1,000,000
authorized; none issued and outstanding......................... -- -- --
Convertible Preferred Stock--Series A, no par value; 1,698,463,
none and none authorized; 1,698,483, none and none issued and
outstanding, respectively....................................... 9,249,000 -- --
Common Stock--$.01 par value; none, 10,000,000 and 40,000,000
authorized; none, 7,372,424 and 8,907,532 shares issued and
outstanding, respectively....................................... -- 74,000 89,000
Common Stock--Class A, no par value; 10,000,000, none and none
authorized; 4,700,000; none and none shares issued and
outstanding, respectively....................................... 1,000 -- --
Paid-in capital................................................... -- 36,839,000 90,743,000
Retained earnings (deficit)....................................... 3,103,000 (25,253,000) (17,622,000 )
Less: Treasury stock, 1,698,463, none and none shares,
respectively.................................................... (40,866,000) -- --
------------ ------------ -------------
Total stockholders' equity (deficit).......................... (28,513,000) 11,660,000 73,210,000
------------ ------------ -------------
$ 31,345,000 $ 36,556,000 $ 94,694,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 100,546,000 $ 121,295,000 $ 146,055,000 $ 107,881,000 $ 131,032,000
Cost of services....................... 86,082,000 103,796,000 122,615,000 90,600,000 107,981,000
-------------- -------------- -------------- -------------- --------------
Gross profit................... 14,464,000 17,499,000 23,440,000 17,281,000 23,051,000
General and administrative expenses.... 9,931,000 8,753,000 11,021,000 8,180,000 10,491,000
-------------- -------------- -------------- -------------- --------------
Operating income............... 4,533,000 8,746,000 12,419,000 9,101,000 12,560,000
Other (income) expense:
Interest (income).................. (11,000) (62,000) -- -- (446,000)
Interest expense................... 16,000 4,087,000 2,484,000 2,260,000 658,000
Other (income) expense............. (5,000) 132,000 -- -- --
-------------- -------------- -------------- -------------- --------------
Total other (income) expense... -- 4,157,000 2,484,000 2,260,000 212,000
Income before income taxes..... 4,533,000 4,589,000 9,935,000 6,841,000 12,348,000
Provision for income taxes
Current year operations............ 355,000 1,530,000 3,974,000 2,736,000 5,124,000
Change in tax status............... -- 3,772,000 -- -- --
-------------- -------------- -------------- -------------- --------------
Total provision for income
taxes........................ 355,000 5,302,000 3,974,000 2,736,000 5,124,000
-------------- -------------- -------------- -------------- --------------
Net income (loss) before extraordinary
items 4,178,000 (713,000) 5,961,000 4,105,000 7,224,000
Loss on retirement of debt, net of
taxes of $1,610,000.................. -- -- (2,460,000) (2,460,000) --
-------------- -------------- -------------- -------------- --------------
Net income (loss)...................... $ 4,178,000 $ (713,000) $ 3,501,000 $ 1,645,000 $ 7,224,000
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Actual and pro forma earnings per
share:
Pro forma net income
(Note 2)......................... $ 2,753,000
--------------
--------------
Net income before extraordinary
items............................ $ 0.57 $ 0.91 $ 0.66 $ 0.87
Loss on retirement of debt, net of
tax.............................. -- (0.37) (0.40) --
-------------- -------------- -------------- --------------
Net income......................... $ 0.57 $ 0.54 $ 0.26 $ 0.87
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average shares
outstanding...................... 4,815,000 6,540,000 6,223,000 8,261,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------ ------------------------
1993 1994 1995 1995 1996
------------- ----------- -------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operations:
Net income (loss).......................................... $ 4,178,000 $ (713,000) $ 3,501,000 $ 1,645,000 $ 7,224,000
Items not requiring cash:
Depreciation of property and equipment................... 847,000 1,274,000 1,601,000 1,224,000 2,081,000
Provision for doubtful accounts.......................... 15,000 353,000 186,000 50,000 183,000
Amortization of deferred finance costs and debt
discount............................................... -- 521,000 228,000 228,000 --
Loss on retirement of debt............................... -- -- 3,912,000 3,912,000 --
Loss on disposal of fixed assets......................... 1,000 134,000 -- -- --
Provision for deferred tax income taxes.................. 244,000 2,758,000 208,000 -- --
Change in assets and liabilities:
Accounts receivable...................................... (3,848,000) (4,730,000) (5,570,000) (3,650,000) (4,266,000)
Prepaid expenses and deposits............................ 311,000 (1,407,000) 344,000 131,000 (722,000)
Accounts payable, accrued expenses and income taxes...... 1,213,000 7,404,000 (296,000) (2,656,000) 4,534,000
------------- ----------- -------------- ----------- -----------
Cash flows from operations............................. 2,961,000 5,594,000 4,114,000 884,000 9,034,000
Cash flows from investing activities:
Purchase of property and equipment......................... (1,763,000) (2,788,000) (2,492,000) (1,628,000) (1,960,000)
Acquisitions of Focus and QMC3, net of cash acquired....... -- -- -- -- (21,080,000)
Proceeds from sale of property and equipment............... 24,000 13,000 -- -- --
Cash surrender value of life insurance..................... (22,000) (23,000) (12,000) -- --
------------- ----------- -------------- ----------- -----------
Cash flows used for investing activities............... (1,761,000) (2,798,000) (2,504,000) (1,628,000) (23,040,000)
Cash flows from financing activities:
Payments of note payable to bank and overdraft............. (337,000) -- -- -- --
Dividends paid............................................. (218,000) -- -- -- --
Borrowings (payments) under revolving credit facilities,
net...................................................... -- 4,716,000 (416,000) 84,000 (4,300,000)
Proceeds from the issuance of Term Loan.................... -- 17,000,000 -- -- --
Payments on Term Loan...................................... -- (750,000) (16,250,000) (16,250,000) --
Payments on capital leases................................. -- -- -- -- (31,000)
Proceeds from issuance of Senior Subordinated Notes........ -- 21,000,000 -- -- --
Payments on the Senior Subordinated Notes.................. -- -- (21,000,000) (21,000,000) --
Proceeds (payments) on issuance of Junior Subordinated
Notes.................................................... -- 5,000,000 -- -- (5,000,000)
Payment on Junior Subordinated Notes....................... -- -- -- -- --
Proceeds from the issuance of Preferred Stock.............. -- 10,000,000 -- -- --
Proceeds from the sale of Common Stock..................... -- -- 40,250,000 40,250,000 55,200,000
Proceeds for the sale of Common Stock under the employee
stock purchase plan and stock option plan................ -- -- 357,000 -- 2,077,000
Costs associated with the issuance of debt................. -- (2,154,000) -- -- --
Costs associated with the issuance of Preferred Stock...... -- (751,000) -- -- --
Costs associated with the sale of Common Stock............. -- -- (3,743,000) (3,743,000) (3,360,000)
Repurchase of Common Stock................................. -- (55,412,000) -- -- --
------------- ----------- -------------- ----------- -----------
Cash flows used for financing activities............... (555,000) (1,351,000) (802,000) (659,000) 44,586,000
------------- ----------- -------------- ----------- -----------
Net increase in cash and cash equivalents.................... 645,000 1,445,000 808,000 (1,403,000) 30,580,000
Cash and cash equivalents, beginning of year................. 107,000 752,000 2,197,000 2,197,000 3,005,000
------------- ----------- -------------- ----------- -----------
Cash and cash equivalents, end of period..................... $ 752,000 $ 2,197,000 $ 3,005,000 $ 794,000 $33,585,000
------------- ----------- -------------- ----------- -----------
------------- ----------- -------------- ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid.............................................. $ 16,000 $ 2,902,000 $ 2,865,000 $ 2,589,000 $ 676,000
Income taxes paid.......................................... $ 48,000 $ 3,690,000 $ 3,392,000 $ 2,940,000 $ 4,893,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE CLASS A $0.01 PAR VALUE
PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------------ ---------------------- ---------------------
NUMBER NUMBER NUMBER PAID-IN
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE CAPITAL
----------- ----------- ----------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992.................. -- $ -- 4,700,000 $ 1,000 -- $ -- $ --
Dividends on Common Stock................ -- -- -- -- -- -- --
Net income............................... -- -- -- -- -- -- --
----------- ----------- ----------- --------- ---------- --------- ------------
Balance December 31, 1993.................. -- -- 4,700,000 1,000 -- -- --
----------- ----------- ----------- --------- ---------- --------- ------------
----------- ----------- ----------- --------- ---------- --------- ------------
Treasury stock purchase.................. -- -- -- -- -- -- --
Treasury stock reissuance................ -- -- -- -- -- -- --
Issuance of Preferred Stock.............. 1,698,463 9,249,000 -- -- -- -- --
Net loss................................. -- -- -- -- -- -- --
----------- ----------- ----------- --------- ---------- --------- ------------
Balance December 31, 1994.................. 1,698,463 9,249,000 4,700,000 1,000 -- -- --
----------- ----------- ----------- --------- ---------- --------- ------------
----------- ----------- ----------- --------- ---------- --------- ------------
Conversion of Convertible Preferred Stock
into Class A Common Stock.............. (1,698,463) (9,249,000) -- -- -- -- --
Conversion of Class A Common Stock into
$0.01 par value Common Stock........... -- -- (4,700,000) (1,000) 4,700,000 47,000 --
Sale of Common Stock at initial public
offering............................... -- -- -- -- 2,515,625 25,000 36,482,000
Common Stock issued for the acquisition
of Alta Pacific Corporation............ -- -- -- -- 136,150 2,000 --
Common Stock issued under employee stock
purchase plan and stock option plan.... -- -- -- -- 20,649 -- 357,000
Net income................................. -- -- -- -- -- -- --
----------- ----------- ----------- --------- ---------- --------- ------------
Balance December 31, 1995.................. -- -- -- -- 7,372,424 74,000 36,839,000
----------- ----------- ----------- --------- ---------- --------- ------------
----------- ----------- ----------- --------- ---------- --------- ------------
Sale of Common Stock at initial public
offering............................... -- -- -- -- 1,200,000 12,000 51,828,000
Common Stock issued for the acquisition
of QMC3................................ -- -- -- -- 230,441 2,000 --
Common Stock issued under employee stock
purchase plan and stock option plan.... -- -- -- -- 104,667 1,000 2,076,000
Net income................................. -- -- -- -- -- -- --
----------- ----------- ----------- --------- ---------- --------- ------------
Balance September 30, 1996................. -- -- -- -- 8,907,532 $ 89,000 $ 90,743,000
----------- ----------- ----------- --------- ---------- --------- ------------
----------- ----------- ----------- --------- ---------- --------- ------------
<CAPTION>
SERIES A
TREASURY STOCK TOTAL
-------------------------- STOCKHOLDERS'
RETAINED NUMBER EQUITY
EARNINGS OF SHARES VALUE (DEFICIT)
------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Balance December 31, 1992.................. $ 11,895,000 -- $ -- $ 11,896,000
Dividends on Common Stock................ (218,000) -- -- (218,000)
Net income............................... 4,178,000 -- -- 4,178,000
------------- ----------- ------------- --------------
Balance December 31, 1993.................. 15,855,000 -- -- 15,856,000
------------- ----------- ------------- --------------
------------- ----------- ------------- --------------
Treasury stock purchase.................. -- (2,303,000) (55,412,000) (55,412,000)
Treasury stock reissuance................ (12,039,000) 604,537 14,546,000 2,507,000
Issuance of Preferred Stock.............. -- -- -- 9,249,000
Net loss................................. (713,000) -- -- (713,000)
------------- ----------- ------------- --------------
Balance December 31, 1994.................. 3,103,000 (1,698,463) (40,866,000) (28,513,000)
------------- ----------- ------------- --------------
------------- ----------- ------------- --------------
Conversion of Convertible Preferred Stock
into Class A Common Stock.............. (31,617,000) 1,698,463 40,866,000 --
Conversion of Class A Common Stock into
$0.01 par value Common Stock........... (46,000) -- -- --
Sale of Common Stock at initial public
offering............................... -- -- -- 36,507,000
Common Stock issued for the acquisition
of Alta Pacific Corporation............ (194,000) -- -- (192,000)
Common Stock issued under employee stock
purchase plan and stock option plan.... -- -- -- 357,000
Net income................................. 3,501,000 -- -- 3,501,000
------------- ----------- ------------- --------------
Balance December 31, 1995.................. (25,253,000) -- -- 11,660,000
------------- ----------- ------------- --------------
------------- ----------- ------------- --------------
Sale of Common Stock at initial public
offering............................... -- -- -- 51,840,000
Common Stock issued for the acquisition
of QMC3................................ 407,000 -- -- 409,000
Common Stock issued under employee stock
purchase plan and stock option plan.... -- -- -- 2,077,000
Net income................................. 7,224,000 -- -- 7,224,000
------------- ----------- ------------- --------------
Balance September 30, 1996................. $ (17,622,000) -- -- $ 73,210,000
------------- ----------- ------------- --------------
------------- ----------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND CAPITALIZATION
CRA Managed Care, Inc. (the "Company") was founded in 1978 and is a provider
of field case management and specialized cost containment services designed to
reduce workers' compensation costs. On March 8, 1994 the Company completed a
recapitalization (the "Recapitalization"), which included the repurchase of
2,303,000 shares of Common Stock from the two principal stockholders of the
Company for $55,412,000; and the sale of 1) 1,698,463 shares of Series A
Preferred Stock for $10,000,000 to J. H. Whitney & Co. and affiliated companies
("Whitney", $9,000,000) and the First Union Corporation ("First Union",
$1,000,0000), with each share being convertible into one share of Common Stock,
2) $17,000,000 principal amount of term loans (the "Term Loan") and a
$10,000,000 revolving credit facility (the "Former Revolving Credit Facility")
due March 31, 1999 at an interest rate of the Base Rate plus 1 1/3% or LIBOR
plus 3% to First Union Bank of North Carolina ("First Union Bank"), 3)
$21,000,000 principal amount of senior subordinated promissory notes (the
"Senior Subordinated Notes") due March 8, 2001 at an interest rate of the
10.101% to Whitney ($19,000,000) and First Union ($2,000,000), and 4) $5,000,000
principal amount of junior subordinated notes (the "Junior Subordinated Notes")
due March 9, 2002 at an interest rate of 10.0% to the Company's two principal
stockholders.
The Company incurred costs of $2,905,000 in connection with the
Recapitalization of which $751,000 was assigned to the issuance of the Preferred
Stock and $2,154,000 to the issuance of the debt. Furthermore, the Company
issued 604,537 shares of Common Stock from its treasury stock to Whitney
(546,962 shares) and First Union (57,575 shares) in connection with the issuance
of the Senior Subordinated Notes. The Company assigned a value of $2,507,000 to
these shares which was recorded as debt discount on the Senior Subordinated
Notes.
On March 15, 1995 the Board of Directors voted to restate the Company's
Amended and Restated Articles of Organization. The effect of the restatement was
(i) to increase to 10,000,000 the number of authorized shares of Common Stock,
to change the par value of the Common Stock to $.01 per share and to create a
new class of preferred stock, $.01 par value.
On May 10, 1995, the Company completed its initial public offering of
2,515,625 shares of its Common Stock, including the exercise of the underwriters
over-allotment option, at a price of $16.00 per share, generating net proceeds
to the Company of $36,507,000. These proceeds, supplemented by borrowings of
$5,000,000 under a new credit facility (the "Credit Facility") with First Union
Bank were used to repay fully the Term Loan ($16,250,000) and the Former
Revolving Credit Facility ($4,226,000) with First Union Bank and the Senior
Subordinated Notes ($21,000,000) issued to Whitney and First Union. The early
repayment of this debt resulted in the Company recording a net loss on the
retirement of debt of $2,460,000 comprised of the write-off of associated
deferred finance costs ($1,772,000), debt discount on the Senior Subordinated
Notes ($2,140,000) and fees associated with the termination of the interest rate
swaps previously required by the former loan agreement ($158,000), offset by a
tax benefit of $1,610,000.
On October 23, 1995, the Company acquired Alta Pacific Corporation, a
workers' compensation case management company with eight offices in the state of
Washington, with revenues of approximately $3,000,000, in a pooling transaction
for 136,150 shares of Common Stock, or approximately $2,900,000 in value, based
upon the market value of the stock on the acquisition date. This acquisition was
not material and the Company restated its opening retained earnings to reflect
the net assets of Alta Pacific Corporation. As such, the results for the year
ended December 31, 1995 include the operating results of Alta Pacific
Corporation subsequent to the acquisition date.
On April 2, 1996, the Company purchased Focus HealthCare Management, Inc.
("Focus") from United HealthCare Corporation for $21,000,000 in cash. Focus,
based in Brentwood, Tennessee, has built and
F-7
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
maintains one of the nation's largest workers' compensation PPO networks, and
last year had annual revenues of approximately $9,900,000. In order to finance
this acquisition, the Company and First Union Bank signed an amendment to expand
the Company's borrowing capacity under the Credit Facility to $40,000,000 under
similar terms and conditions.
The acquisition of Focus has been accounted for by the Company as a purchase
whereby the basis for accounting for Focus' assets and liabilities are based
upon their fair values at the date of acquisition. The preliminary allocation of
the purchase price to the assets and liabilities of Focus is as follows:
<TABLE>
<S> <C>
Estimated purchase price including fees and expenses: $21,555,000
Purchase price allocated to:
Current assets 1,795,000
Property and equipment 929,000
Other long term assets 5,000
Current liabilities (711,000)
Long-term deferred tax liabilities (324,000)
Long-term capital leases (39,000)
-----------
Net assets acquired 1,655,000
-----------
Excess of cost over fair value of net assets acquired $19,900,000
-----------
</TABLE>
The foregoing purchase price allocation is based upon preliminary
information. The final purchase price allocation is contingent upon the final
determination of the fair value of the net assets acquired on April 2, 1996, the
date of acquisition. Based upon presently available information, the Company
does not believe that the final purchase price allocation will materially differ
from the preliminary allocation. The Company is amortizing the excess of cost
over the fair value of net assets acquired (goodwill) over the thirty years on
the straight line method.
(2) ACTUAL, PRO FORMA AND SUPPLEMENTAL PRO FORMA EARNINGS PER SHARE
(A) EARNINGS PER SHARE
Earnings per share for the year ended December 31, 1995 and the nine months
ended September 30, 1995 and 1996 has been calculated based on the weighted
average number of shares of Common Stock and Common Stock equivalents
outstanding during the year. Earnings per share for the year ended December 31,
1993 has not been presented as it is not meaningful.
(B) PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share for the year ended December 31, 1994 has been
calculated as if the Company had been subject to federal and state income taxes
for the period based upon an effective tax rate indicative of the statutory
rates in effect during the period (prior to the Recapitalization on March 8,
1994, the Company elected to be taxed as an S corporation on a cash basis, and
accordingly, was not subject to federal income taxes and certain state income
tax jurisdictions).
(C) SUPPLEMENTAL PRO FORMA EARNINGS PER SHARE--1995 (UNAUDITED)
Supplemental pro forma earnings per share has been calculated as if the
Company repaid the Term Loan, Former Revolving Credit Facility and Senior
Subordinated Notes at the beginning of 1995 utilizing the net proceeds
($36,507,000) from its sale of Common Stock and borrowings under the Credit
Facility
F-8
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($5,000,000). The weighted average number of shares (7,376,000) is the actual
weighted average number of common shares and common share equivalents
outstanding plus the impact of the 2,515,625 shares of Common Stock that were
sold on May 10, 1995. Supplemental pro forma net income and earnings per share
for the year ended December 31, 1995 would have been $6,871,000 or $0.93 per
share.
(D) SUPPLEMENTAL PRO FORMA EARNINGS PER SHARE--1996 (UNAUDITED)
Supplemental pro forma earnings per share for the first nine months of 1996
has been calculated as if (i) the acquisition of Focus had been consummated at
January 1, 1996, (ii) the Company repaid all its outstanding debt at the
beginning of 1996 (including the additional borrowings of $21,000,000 to acquire
Focus) utilizing the net proceeds of $51,840,000 from the sale of 1,200,000
shares of Common Stock in June, 1996 and (iii) the excess proceeds from the sale
of Common Stock, after the repayment of debt, were invested in financial
instruments generating a return of 6.0%. Supplemental pro forma revenue, net
income and earnings per share for the nine months ended September 30, 1996 would
have been $133,090,000 and $7,866,000 and $0.88, respectively. The supplemental
pro forma weighted average number of shares of 8,928,000 is the actual weighted
average number of shares of Common Stock and Common Stock equivalents
outstanding plus the impact of the 1,200,000 shares of Common Stock that were
sold.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) 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.
(B) REVENUE RECOGNITION
The Company recognizes revenue primarily as services have been rendered
based upon time and expenses incurred. A certain portion of the Company's
revenues are derived from fee schedule auditing which is based on the number of
charges reviewed, and to a limited extent, based on a percentage of savings
achieved for the Company's customers. Accounts receivable at December 31, 1994,
December 31, 1995 and March 31, 1996 include $3,734,000, $4,350,000 and
$4,350,000, respectively, of unbilled accounts receivable relating to services
rendered prior to the period-end but not invoiced until after the period-end.
(C) DEPRECIATION
The Company provides for depreciation on property and equipment using
straight-line and accelerated methods by charges to operations in amounts that
allocate the cost of depreciable assets over their estimated lives as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- ------------------------------------------------------------------ --------------------------
<S> <C>
Furniture and fixtures 7 Years
Office equipment 3-5 Years
Automobiles 5 Years
Leasehold improvements The shorter of the
life of lease or asset
life
</TABLE>
(D) DEFERRED FINANCE COSTS
Costs of $2,154,000 associated with the debt issued in connection with the
Recapitalization was allocated to each debt instrument and was being amortized
as interest expense over the life of the debt instruments
F-9
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
with lives ranging from five to six years. All deferred finance costs were
written off as a result of the early retirement of debt in connection with the
sale of Common Stock on May 10, 1995.
(E) INCOME TAXES
Prior to the Recapitalization, the Company had elected "S" corporation
status under Section 1362 of the Internal Revenue Code. Accordingly, the Company
was not liable for federal income taxes as income was taxed directly to the
Company's stockholders. However, certain states in which the Company conducts
its operations did not recognize "S" corporation status. As a result, the
Company had provided for state income tax for these states.
In connection with the Recapitalization, the Company was required to change
from an "S" corporation to a "C" corporation and to report income on an accrual
basis for tax purposes as opposed to a cash basis. This change resulted in the
Company recording an incremental tax provision of $3,772,000.
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FASB 109"), for the year ended December 31, 1993
which required a change from the deferred method to the asset and liability
method of accounting for income taxes. Under the asset and liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory rates applicable to future years to
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. Under FASB 109, the effect on deferred taxes
of a change in tax rates is recognized as income in the period that includes the
enactment date.
The adoption of FASB 109 did not impact the Company's statement of
operations for the year ended December 31, 1993 and there was no cumulative
effect as of the date of adoption.
(F) FOREIGN CURRENCY TRANSLATION
All assets and liabilities of the Company's Canadian office are translated
at the year-end exchange rate while revenues and expenses are translated at the
average exchange rate for the year.
(G) 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.
(4) REVOLVING CREDIT FACILITIES
(A) CREDIT FACILITY
On April 28, 1995, the Company entered into the $25,000,000 Credit Facility
with First Union Bank. On March 29, 1996, the Company and First Union Bank
signed an amendment to expand the Company's borrowing capacity under the Credit
Facility to $40,000,000 under similar terms and conditions in order to finance
the acquisition of Focus. Interest on borrowings under the Credit Facility will
be payable, at the Company's option, at the First Union Bank's prime rate plus
an additional percentage of up to 0.375%, or LIBOR plus an additional percentage
of up to 1.875%, depending on certain financial criteria. At December 31, 1995,
the Company had borrowings under the Credit Facility of $4,300,000 at an average
rate of interest of 7.361%.
F-10
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The 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 Credit Facility, the Company is also required to satisfy
certain financial covenants, such as cash flow, capital expenditures and other
financial ratio tests including current ratios and interest expense coverage
ratios. The Company was in compliance with all such covenants during 1995. The
ability of the Company to meet its debt service requirements and to comply with
such covenants is dependent upon the Company's future performance, which is
subject to financial, economic, competitive and other factors affecting the
Company, some of which are beyond its control. The entire $40,000,000 of
revolving credit is available for borrowing by the Company provided that the
Company is prohibited from borrowing under the Credit Facility in order to
finance the acquisition of other businesses unless the Company will have,
immediately following any such acquisition, at least $5,000,000 available for
additional working capital borrowings under the Credit Facility. The Company's
obligations under the Credit Facility are secured by a first priority security
interest in substantially all of the Company's properties and assets.
The Company is required to pay First Union Bank a facility fee of 0.25% to
0.375% per annum, depending on certain financial criteria, on the unused portion
of the Credit Facility as well as a quarterly agent fee of $3,750, payable in
advance.
(B) FORMER REVOLVING CREDIT FACILITY
As part of the Recapitalization, the Company obtained the Former Revolving
Credit Facility of $10,000,000 and the Term Loan of $17,000,000 (see below)
through First Union Bank pursuant to a loan agreement (the "Former Loan
Agreement"). The Former Revolving Credit Facility permitted borrowings by the
Company of up to a maximum of $10,000,000, subject to certain borrowing base
requirements, until maturity on March 31, 1999 at an interest a rate of the Base
Rate plus 1 1/2% or LIBOR plus 3% (9.375% at December 31, 1994). At December 31,
1994, the Company had borrowings of $4,716,000.
Under the former Loan Agreement, the Company was required to satisfy certain
financial covenants, such as cash flow, capital expenditures and other financial
ratio tests including current ratios and interest expense coverage ratios. The
Company complied with or obtained waivers relative to the financial covenants
through March 31, 1995.
The Company was required to pay First Union Bank a facility fee of 0.5% per
annum on the unused portion of the Former Revolving Credit Facility, quarterly
in arrears, as well as a yearly agent fee of $25,000.
For the years ended December 31, 1993, 1994 and 1995, the weighted average
borrowings under these revolving credit facilities were $250,000, $3,404,000 and
$4,903,000, respectively and the weighted average interest rates were 6.43%,
7.39% and 8.55%, respectively.
F-11
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- --------------
<S> <C> <C> <C>
Term Loan, less current portion of $2,500,000.............................. $ 13,750 $ -- $ --
Senior Subordinated Notes, net of unamortized debt discount of
$2,250,000................................................................ 18,750 -- --
Junior Subordinated Notes, less current portion of $5,000,000.............. 5,000 -- --
Capital Lease Obligations, less current portion of $71,000................. -- -- 6
--------- --------- -------
$ 37,500 $ -- $ 6
--------- --------- -------
--------- --------- -------
</TABLE>
(A) TERM LOAN
Pursuant to the Former Loan Agreement with First Union Bank, the Company
obtained a $17,000,000 Term Loan due March 31, 1999 at an interest rate of the
Base Rate plus 1 1/2% or LIBOR plus 3% (9.375% at December 31, 1994). The Term
Loan required quarterly principal payments of $250,000 beginning June 30, 1994
through March 31, 1995, $750,000 beginning June 30, 1995 through March 31, 1997,
$1,000,000 beginning June 30, 1997 through December 31, 1998 and a final payment
of $3,000,000 on March 31, 1999. The Term Loan was repaid in full on May 10,
1995.
As required by the Former Loan Agreement, the Company entered into an
interest rate swap that limited LIBOR to 8% on $8,500,000 of Term Loan
borrowings through June 14, 1997. In order to mitigate the up front cost of this
interest rate swap, the Company entered into another interest rate swap, which
also matured on June 14, 1997. This swap set the LIBOR floor on $3,250,000 of
these borrowings at 8%. These agreements resulted in the Company recording
additional interest expense of approximately $53,000 and $13,000 for the years
ended December 31, 1994 and 1995, respectively. These financial instruments were
terminated at a cost of $158,000 during the second quarter of 1995 due to the
repayment of the debt and this cost is included in Loss on Retirement of Debt.
(B) SENIOR SUBORDINATED NOTES
The Company issued $21,000,000, principal amount, of Senior Subordinated
Notes due March 8, 2001 at an interest rate of the 10.101% to Whitney
($19,000,000) and First Union ($2,000,000). Furthermore, the Company issued
604,538 shares of its treasury stock to Whitney (546,963 shares) and First Union
(57,575 shares) in connection with the issuance of the Senior Subordinated
Notes, to which the Company assigned a value of $2,507,000 at the date of
issuance, which was reflected as debt discount on the Senior Subordinated Notes
and was being amortized as interest expense over the life of the debt.The Senior
Subordinated Notes were repaid in full on May 10, 1995 and the associated debt
discount was written off and was included in Loss on Retirement of Debt.
Similar to the Former Loan Agreement, the Senior Subordinated Notes
agreement also required the Company to satisfy certain financial covenants. The
Company complied with or obtained waivers relative to such financial covenants.
(C) JUNIOR SUBORDINATED NOTES
In connection with the repurchase of 2,303,000 shares of Common Stock from
the two principal stockholders of the Company as part of the Recapitalization,
the Company issued $5,000,000, principal
F-12
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
amount, of Junior Subordinated Notes due March 9, 2002 at an interest rate of
10.0%. On January 16, 1996 the Company retired the 10% Junior Subordinated Notes
utilizing borrowings under the Credit Facility.
(6) INCOME TAXES
The provision for income taxes consisted of the following for the years
ended December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................................ $ -- $ 1,777,000 $ 1,658,000
State.............................................. 111,000 767,000 498,000
---------- ------------ ------------
111,000 2,544,000 2,156,000
Deferred:
Federal............................................ -- 2,822,000 166,000
State.............................................. 244,000 (64,000) 42,000
---------- ------------ ------------
244,000 2,758,000 208,000
---------- ------------ ------------
Total............................................ $ 355,000 $ 5,302,000 $ 2,364,000
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
Significant items making up deferred tax liabilities and deferred tax assets
were as follows at December 31:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Deferred Tax Assets:
Allowance for doubtful accounts................................. $ 152,000 $ 169,000
Accrued expenses................................................ 564,000 452,000
------------ ------------
$ 716,000 $ 621,000
------------ ------------
------------ ------------
Deferred Tax liabilities:
Book to tax depreciation........................................ $ 52,000 $ 180,000
Change in tax status............................................ 4,302,000 2,497,000
------------ ------------
$ 4,354,000 $ 2,677,000
------------ ------------
------------ ------------
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
tax rate for the years ended December 31, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1994 % 1995 %
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Tax provision at federal statutory rate................................ $ 1,560,000 34.0% $ 1,994,000 34.0%
Income prior to Recapitalization, taxes as an S corporation............ (352,000) (7.7) -- --
State taxes, net of federal income tax benefit......................... 228,000 5.0 356,000 6.1
Items not deductible for tax purposes and other items.................. 94,000 2.0 14,000 0.2
------------ --- ------------ ---
$ 1,530,000 33.3% $ 2,364,000 40.3%
------------ --- ------------ ---
------------ --- ------------ ---
</TABLE>
Prior to the Recapitalization, the Company was an S corporation under
Section 1362 of the Internal Revenue Code. The tax provision in prior years
resulted from certain states that do not recognize S corporation status.
F-13
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In connection with the Recapitalization, the Company was required to change
from an S corporation to a C corporation and to report income on an accrual
basis for tax purposes as opposed to a cash basis. This change resulted in the
Company recording an incremental tax provision of $3,772,000.
(7) STOCKHOLDERS' EQUITY
(A) PREFERRED STOCK
Pursuant to the Articles of Organization, the Board of Directors is
authorized, subject to any limitations prescribed by law, without further
stockholder approval, to issue shares of Preferred Stock in one or more classes
or one or more series within each class. Each such series of Preferred Stock
shall have such rights, preferences, privileges and restrictions, including
voting rights, dividends rights, conversion rights and redemption privileges and
liquidation preferences, as shall be determined by the Board of Directors.
The Company has granted the Board of Directors authority to designate and
issue Preferred Stock and to determine its rights and preferences to eliminate
delays associated with a stockholder vote on specific issues. The issuances of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of the outstanding voting stock of the
Company.
(B) CONVERTIBLE PREFERRED STOCK
Each share of the Series A Convertible Preferred Stock could have been
converted by the holder into a share of Class A Common Stock subject to certain
antidilution adjustments. The holders of the Series A Convertible Preferred
Stock were entitled to receive dividends or distributions on an as-converted
basis equal to amounts declared by the Company on its Common Stock. The holders
of Series A Convertible Preferred Stock were entitled to vote with the holders
of Class A Common Stock on an as converted basis.
The Company could require the conversion of all outstanding Series A
Convertible Preferred Stock in connection with a qualified initial public
offering. The Company exercised this option in connection with the sale of
Common Stock on May 10, 1995 and subsequently canceled, retired and eliminated
all shares of Series A Convertible Preferred Stock from the Company's authorized
shares.
(C) CLASS A COMMON STOCK
All shares of Class A Common Stock were converted into $.01 par value Common
Stock in connection with the sale of Common Stock on May 10, 1995 and the
Company subsequently canceled, retired and eliminated all shares of Class A
Common Stock from the Company's authorized shares.
(8) COMMITMENTS
The Company leases certain office facilities and office equipment from
related parties under leases that expire on various dates through December 31,
2003. Certain leases require the Company to pay increases in operating costs and
real estate taxes. In addition, the Company leases certain office facilities
from unrelated parties under operating lease agreements that expire on various
dates to July 31, 2000.
Certain motor vehicles are leased from unrelated parties under
noncancellable operating leases that expire on various dates through December
31, 1997. During 1993, the Company purchased from a related party, office
equipment that had been leased. The purchase price was the estimated fair value
of the equipment.
F-14
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule of rent expense by major category for the years
ended December 31:
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Facilities--related parties......................... $ 1,310,000 $ 714,000 $ 726,000
Facilities--unrelated parties....................... 2,121,000 2,673,000 3,199,000
------------ ------------ ------------
3,431,000 3,387,000 3,925,000
Office equipment--unrelated parties................. 121,000 150,000 190,000
Computer equipment--related parties................. 369,000 -- --
Automobiles--unrelated parties...................... 1,798,000 2,181,000 2,638,000
------------ ------------ ------------
Total rent expense................................ $ 5,719,000 $ 5,718,000 $ 6,753,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The following is a schedule of future minimum lease payments under
noncancellable operating leases for the years ending December 31:
<TABLE>
<CAPTION>
RELATED UNRELATED
YEAR PARTIES PARTIES TOTAL
- ------------------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
1996........................................... $ 726,000 $ 4,872,000 $ 5,598,000
1997........................................... 726,000 3,559,000 4,285,000
1998........................................... 726,000 1,877,000 2,603,000
1999........................................... 726,000 1,022,000 1,748,000
2000........................................... 726,000 537,000 1,263,000
Thereafter....................................... 2,179,000 227,000 2,406,000
------------ ------------- -------------
$ 5,809,000 $ 12,094,000 $ 17,903,000
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
(9) EMPLOYEE RETIREMENT PLANS AND SALARY CONTINUATION PROGRAMS
(A) PROFIT SHARING PLAN
All employees who were at least 21 years of age and had completed 12 months
of service in which they worked at least 1,000 hours were eligible to
participate in the Profit Sharing Plan. The Company made discretionary
contributions to this plan each year out of its profits. Qualified employees
were entitled to receive 100% of the contributions upon retirement, death or
disability. The amount contributed to the plan was determined by the Company's
Board of Directors, and the participants could not contribute directly to the
plan.
The Company elected not to contribute to the Profit Sharing Plan for the
year ended December 31, 1994 and made contributions of $144,000 for the year
ended December 31, 1993. This plan was terminated and contributions made to the
plan were consolidated and combined with the 401(k) Plan.
(B) 401(K) PLAN
The Company has a defined contribution plan (the "401(k) Plan") pursuant to
which employees who are at least 21 years of age and who have completed at least
six months of service are eligible to participate. Participants in the 401(k)
Plan may not contribute more than the lesser of a specified statutory amount or
15% of his or her pre-tax total compensation. The 401(k) Plan permits, but does
not require, additional contributions to the 401(k) Plan by the Company.
Employees are 100% vested in their own contributions while Company contributions
vest 20% after three years and vest an additional 20% each year thereafter.
F-15
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Under the 401(k) Plan, the Company has the option of matching up to 50% of
participants' pretax contributions up to a maximum of 6% of compensation. For
the years ended December 31, 1993, 1994 and 1995, respectively, the Board of
Directors has elected to match 50% of 4% of compensation.
The company made net contributions to this plan of $439,000, $518,000 and
$581,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
(C) ALTA PACIFIC 401(K) PROFIT SHARING PLAN
The Company's subsidiary, Alta Pacific Corporation has a defined
contribution plan (the "Alta Pacific 401(k) Profit Sharing Plan") pursuant to
which employees of Alta Pacific Corporation 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 Alta Pacific 401(k) Plan may not contribute more than the
specific statutory amount. The Alta Pacific Profit Sharing 401(k) Plan permits,
but does not require, additional contributions to the Alta Pacific 401(k) Profit
Sharing Plan by Alta Pacific Corporation. Alta Pacific Corporation does not make
contributions for any employees unless they have worked at least 1,000 hours.
Employees are 100% vested in their own contributions while contributions by Alta
Pacific Corporation vest 20% after two years and 20% each year thereafter.
Alta Pacific Corporation made contributions to this plan of $93,000, $64,000
and $73,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
It is expected that this plan will be terminated and contributions made to the
plan will be consolidated and combined with the 401(k) Plan.
(D) EMPLOYMENT AGREEMENTS
Lois E. Silverman and Donald J. Larson are each party to separate employment
agreements with the Company, dated as of March 8, 1994 (the "Employment
Agreements"). The Employment Agreements have initial terms of five years unless
earlier terminated as provided therein; Ms. Silverman may terminate her
Employment Agreement as of March 8, 1997, if notice is provided one year prior
to such date. The terms of the Employment Agreements may be automatically
renewed for additional one year terms, subject to limitations contained therein.
The Company may terminate Ms. Silverman and/or Mr. Larson for cause, as defined
therein, and Ms. Silverman and Mr. Larson may terminate their respective
Employment Agreements for Good Reason, as defined therein. The Employment
Agreements contain provisions pursuant to which Ms. Silverman and Mr. Larson
agree not to disclose any proprietary information of the Company and also agree
not to compete with the Company (in the U.S., Canada or any other country in
which the Company does business, or take steps to do business before termination
of their employment), or solicit its employees, for the term of the Employment
Agreements and up to two years after termination of employment, for any reason.
Three other executive officers have been afforded continuation of salary
protection for one year if their employment with the Company is terminated
without cause.
(10) STOCK PLANS
(A) 1994 NON-QUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The Non-Employee Director Plan (the "Director Plan") provides for the grant
of options to acquire up to 94,000 shares of Common Stock, in such amounts, on
such terms and to such non-employee Directors as the administrators of the
Director Plan may select, in accordance with the terms of the Director Plan.
Options granted under the Director Plan are not intended to qualify as Incentive
Stock Options under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"). The Director Plan is administered by a committee of the Board of
Directors of the Company, consisting of two or more members appointed by the
F-16
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Board of Directors of the Company, which selects the optionees and determines
the number of shares, vesting schedule and duration of each option (not to
exceed 10 years). Options granted under the Director Plan must have an exercise
price equal to the fair value of the Common Stock of the Company, as determined
by such committee, on the date of grant. As of December 31, 1995, options to
purchase 47,000 shares of Common Stock at an exercise price of $5.89 per share
had been granted under the Director Plan, all of which were outstanding and
7,833 of which were exercisable.
Options granted under the Director Plan automatically vest no later than 10
years from the date of grant; however, pursuant to separate option agreements
between the Company and its optionees under the Director Plan, the options
granted to date become vested ratably over a three year period on the
anniversary of the grant date. Upon the sale of all stock or assets of the
Company, the options fully vest and become exercisable immediately.
(B) 1994 TIME ACCELERATED RESTRICTED STOCK OPTION PLAN
The Company's 1994 Time Accelerated Restricted Stock Option Plan (the "1994
Stock Option Plan") provides for the grant of options to acquire up to 376,000
shares of Common Stock, in such amounts, on such terms and to such officers and
other key employees as the administrators of the 1994 Stock Option Plan may
select. Options granted under the 1994 Stock Option Plan are not intended to
qualify as Incentive Stock Options under the Code. The 1994 Stock Option Plan is
administered by the Board of Directors of the Company and provides that all of
the options shall have a per share exercise price equal to the fair market value
of the Common Stock on the date of such grant, as determined by the Board of
Directors. At December 31, 1995, options to purchase 338,200 shares of Common
Stock at an average exercise price of $10.57 per share were outstanding, of
which 109,940 were exercisable.
Options granted under the 1994 Stock Option Plan become fully exercisable no
later than the tenth anniversary of the date of grant, and no option may have a
term in excess of ten years and six months from the date of grant. The stock
option agreements pursuant to which options have been granted under the 1994
Stock Option Plan provide for accelerated vesting each year of 10% to 20% of the
shares subject to the option in the event certain financial tests are met,
commencing with respect to the fiscal year ended December 31, 1994. The Board of
Directors may accelerate all options upon a sale or conveyance of all or
substantially all of the assets, or a change in control of the Company, which
includes, among other events, the acquisition by any person who owned less than
10% of the outstanding Common Stock becoming the beneficial owner of at least
51% of the Common Stock. All recipients of options under the 1994 Stock Option
Plan to date were required to execute a Non-Competition and Non-Disclosure
Agreement as a condition to any such option grant.
F-17
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SUMMARY OF STOCK OPTION PLAN ACTIVITY
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------
PRICE PER
RESERVED SHARES NUMBER SHARE
---------------- --------- --------------
<S> <C> <C> <C>
Balance December 31, 1993................................. -- -- $ --
Reserved................................................ 470,000 -- --
Granted................................................. -- 251,450 $ 5.89
Exercised............................................... -- -- --
Canceled................................................ -- -- --
------- --------- --------------
Balance December 31, 1994................................. 470,000 251,450 $ 5.89
Reserved................................................ -- -- --
Granted................................................. -- 145,500 $ 5.89-$22.75
Exercised............................................... -- (2,350) $ 5.89
Canceled................................................ -- (9,400) $ 5.89
------- --------- --------------
Balance December 31, 1995................................. 470,000 385,200 $ 5.89-$22.75
------- --------- --------------
------- --------- --------------
</TABLE>
(C) 1995 EMPLOYEE STOCK PURCHASE PLAN
The 1995 Employee Stock Purchase Plan (the "1995 Purchase Plan") for
employees of the Company authorizes the issuance of a maximum of 235,000 shares
of Common Stock pursuant to the exercise of nontransferable options granted to
participating employees.
The 1995 Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees of the Company whose customary employment is
20 hours or more per week and have been employed by the Company for at least six
months are eligible to participate in the 1995 Purchase Plan. Employees who own
5% or more of the Company's stock and directors who are not employees of the
Company may not participate in the 1995 Purchase Plan. To participate in the
1995 Purchase Plan, an employee must authorize the Company in writing to deduct
an amount (not less than 1% nor more than 10% of a participant's base
compensation and in any event not more than $12,500) from his or her pay during
six month periods commencing on January 1 and July 1 of each year (each a
"Purchase Period"). On the first day of each Purchase Period, the Company grants
to each participating employee an option to purchase up to 500 shares of Common
Stock. The exercise price for shares purchased under the 1995 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. If an
employee is not a participant on the last day of the Purchase Period, such
employee is not entitled to purchase any shares during such Purchase Period, and
the amount of his or her accumulated payroll deduction will be refunded to the
employee. An employee's rights under the 1995 Purchase Plan terminate upon his
or her voluntary withdrawal from the plan at any time or upon termination of
employment.
Common Stock for the 1995 Purchase Plan will be made available either from
authorized but unissued shares of Common Stock or from shares of Common Stock
reacquired by the Company, including shares repurchased in the open market. The
Company issued 18,299 shares of Common Stock at a price of $18.73 per share for
the first Purchase Period ended December 31, 1995.
The Financial Accounting Standards Board ("FASB") issued a new standard on
"Accounting for Stock-Based Compensation". The Company will adopt the disclosure
requirements of the new standard effective
F-18
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
for the fiscal year ended December 31, 1996. This standard establishes the
financial accounting and disclosure requirements for stock-based employee
compensation plans. These plans include all arrangements by which an employee
receives shares of stock or other equity instruments of the employer or the
employer incurs liabilities to employees in amounts based upon the price of the
employer's stock such as the stock option and stock purchase plans described
above. At a minimum, the new standard requires the Company to disclose the pro
forma effect, if any, that would have been recognized in the income statement if
the fair value based method of accounting for the stock-based employee
compensation plans had been used. The Company is completing its analysis of the
impact of this new accounting standard and has not yet fully quantified the
impact of this standard.
(11) RELATED PARTY TRANSACTIONS
The Company had the following related party transactions during the years
ended December 31, 1993, 1994 and 1995 (also see Note 4, "Revolving Credit
Facilities," Note 5, "Long-term Debt" and Note 8, "Commitments"):
(A) COLONIAL REALTY TRUST
The Company made rental payments to Colonial Realty Trust of $1,310,000,
$714,000 and $726,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. Colonial Realty Trust is a real estate company owned by two
principal stockholders of the Company.
(B) COMPUTER EQUIPMENT SYSTEMS
The Company made computer rental payments to Computer Equipment Systems of
$369,000 for the year ended December 31, 1993 while the Company made no payments
in 1994 and 1995. Computer Equipment Systems was a computer rental company,
which has since been liquidated, owned by two principal stockholders of the
Company.
(C) WHITNEY
Whitney was paid an equity placement fee of $500,000 in connection with the
issuance of the Series A Convertible Preferred Stock, a debt placement fee of
$630,000 in connection with the issuance of the Senior Subordinated Notes and
management fees of $100,000 for the year ended December 31, 1994. The Company
also reimburses Whitney for reasonable out-of-pocket expenses incurred in
connection with attending to the Company's business.
(D) FIRST UNION BANK
The Company paid First Union Bank a commitment fee of $405,000 which was
capitalized as Deferred Finance Costs and was being amortized over the life of
the debt and an up front agent fee of $50,000 at the closing of the loans on
March 7, 1994. The Company also paid First Union Bank a commitment fee of
$63,000 in connection with the establishment of the Credit Facility and an
amendment fee of $88,5000 associated with the expansion of the Credit Facility's
borrowing capacity to $40,000,000.
(12) LEGAL MATTERS
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.
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Focus Healthcare Management, Inc.:
We have audited the accompanying balance sheets of Focus Healthcare
Management, Inc. ("Focus") as of December 31, 1994 and 1995, and the related
statements of operations, shareholder's equity (deficit) and cash flows for each
of the two years in the period ended December 31, 1995. We have also audited the
statements of operations, shareholder's equity (deficit) and cash flows of Focus
Healthcare Management, Inc. (the Predecessor) for the year ended December 31,
1993. These financial statements are the responsibility of the Focus'
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 Focus as of December 31,
1994 and 1995, and the results of the operations of Focus and the Predecessor
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 27, 1996
F-20
<PAGE>
FOCUS HEALTHCARE MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- ------------- MARCH 31,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 58,000 $ 62,000 $ 16,000
Accounts receivable, net of allowance for doubtful accounts of
$493,000, $388,000 and $388,000 in December 31, 1994 and 1995,
and March 31, 1996, respectively................................ 2,465,000 1,464,000 1,745,000
Prepaid expenses and other current assets......................... 134,000 66,000 34,000
------------- ------------- -------------
Total current assets........................................ 2,657,000 1,592,000 1,795,000
PROPERTY AND EQUIPMENT, NET......................................... 2,139,000 1,067,000 929,000
OTHER ASSETS........................................................ 6,000 5,000 5,000
GOODWILL, NET....................................................... 29,275,000 28,526,000 28,339,000
------------- ------------- -------------
Total assets................................................ $ 34,077,000 $ 31,190,000 $ 31,068,000
------------- ------------- -------------
------------- ------------- -------------
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of capital lease obligations...................... $ 84,000 $ 70,000 $ 69,000
Accounts payable.................................................. 375,000 240,000 310,000
Accrued expenses.................................................. 1,206,000 137,000 176,000
Accrued taxes..................................................... 30,000 18,000 2,000
Other current liabilities......................................... 267,000 139,000 154,000
Intercompany payable, net......................................... 3,165,000 1,488,000 1,479,000
------------- ------------- -------------
Total current liabilities....................................... 5,127,000 2,092,000 2,190,000
------------- ------------- -------------
CAPITAL LEASE OBLIGATIONS........................................... 126,000 55,000 39,000
DEFERRED TAXES...................................................... -- 324,000 324,000
COMMITMENTS AND CONTINGENCIES (Notes 3 and 5).......................
SHAREHOLDER'S EQUITY:
Parent Company investment......................................... 30,965,000 30,965,000 30,965,000
Accumulated deficit............................................... (2,141,000) (2,246,000) (2,450,000)
------------- ------------- -------------
Total shareholder's equity.................................. 28,824,000 28,719,000 28,515,000
------------- ------------- -------------
Total liabilities and shareholder's equity.................. $ 34,077,000 $ 31,190,000 $ 31,068,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
FOCUS HEALTHCARE MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(PREDECESSOR) (FOCUS)
-------------- -------------------------------------------
FOR THE THREE
FOR THE YEARS ENDED DECEMBER 31, MONTHS ENDED
-------------------------------------------
1993 1994 1995
-------------- ------------- ------------ MARCH 31,
1996
--------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Case management................................... $ 7,625,000 $ 4,740,000 $ -- $ --
Network access fees............................... 10,207,000 9,367,000 9,295,000 2,227,000
Fee schedule audit................................ 1,537,000 856,000 613,000 100,000
-------------- ------------- ------------ --------------
Total revenues.............................. 19,369,000 14,963,000 9,908,000 2,327,000
-------------- ------------- ------------ --------------
COSTS AND EXPENSES:
Cost of services.................................. 18,796,000 14,811,000 7,347,000 1,926,000
General and administrative........................ 2,271,000 3,124,000 2,269,000 605,000
-------------- ------------- ------------ --------------
Total costs and expenses.................... 21,067,000 17,935,000 9,616,000 2,531,000
-------------- ------------- ------------ --------------
(LOSS) INCOME FROM OPERATIONS....................... (1,698,000) (2,972,000) 292,000 (204,000)
INTEREST EXPENSE (INCOME) NET....................... 95,000 (112,000) 2,000 --
-------------- ------------- ------------ --------------
(LOSS) INCOME BEFORE PROVISION INCOME TAXES......... (1,793,000) (2,860,000) 290,000 (204,000)
PROVISION FOR INCOME TAXES.......................... 100,000 19,000 395,000 --
-------------- ------------- ------------ --------------
NET LOSS............................................ $ (1,893,000) $ (2,879,000) $ (105,000) $ (204,000)
-------------- ------------- ------------ --------------
-------------- ------------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
FOCUS HEALTHCARE MANAGEMENT, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
REDEEMABLE COMMON STOCK ADDITIONAL
PREFERRED ----------------------- PAID-IN ACCUMULATED TREASURY
STOCK SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
------------- ---------- ----------- ------------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1992................... $ 10,722,000 3,667,000 $ 2,000 $ 617,000 $(10,285,000) $ (432,000) $ 624,000
Exercise of stock
options.............. -- 68,000 -- 8,000 -- -- 8,000
Accretion of preferred
stock to redemption
value................ 1,264,000 -- -- -- (1,264,000) -- --
Net loss............... -- -- -- -- (1,893,000) -- (1,893,000)
------------- ---------- ----------- ------------ ------------- ---------- ------------
BALANCE DECEMBER 31,
1993................... 11,986,000 3,735,000 2,000 625,000 (13,442,000) (432,000) (1,261,000)
Exercise of stock
options.............. -- 198,000 -- 34,000 -- -- 34,000
Elimination of
Predecessor
stockholder's
equity............... (11,986,000) (3,933,000) (2,000) (659,000) 14,180,000 432,000 1,965,000
Acquisition by United
and push-down of
purchase price....... -- -- -- 30,965,000 -- -- 30,965,000
Net loss............... -- -- -- -- (2,879,000) -- (2,879,000)
------------- ---------- ----------- ------------ ------------- ---------- ------------
BALANCE DECEMBER 31,
1994................... -- -- -- 30,965,000 (2,141,000) -- 28,824,000
Net Loss............... -- -- -- -- (105,000) -- (105,000)
------------- ---------- ----------- ------------ ------------- ---------- ------------
BALANCE DECEMBER 31,
1995................... -- -- -- 30,965,000 (2,246,000) -- 28,719,000
Net loss for the three
months ended March
31, 1996
(unaudited).......... -- -- -- -- (204,000) -- (204,000)
------------- ---------- ----------- ------------ ------------- ---------- ------------
BALANCE, MARCH 31, 1996.. $ -- -- $ -- $ 30,965,000 $(2,450,000) $ -- $ 28,515,000
------------- ---------- ----------- ------------ ------------- ---------- ------------
------------- ---------- ----------- ------------ ------------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
FOCUS HEALTHCARE MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(PREDECESSOR) (FOCUS)
-------------- ------------------------------------------
FOR THE THREE
FOR THE YEARS ENDED DECEMBER 31, MONTHS ENDED
------------------------------------------
1993 1994 1995
-------------- ------------ ------------ MARCH 31,
1996
--------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $ (1,893,000) $ (2,879,000) $ (105,000) $ (204,000)
Adjustment to reconcile net loss to net cash
provided by operating activities--
Deprecation and amortization...................... 1,038,000 2,211,000 1,778,000 397,000
Loss on sale of property and equipment............ (5,000) -- -- --
Transfers of property and equipment (to) from
United, net..................................... -- (211,000) 203,000 --
Deferred taxes.................................... -- -- 324,000 --
Changes in assets and liabilities--
Decrease (increase) in accounts receivable...... 457,000 (250,000) 1,001,000 (281,000)
(Increase) decrease in prepaid expenses and
other current assets.......................... (176,000) 152,000 68,000 34,000
Decrease in other assets........................ 486,000 5,000 1,000 --
Increase (decrease) in accounts payable......... 1,387,000 (1,563,000) (134,000) 70,000
Decrease in accrued expenses.................... (603,000) (617,000) (1,082,000) 21,000
Increase (decrease) in other current
liabilities................................... 168,000 99,000 (128,000) 15,000
Increase (decrease) in intercompany payable..... -- 3,165,000 (1,677,000) (9,000)
-------------- ------------ ------------ --------------
Net cash provided by operating activities..... 859,000 112,000 249,000 43,000
-------------- ------------ ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................. (2,174,000) (487,000) (161,000) (72,000)
-------------- ------------ ------------ --------------
Net cash used in investing activities......... (2,174,000) (487,000) (161,000) (72,000)
-------------- ------------ ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options........................... 8,000 34,000 -- --
Acquisition of Focus by United...................... -- 3,294,000 -- --
Proceeds (payment) of long-term debt, net........... 1,315,000 (2,867,000) -- --
Payment of capital lease obligations................ (248,000) (29,000) (84,000) (17,000)
-------------- ------------ ------------ --------------
Net cash provided by (used in) financing
activities.................................. 1,075,000 432,000 (84,000) (17,000)
-------------- ------------ ------------ --------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...... (240,000) 57,000 4,000 (46,000)
-------------- ------------ ------------ --------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 241,000 1,000 58,000 62,000
-------------- ------------ ------------ --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $ 1,000 $ 58,000 $ 62,000 $ 16,000
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest............ $ 195,000 $ 47,000 $ 16,000 $ --
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
Cash paid during the period for taxes............... $ 205,000 $ 747,000 $ 74,000 $ 16,000
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Accretion of redeemable preferred stock............. $ 1,264,000 $ -- $ -- $ --
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
Capital lease assets acquired and obligations
incurred.......................................... $ 13,000 $ -- $ -- $ --
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
FOCUS HEALTHCARE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Focus Healthcare Management, Inc. ("Focus") was incorporated in the State of
Tennessee in February 1986 to develop and operate managed care programs related
to workers' compensation and to provide administrative services for
self-insuring employers, insurance carriers and others.
On December 20, 1993, Focus was acquired pursuant to an Agreement and Plan
of Acquisition (the Agreement) with UHC Management, Inc., an affiliate of United
HealthCare Corporation (collectively, "United"). Under the terms of the
Agreement, United purchased all of the stock of Focus for $28,000,000 in cash
and the assumption of $2,578,000 in debt. For accounting purposes, the
transaction was assumed to be effective January 1, 1994. In connection
therewith, United implemented a restructuring that consolidated Focus'
operations and resulted in the exit from the case management services business.
The charge for restructuring has been reflected as an increase in goodwill
associated with the transaction.
(A) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of highly liquid investments with
original maturities of three months or less.
(B) REVENUES
Focus recognizes revenue primarily as services are rendered based on the
number of charges reviewed or the percentage of savings achieved for Focus'
customers. Accounts receivable at December 31, 1994 and 1995 include $1,321,000
and $536,000, respectively, of unbilled accounts receivable relating to services
rendered prior to the period but not invoiced until after year end.
(C) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets. Amortization
of capital leases is included in depreciation and amortization expense. The
estimated useful lives of the depreciable assets are as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- ------------------------------------------------------------------------ --------------------
<S> <C>
Software................................................................ 3 years
Office equipment........................................................ 3-5 years
Furniture and fixtures.................................................. 5-7 years
Equipment under capital leases.......................................... The shorter of the
life of lease or
asset life
</TABLE>
(D) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of income and expenses during the reporting
periods. Actual results could differ from these estimates.
F-25
<PAGE>
FOCUS HEALTHCARE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(E) CONCENTRATION OF CREDIT RISK
Statement of Financial Accounting Standards (SFAS) No. 105, DISCLOSURE OF
INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT RISK, requires disclosure of
any significant off-balance-sheet and credit risk concentrations. Financial
instruments that subject Focus to credit risk consist primarily of trade
accounts receivable.
(F) GOODWILL
Goodwill is being amortized using the straight-line method over a period of
40 years. Accumulated amortization was $687,000 and $749,100 at December 31,
1994 and 1995, respectively. Focus periodically evaluates whether changes have
occurred which would require revision of the remaining estimated useful life of
the assigned goodwill or render the goodwill not recoverable based on the gross
cash flow method.
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1994 and
1995:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Software.................................................................... $ 456,000 $ 481,000
Office equipment............................................................ 2,436,000 2,076,000
Furniture and fixtures...................................................... 1,198,000 866,000
Equipment under capital leases.............................................. 573,000 367,000
------------ ------------
4,663,000 3,790,000
Less--Accumulated depreciation and amortization............................. 2,524,000 2,723,000
------------ ------------
$ 2,139,000 $ 1,067,000
------------ ------------
------------ ------------
</TABLE>
(3) LEASES
Focus leases office space under various operating leases. The corporate
office lease has an option to renew for an additional five years at prevailing
rates and is subject to increase based on increases in building maintenance and
operating expenses. Total rent expense for the years ended 1993, 1994 and 1995
was $573,000, $639,000 and $514,000, respectively.
Focus leases certain equipment under capital leases that extend to various
dates through 1997. Future minimum payments, by year and in the aggregate, under
the capital leases and noncancellable operating leases with terms of one year or
more consist of the following at December 31, 1995:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
Year Ending December 31,
1996......................................................................... $ 85,000 $ 240,000
1997......................................................................... 62,000 132,000
---------- -----------
Total minimum lease payments............................................... 147,000 $ 372,000
-----------
-----------
Less--Amounts representing interest and taxes................................ 22,000
----------
$ 125,000
----------
----------
</TABLE>
F-26
<PAGE>
FOCUS HEALTHCARE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(4) INCOME TAXES
Focus accounts for income taxes in accordance with SFAS No. 109, ACCOUNTING
FOR INCOME TAXES, which requires the asset and liability method of accounting
for income taxes. Prior to its acquisition by United, Focus elected to be taxed
as an S corporation under Section 1362 of the Internal Revenue Code. The tax
provision in 1993 resulted from certain states that do not recognize S
corporation status.
Beginning in 1994, Focus' results were included in the consolidated tax
return of United. No federal tax benefit was recognized in 1994 due to the loss
for the year. In accordance with the tax allocation agreement with United,
Focus' net operating loss was utilized by United in the IRS Tax filing.
The tax provision for 1995 consisted of the following:
<TABLE>
<S> <C>
Current--
Federal................................................................. $ --
State................................................................... 18,000
---------
18,000
---------
Deferred--
Federal................................................................. 339,000
State................................................................... 38,000
---------
377,000
---------
$ 395,000
---------
---------
</TABLE>
The deferred tax liabilities consist of the difference between book and tax
depreciation methods and certain differences in the book and tax deduction of
certain accrued and prepaid items.
The difference between the federal statutory rate and the Focus' effective
tax rate for 1995 consists of nondeductible amortization of goodwill and state
income taxes, net of federal benefits.
(5) LITIGATION
Focus, Genesys, and the other shareholder of Genesys are defendants in a
class action seeking damages resulting from alleged breach of contract and other
claims. Focus is pursuing discovery of the allegations; until such discovery is
completed, it is not possible to evaluate the outcome or estimate the amount or
range of potential loss. Accordingly, no provision for any loss that may result
upon resolution of this matter has been made in the accompanying financial
statements. In connection with the acquisition, Focus has been indemnified by
United and, as a result, does not expect any outcome to materially affect its
financial position.
Focus is also involved in various other legal matters arising in the
ordinary course of business. Focus is not involved in any legal proceeding that
it believes will result, individually or in the aggregate, in a material adverse
effect on financial position or results of operations.
(6) CORPORATE SERVICES
Focus and United have a corporate services agreement under which United's
corporate staff provides certain administrative services, including legal advice
and services, risk management, certain employee benefit administration, tax
advice and preparation of tax returns, centralized cash management , and certain
financial and other services, for which Focus pays United annually. For these
services, Focus was charged
F-27
<PAGE>
FOCUS HEALTHCARE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(6) CORPORATE SERVICES (CONTINUED)
$887,000 and $1,725,000 in fiscal 1994 and 1995, respectively. For items such as
employee benefit plans, insurance coverage and other identifiable costs, United
charges Focus based on costs directly attributable to Focus.
(7) SUBSEQUENT EVENT
On March 19, 1996, CRA Managed Care, Inc. signed a definitive agreement to
acquire Focus from United for $21,000,000 in cash. The transaction was completed
on April 2, 1996.
F-28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Prompt Associates, Inc.
We have audited the accompanying balance sheets of Prompt Associates, Inc.
as of December 31, 1995 and 1994, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. The 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 Prompt Associates, Inc. at
December 31, 1995 and 1994 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Salt Lake City, Utah
April 19, 1996
F-29
<PAGE>
PROMPT ASSOCIATES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, (UNAUDITED)
---------------------- SEPTEMBER
ASSETS 1994 1995 30, 1996
- ----------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 906,000 $1,616,000 $3,913,000
Short-term investments 246,000 449,000 --
Accounts receivable, less allowance for doubtful accounts of
$1,400,000, $1,052,000 and $1,475,000, respectively 744,000 982,000 1,568,000
Prepaid expenses 93,000 617,000 425,000
Current deferred tax assets -- 643,000 372,000
Receivable from related party 248,000 -- --
Current portion of loan to shareholders 1,040,000 685,000 685,000
---------- ---------- ----------
Total current assets 3,277,000 4,992,000 6,963,000
PROPERTY AND EQUIPMENT, AT COST 785,000 1,009,000 1,255,000
Less: Accumulated depreciation and amortization 432,000 674,000 817,000
---------- ---------- ----------
Net property and equipment 353,000 335,000 438,000
OTHER ASSETS:
Loan to shareholders 4,160,000 1,560,000 1,040,000
Non-current deferred tax assets -- 994,000 536,000
---------- ---------- ----------
Total other assets 4,160,000 2,554,000 1,576,000
---------- ---------- ----------
$7,790,000 $7,881,000 $8,977,000
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 906,000 $ 730,000 $ 962,000
Accrued payroll and related 396,000 362,000 423,000
Current portion of payable under long-term agreements to related
parties (net of discount of $377,000, $151,000 and $141,000,
respectively) 1,029,000 680,000 690,000
---------- ---------- ----------
Total current liabilities 2,331,000 1,772,000 2,075,000
Long-term portion of payable under long-term agreements to related
parties (net of discount of $754,000, $226,000 and $85,000,
respectively) 4,117,000 1,544,000 1,009,000
COMMITMENTS AND CONTINGENCIES (Note 3) -- -- --
STOCKHOLDERS' EQUITY :
Preferred Stock -- $.001 par value, 78,000 authorized and issued -- -- --
Common stock -- $.001 par value; 1,500,000 authorized; 500,000 shares
issued and outstanding 1,000 1,000 1,000
Paid-in-capital 700,000 2,457,000 2,457,000
Retained earnings 641,000 2,107,000 3,435,000
---------- ---------- ----------
Total stockholders' equity 1,342,000 4,565,000 5,893,000
---------- ---------- ----------
$7,790,000 $7,881,000 $8,977,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
PROMPT ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------- SEPTEMBER
1993 1994 1995 30, 1996
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
NET REVENUES $ 3,939,000 $ 6,835,000 $10,385,000 $9,692,000
COST OF SERVICES 1,489,000 4,059,000 5,945,000 4,985,000
------------ ----------- ---------- ----------
GROSS PROFIT 2,450,000 2,776,000 4,440,000 4,707,000
MARKETING AND SALES EXPENSES 769,000 433,000 554,000 596,000
GENERAL AND ADMINISTRATIVE EXPENSES 1,799,000 2,325,000 2,361,000 2,048,000
------------ ----------- ---------- ----------
OPERATING INCOME (LOSS) (118,000) 18,000 1,525,000 2,063,000
OTHER (INCOME) EXPENSE, NET:
Interest (income) (428,000) (473,000) (76,000) (103,000 )
Interest expense 1,479,000 1,547,000 -- --
Other (income) expense, net (14,000) 42,000 14,000 --
------------ ----------- ---------- ----------
Total (income) expense, net 1,037,000 1,116,000 (62,000) (103,000 )
INCOME (LOSS) BEFORE INCOME TAXES (1,155,000) (1,098,000) 1,587,000 2,166,000
PROVISION FOR INCOME TAXES -- -- 121,000 838,000
------------ ----------- ---------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (1,155,000) (1,098,000) 1,466,000 1,328,000
GAIN ON RETIREMENT OF DEBT -- 3,254,000 -- --
------------ ----------- ---------- ----------
NET INCOME (LOSS) ($1,155,000) $ 2,156,000 $1,466,000 $1,328,000
------------ ----------- ---------- ----------
------------ ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
PROMPT ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNUDITED)
NINE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------- SEPTEMBER
1993 1994 1995 30, 1996
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income (loss) ($1,155,000) $2,156,000 $1,466,000 $1,328,000
Items not requiring cash:
Depreciation of property and equipment 180,000 196,000 243,000 143,000
Amortization of debt discount 276,000 -- -- --
Gain on retirement of debt -- (1,974,000) -- --
Loss on forgiveness of shareholder debt -- -- 51,000 --
Loss on disposal of fixed assets -- -- 1,000 --
Provision for deferred tax income taxes -- -- 121,000 729,000
Change in assets and liabilities:
Accounts receivable (201,000) 174,000 (473,000) (586,000 )
Prepaid expenses and other assets (224,000) 298,000 (523,000) 192,000
Accounts payable, accrued expenses and income taxes 1,426,000 26,000 124,000 288,000
------------ ---------- ---------- ----------
Cash flows from operations 302,000 876,000 1,010,000 2,094,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (62,000) (182,000) (203,000) (246,000 )
Sale (purchase) of short-term investments 2,000 (246,000) (226,000) 449,000
------------ ---------- ---------- ----------
Cash flows used for investing activities (60,000) (428,000) (429,000) 203,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under long-term agreements with related
parties -- -- (703,000) --
Receipts on note from shareholders -- -- 708,000 --
Receipts on receivable from related party -- -- 124,000 --
------------ ---------- ---------- ----------
Cash flows used for financing activities -- -- 129,000 --
------------ ---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 242,000 448,000 710,000 2,297,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 216,000 458,000 906,000 1,616,000
------------ ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 458,000 $ 906,000 $1,616,000 $3,913,000
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ -- $ -- $ -- $ --
Income taxes paid $ -- $ -- $ 417,000 $ 263,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
PROMPT ASSOCIATES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN- RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
---------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1992 $ -- $1,000 $ 700,000 $ (360,000) $ 341,000
Net loss -- -- -- (1,155,000) (1,155,000)
---------- ------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1993 -- 1,000 700,000 (1,515,000) (814,000)
---------- ------- ---------- ---------- ----------
---------- ------- ---------- ---------- ----------
Net income -- -- -- 2,156,000 2,156,000
---------- ------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1994 -- 1,000 700,000 641,000 1,342,000
---------- ------- ---------- ---------- ----------
---------- ------- ---------- ---------- ----------
Tax benefits allocated to contributed capital -- -- 1,757,000 -- 1,757,000
Net income -- -- -- 1,466,000 1,466,000
---------- ------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1995 -- 1,000 2,457,000 2,107,000 4,565,000
---------- ------- ---------- ---------- ----------
---------- ------- ---------- ---------- ----------
Net income (unaudited) -- -- -- 1,328,000 1,328,000
---------- ------- ---------- ---------- ----------
BALANCE SEPTEMBER 30, 1996 $ -- $1,000 $2,457,000 $3,435,000 $5,893,000
---------- ------- ---------- ---------- ----------
---------- ------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
PROMPT ASSOCIATES, INC.
Notes to Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF THE COMPANY
Prompt Associates, Inc. ("Prompt") was established in 1989 to help identify
savings to insurance companies, self-insured companies, third party
administrators ("TPA") and health maintenance organizations ("HMO") nationwide
by providing statistical data regarding usual, reasonable and customary
outpatient facility charges.
In 1994, Prompt established an inpatient charge review service utilizing
databases and employee registered nurses who review claims on a line-by-line
basis for possible savings. Prompt earns revenue by charging insurance company
clients a fee based on the savings.
MultiPlan, an unrelated company, has preferred provider organizations
("PPO") contracts with various health care providers across the country. In
1994, Prompt entered into an agreement with MultiPlan whereby Prompt applies the
MultiPlan PPO contract rates to selected health insurance claims to identify
possible contractual savings. Prompt shares in the savings that are identified
and realized.
Four principal customers comprised approximately 40% of gross revenue in
1994 while three principal customers comprised approximately 37% of gross
revenue in 1995.
(B) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(C) CASH AND EQUIVALENTS
Cash and equivalents consist of cash and short-term investments in highly
liquid investments with maturities of less than three months from the date of
purchase.
(D) CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk include cash, short-term investments and trade
receivables. The Company places its temporary cash investments with
creditworthy, high quality financial institutions. The Company at times holds
notes and bonds issued by the United States government, its agencies and
financially strong corporations. The Company has not experienced significant
losses related to receivables from individual customers, groups of customers
within the health care industry or customers within certain geographic areas.
(E) SHORT-TERM INVESTMENTS
Short-term investments consist of commercial paper with maturities greater
than 90 days from the date of purchase. These securities are considered to be
held-to-maturity and are carried at amortized cost, which approximates fair
market value.
(F) ALLOWANCE
The allowance is based on historical experience of ineligible claims which
are either charged back or given a negotiated discount. Prompt utilizes several
methods to project unpresented discounts and chargebacks including a tracking of
the actual experience of contractual discounts. Other factors that affect
F-34
<PAGE>
collectibility and bad debts for each service line are evaluated and additional
allowance amounts may be provided.
Insurance claims are modeled prior to the insurance company's review
procedures, which indicate if the claims are payable. During the insurance
company's review process, some claims have PPO or HMO arrangements, pre-existing
conditions, or other disqualifying situations. When these situations occur, a
refund (chargeback) is requested for the amounts paid (invoiced) on these
claims.
Prompt's policy is to record the allowance as an offset to sales and
accounts receivable based on the historical tracking of discounts and/or
chargebacks. Prompt recorded net provisions to the allowance for the years ended
December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1996 of
$4,941,000, $5,360,000, $5,089,000 and $4,121,000, respectively. It is
reasonably possible that management's analysis of the allowance will change in
the near term. Such a change could be material to the financial statements.
(G) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over estimated useful lives of 3 to 5 years.
Maintenance and repairs that do not improve or extend the life of the
equipment are charged to expenses as incurred. Major renewals and improvements
are treated as capital expenditures and depreciated over the extended remaining
lives of the assets.
(H) INCOME TAXES
Effective December 29, 1994, Prompt terminated its subchapter S corporation
status and became a C corporation. The liability method is used in accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when differences are expected to reverse.
(I) ADVERTISING COSTS
In accordance with SOP 93-7, the Company expenses the production costs of
non direct-response advertising as the costs are incurred during the period the
advertising first takes place.
(J) RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements to
conform with the 1995 presentation.
(2) INCOME TAXES
As of December 31, 1995, the Company had federal and state net operating
loss carryforwards of approximately $1,604,000. The net operating loss
carryforwards will expire at various dates beginning in 2009 through 2010, if
not utilized.
F-35
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
1994 1995
-------- ----------
<S> <C> <C>
Deferred Tax Assets:
Fixed assets $ 14,000 $ 14,000
Allowance for doubtful accounts -- 83,000
Accounting method differences 143,000 90,000
Accrued expenses -- 92,000
Net operating loss carryforwards 384,000 598,000
Restructuring differences -- 759,000
-------- ----------
541,000 1,636,000
Valuation allowance (541,000) --
-------- ----------
$ -- $1,636,000
-------- ----------
-------- ----------
</TABLE>
The net valuations allowance decreased by $541,000 during the year ended
December 31, 1995.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- ----------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State -- -- --
-------- -------- ----------
Total current -- -- --
Deferred:
Federal -- -- (1,417,000)
State -- -- (219,000)
-------- -------- ----------
-- -- (1,636,000)
Tax benefits allocated to contributed capital -- -- 1,757,000
-------- -------- ----------
Total net deferred -- -- 121,000
-------- -------- ----------
Total $ -- $ -- $ 121,000
-------- -------- ----------
-------- -------- ----------
</TABLE>
Differences between the reported amount of income tax expense for the year
and the amount of income tax expense that would result from applying domestic
federal statutory tax rates to pretax income, relate primarily to permanent
differences and changes in the valuation allowance for deferred tax assets.
Tax benefits allocated to contributed capital of $1 ,757,000, for the year
ended December 31, 1995 relates to differences in accounting for income tax
purposes for the stock purchased from original shareholders as described in Note
5.
(3) COMMITMENTS AND CONTINGENCIES
Prompt leases office space and has certain other operating leases. The
office lease contains an annual escalation clause of approximately 8%. Rental
expense was approximately $55,000, $76,000 and $118,000 for
F-36
<PAGE>
1993, 1994 and 1995, respectively. The future payments at December 31, 1995
required under these obligations for each of the five succeeding years are
approximately as follows:
<TABLE>
<S> <C>
1996 $ 124,000
1997 122,000
1998 26,000
1999 6,000
2000 --
</TABLE>
Prompt has entered into an exclusive agreement with MEDSTAT Systems, Inc.
("MEDSTAT"), a provider of researched data in the health care industry, to
provide outpatient surgical facility charge data. Amounts paid to MEDSTAT under
this agreement were $763,000, $438,000 and $581,000 in 1993, 1994 and 1995,
respectively. Recurring minimum payments associated with this agreement at
December 31, 1995 are approximately as follows:
<TABLE>
<S> <C>
1996 $ 706,000
1997 831,000
1998 956,000
1999 525,000
2000 --
</TABLE>
(4) LOANS TO SHAREHOLDERS
Loans to shareholders and the related interest totaled $5,448,000 and
$2,245,000 for the years ended December 31, 1994 and 1995, respectively. These
shareholder loans are secured by promissory notes at a rate of 7.25% with
interest payable each June 30th and maturing on June 30, 1999. These notes are
further secured by a stock pledge agreement for 100% of the shareholders'
outstanding shares of Prompt. Prompt also paid consulting fees totaling $700,000
and $425,000 to certain shareholders during the years ended December 31, 1994
and 1995, respectively, which are included in general and administrative
expense. (See Note 5).
(5) DEBT AND SHAREHOLDERS' EQUITY
On June 30, 1992, Prompt entered into a debt agreement with Summit Partners
("Summit"), a venture capital group, in which Prompt signed an $8,000,000 note
due in three equal installments payable on June 30, 1996, 1997 and 1998, with an
interest rate of 15%, payable quarterly in arrears beginning September 30, 1992
in exchange for $6,000,000 in cash. As such, Prompt recorded a debt discount of
$2,000,000. The debt discount was to be amortized using the effective interest
rate method of approximately 24% over the life of the note. Prompt also issued
warrants to Summit to purchase 409,091 shares of common stock. As of December
29, 1994, no principal had been paid on the note to Summit and interest payable,
net of the unamortized discount, had accrued to approximately $1,188,000.
The net proceeds of the note payable of $6,000,000 from Summit was loaned by
Prompt to the original shareholders for promissory notes bearing interest at
approximately 7.25%. As of December 29, 1994, the principal balance of the loan
was $5,900,000 with accrued interest of approximately $250,000.
At December 29, 1994, Prompt entered into the Security Exchange Agreement
("Agreement") with Summit and the original shareholders, whereby, 90% of
Prompt's common stock was purchased by Prompt from the original shareholders.
Prompt then transferred 80% of the common stock to Summit and issued 78,000
shares of preferred stock to Summit in full settlement of the note, outstanding
interest and warrants. Additionally, 10% of Prompt's common stock was purchased
by Prompt's chief executive officer. The original shareholders held a combined
10% interest in Prompt at December 31, 1994 and 1995. The transaction was
reflected as a troubled debt restructuring in the 1994 financial statements and
resulted in an extraordinary gain of $3,254,000.
F-37
<PAGE>
The preferred stock carries no voting rights. In the event of any
liquidation, dissolution or winding-up of Prompt, whether voluntary or
involuntarily, each share of preferred stock is entitled to be paid up to $100
per share.
The transaction also resulted in the terms of the loan to the original
shareholders being modified, and corresponding payables under long-term
agreements to these shareholders being recorded, in exchange for consulting
services and covenants not to compete for which no value was accrued. Therefore,
the receipt of payment on the loan to the original shareholders and payment of
the payables under long-term agreements to the original shareholders will
approximately offset over a five year period.
During 1995, one of the original shareholders declared bankruptcy and
effectively defaulted on his obligations to Prompt. No payments were made by
Prompt to this shareholder under the long-term consulting and non-compete
agreements. As of December 31, 1995, the Company had accepted a bankruptcy
settlement agreement, which forgave all existing loans and payable under the
above long-term agreement and reestablished a new promissory notes with an
offsetting payable valued at $165,000 each. This forgiveness resulted in a net
loss to the Company of approximately $50,000. The receipt of the $165,000 loan
and $165,000 payment of the payable to the shareholder will offset over the next
year.
Prompt also agreed to pay the original shareholders' tax liability
(approximately $100,000) related to Prompt's net income for the period ending
December 28, 1994.
Pursuant to the Agreement, the board of directors authorized options
totaling 55,556 shares. On February 7, 1995 options to purchase an additional
4,222 shares were authorized. Options to purchase 27,778 shares were granted to
the chief executive officer on December 29, 1994. These shares are exerciseable
at $.25 per share and vest in full on April 1, 2004. In July 1995, Prompt
granted 20,250 options to certain employees. These options have a four year
vesting period and an exercise price of $.25. Approximately 12.5 percent of
these options were vested on December 31, 1995.
F-38
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
The following sets forth the Company's Consolidated Pro Forma Balance Sheet
as of September 30, 1996 giving effect to the acquisition of Prompt Associates,
Inc. ("Prompt"). The Company's Consolidated Pro Forma Balance Sheet presents the
acquisition of Prompt as if it had been consummated on September 30, 1996. The
Consolidated Pro Forma Financial Statements of the Company do not purport to
present the financial position or results of operations of the Company had the
transaction assumed therein occurred on the dates indicated, nor are they
necessarily indicative of the results of operations which may be expected to
occur in the future.
The acquisition of Prompt has been accounted for by the Company as a
purchase whereby the basis for accounting for Prompt's assets and liabilities is
based upon their fair values at the date of acquisition. Pro forma adjustments
represent the Company's preliminary determination of these adjustments and are
based upon available information and certain assumptions the Company considers
reasonable under the circumstances. Final amounts could differ from those set
forth below.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------------------
PRO FORMA PRO FORMA
CRA PROMPT ADJUSTMENTS COMBINED
----------- ---------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $33,585,000 $3,913,000 $(25,000,000)(1) $ 12,498,000
Accounts receivable, net..................... 32,395,000 1,568,000 33,963,000
Current portion of loan to shareholders -- 685,000 (685,000)(2) --
Prepaid expenses and tax assets.............. 1,685,000 797,000 2,482,000
----------- ---------- --------------- ------------
Total current assets..................... 67,665,000 6,963,000 (25,685,000) 48,943,000
Property and equipment, net.................. 7,075,000 438,000 7,513,000
Other assets................................. 386,000 536,000 922,000
Long-term portion of loan to shareholders.... -- 1,040,000 (1,040,000)(2) --
Excess of cost over fair value of assets
acquired................................... 19,568,000 -- 29,000,000(3) 48,568,000
----------- ---------- --------------- ------------
$94,694,000 $8,977,000 $ 2,275,000 $105,946,000
----------- ---------- --------------- ------------
----------- ---------- --------------- ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities.................. $ -- $ -- $ 5,000,000(1) $ 5,000,000
Current portion of long-term debt............ 71,000 -- 71,000
Accounts payable and accrued expenses 18,985,000 1,385,000 4,867,000(4) 25,237,000
Current portion of long-term payable to
related parties............................ -- 690,000 (690,000)(2) --
----------- ---------- --------------- ------------
Total current liabilities................ 19,056,000 2,075,000 9,177,000 30,308,000
Long-term debt................................. 6,000 -- 6,000
Long-term payable to related parties........... -- 1,009,000 (1,009,000)(2) --
Long-term deferred tax liabilities............. 2,422,000 -- 2,422,000
Stockholders' equity........................... 73,210,000 5,893,000 (5,893,000)(5) 73,210,000
----------- ---------- --------------- ------------
$94,694,000 $8,977,000 $ 2,275,000 $105,946,000
----------- ---------- --------------- ------------
----------- ---------- --------------- ------------
</TABLE>
See accompanying Notes to Consolidated Pro Forma Financial Statements.
F-39
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
The following sets forth the Company's Consolidated Pro Forma Statement of
Operations for the fiscal year ended December 31, 1995 and the nine months ended
September 30, 1996 giving effect the purchases of Prompt and Focus Healthcare
Management, Inc. ("Focus") and the Company's sales of 2,515,625 and 1,200,000
shares of Common Stock in May of 1995 and June of 1996, respectively, and the
application of the net proceeds to repay the Company's existing indebtness and
additional borrowings to finance the Focus and Prompt acquisitions effective
January 1, 1995. Focus was acquired on April 2, 1996 and, as such, all pro forma
adjustments related to Focus are for the period prior to its acquisition. The
Consolidated Pro Forma Financial Statements of the Company do not purport to
present the financial position or results of operations of the Company had the
transaction assumed therein occurred on the dates indicated, nor are they
necessarily indicative of the results of operations which may be expected to
occur in the future. The Statement of Operations for Prompt for the year ended
December 31, 1995 and nine months ended September 30, 1996 have been
reclassified to conform with the Company's basis of presentation.
The acquisitions of Prompt and Focus have been accounted for by the Company
as purchases whereby the basis for accounting for Prompt's and Focus' assets and
liabilities are based upon their fair values at the date of acquisition. Pro
forma adjustments represent the Company's preliminary determination of these
adjustments and are based upon available information and certain assumptions the
Company considers reasonable under the circumstances. Final amounts could differ
from those set forth below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------
PRO FORMA PRO FORMA
CRA FOCUS PROMPT ADJUSTMENTS COMBINED
------------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $146,055,000 $9,089,000 $10,385,000 $ (407,000)(6) 1$65,122,000
Cost of services 122,615,000 7,347,000 6,499,000 474,000(7) 136,935,000
------------ ---------- ----------- ------------- -------------
Gross profit 23,440,000 1,742,000 3,886,000 (881,000) 28,187,000
General and administrative
expenses 11,021,000 2,269,000 2,361,000 (646,000)(8) 15,005,000
------------ ---------- ----------- ------------- -------------
Operating income 12,419,000 (527,000) 1,525,000 (235,000) 13,182,000
Interest (income) expense, net 2,484,000 2,000 (62,000) (1,988,000)(9) 436,000
Provision for income taxes 3,974,000 395,000 121,000 995,000(10) 5,485,000
------------ ---------- ----------- ------------- -------------
Net income (loss) $ 5,961,000 $ (924,000) $ 1,466,000 $ 758,000 $7,261,000
------------ ---------- ----------- ------------- -------------
------------ ---------- ----------- ------------- -------------
Earnings per share $ 0.91 $ 0.85
------------ -------------
------------ -------------
Weighted average shares
outstanding 6,540,000 8,579,000(11)
------------ -------------
------------ -------------
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------------------------------
PRO FORMA PRO FORMA
CRA FOCUS PROMPT ADJUSTMENTS COMBINED
------------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $131,032,000 $2,327,000 $ 9,692,000 $ (269,000)(6) 1$42,782,000
Cost of services 107,981,000 1,926,000 5,581,000 435,000(7) 115,923,000
------------ ---------- ----------- ------------- -------------
Gross profit 23,051,000 401,000 4,111,000 (704,000) 26,859,000
General and administrative
expenses 10,491,000 605,000 2,048,000 (110,000)(8) 13,034,000
------------ ---------- ----------- ------------- -------------
Operating income 12,560,000 (204,000) 2,063,000 (594,000) 13,825,000
Interest (income) expense, net 212,000 0 (103,000) (99,000)(9) 10,000
Provision for income taxes 5,124,000 0 838,000 72,000(10) 6,034,000
------------ ---------- ----------- ------------- -------------
Net income (loss) $ 7,224,000 $ (204,000) $ 1,328,000 $ (567,000) $7,781,000
------------ ---------- ----------- ------------- -------------
------------ ---------- ----------- ------------- -------------
Earnings per share $ 0.87 $ 0.87
------------ -------------
------------ -------------
Weighted average shares
outstanding 8,261,000 8,928,000(11)
------------ -------------
------------ -------------
</TABLE>
See accompanying Notes to Consolidated Pro Forma Financial Statements.
F-40
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS--UNAUDITED)
(1) To record the use of $25,000,000 of existing cash and borrowings of
$5,000,000 under the Company's $40,000,000 Credit Facility to finance the
Prompt acquisition.
(2) To eliminate the loan to shareholder and long-term payable to related
parties which will be terminated immediately prior to the closing of the
transaction.
(3) To record the excess of cost over fair value of net assets acquired
resulting from the preliminary purchase price allocation as follows:
<TABLE>
<S> <C>
Pro forma purchase price including fees and expenses: $34,867,000
Purchase price allocated to:
Current assets 6,278,000
Property and equipment 438,000
Other long term assets 536,000
Current liabilities (1,385,000)
-----------
Net assets acquired 5,867,000
-----------
Excess of cost over fair value of net assets acquired $29,000,000
-----------
-----------
</TABLE>
The foregoing purchase price allocation is based upon preliminary
information. The final purchase price allocation is contingent upon the
final determination of the fair value of the net assets acquired on October
28, 1996, the date of acquisition. Based upon presently available
information, the Company does not believe that the final purchase price
allocation will materially differ from the preliminary allocation.
(4) Record fees and expenses associated with the purchase of Prompt.
(5) To eliminate the historical stockholders' equity of Prompt.
(6) To eliminate sales between CRA and Focus of $407,000 and $269,000 for the
year ended December 31, 1995 and the nine months ended September 30, 1996,
respectively.
(7) The pro forma adjustment includes:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- --------------------
<S> <C> <C>
Elimination of sales between CRA and Focus $ (407,000) $ (269,000)
Elimination of historical Focus goodwill amortization (749,000) (187,000)
Record new Focus goodwill amortization under a thirty year life 663,000 166,000
Record Prompt goodwill amortization under a thirty year life 967,000 725,000
---------- ----------
$ 474,000 $ 435,000
---------- ----------
---------- ----------
</TABLE>
(8) To eliminate general overhead expenses allocated to Focus by United
HealthCare Corporation of $646,000 and $110,000 for the year ended December
31, 1995 and the nine months ended September 30, 1996, respectively.
(9) To reduce interest expense by $1,988,000 and $99,000 for the year ended
December 31, 1995 and nine months ended September 30, 1996, respectively to
reflect the interest expense associated with the estimated outstanding
borrowings under the Company's existing Credit Facility after the
application of
F-41
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS--UNAUDITED)
the net proceeds from the Company's two sales of Common Stock to repay all
existing indebtedness at January 1, 1995 and the additional borrowings of
$21,000,000 and $30,000,000 for the Focus and Prompt acquisitions,
respectively. The calculation of the January 1, 1995 estimated outstanding
borrowings under the Credit Facility is as follows:
<TABLE>
<S> <C>
Net proceeds from the sale of 2,515,625 shares of Common
Stock $36,507,000
Net proceeds from the sale of 1,200,000 shares of Common
Stock 51,840,000
-----------
Total proceeds 88,347,000
Total outstanding debt at January 1, 1995 44,716,000
Borrowings required for the Focus acquisition 21,000,000
Borrowings required for the Prompt acquisition 30,000,000
-----------
Total uses of funds 95,716,000
-----------
Estimated outstanding borrowings at January 1, 1995 $ 7,369,000
-----------
-----------
</TABLE>
The Company further assumed that it would be able to repay all of the
outstanding January 1, 1995 borrowings in seven equal quarterly installments
beginning March 31, 1995. Interest expense was calculated assuming an
interest rate of 8.55% and 7.12% (weighted average interest rate on
borrowings during the period) for the year ended December 31, 1995 and nine
months ended September 30, 1996, respectively.
(10) To record a tax provision of $995,000 and $72,000 associated with the pro
forma adjustments and to adjust Focus's and Prompt's results of operation to
an effective tax rate of 40% and 41.5%, after adding back the Prompt
goodwill amortization which is non-deductible for tax purposes, for the year
ended December 31, 1995 and nine months ended September 30, 1996,
respectively.
(11) The weighted average shares outstanding has been increased to reflect the
issuance of additional shares from the Company's sale of 2,515,625 shares of
Common Stock in May 1995 and 1,200,000 shares of Common Stock in June 1996.
F-42
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNEC-
TION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTA-
TION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRE-
SENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY UN-
DERWRITER. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Recent Developments............................ 10
Use of Proceeds................................ 11
Price Range of Common Stock.................... 11
Dividend Policy................................ 11
Capitalization................................. 12
Selected Historical Consolidated Financial
Data......................................... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 14
Business....................................... 21
Management..................................... 31
Principal and Selling Stockholders............. 33
Description of Capital Stock................... 35
Underwriting................................... 37
Legal Matters.................................. 38
Experts........................................ 38
Additional Information......................... 38
Incorporation by Reference..................... 39
Index to Financial Statements.................. F-1
</TABLE>
--------------
2,000,000 SHARES
[LOGO]
COMMON STOCK
------------
PROSPECTUS
------------
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
MONTGOMERY SECURITIES
J.P. MORGAN & CO.
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the
securities being registered hereby, other than the underwriting discount, to be
paid by the Company, are estimated as follows:
<TABLE>
<S> <C>
Registration fee under Securities Act..................................... $ 35,023
NASD filing fee........................................................... 12,058
Nasdaq National Market fee................................................ 17,500
Legal fees and expenses................................................... 175,000
Accounting fees and expenses.............................................. 75,000
Blue Sky fees and expenses (including legal fees)......................... 15,000
Printing and engraving expenses........................................... 90,000
Transfer agent fees and expenses.......................................... 10,000
Miscellaneous............................................................. 170,419
---------
Total................................................................. $ 600,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 67 of Chapter 156B of the Massachusetts Business Corporation Law,
which is applicable to the Company, provides as follows:
Indemnification of directors, officers, employees and other agents of a
corporation, and persons who serve at its request in any capacity with respect
to any employee benefit plan, may be provided by it to whatever extent shall be
specified in or authorized by (i) the articles of organization or (ii) a by-law
adopted by the stockholders or (iii) a vote adopted by the holders of a majority
of the shares of stock entitled to vote on the election of directors. Except as
the articles of organization or by-laws otherwise require, indemnification of
any persons referred to in the preceding sentence who are not directors of the
corporation may be provided by it to the extent authorized by the directors.
Such indemnification may include payment by the corporation of expenses incurred
in defending a civil or criminal action or proceeding in advance of the final
disposition of such action or proceeding, upon receipt of an undertaking by the
person indemnified to repay such payment if he shall be adjudicated to be not
entitled to indemnification under this section which undertaking may be accepted
without reference to the financial ability of such person to make repayment. Any
such indemnification may be provided although the person to be indemnified is no
longer an officer, director, employee or agent of the corporation or of such
other organization or no longer serves with respect to any such employee benefit
plan.
No indemnification shall be provided by any person with respect to any
matter as to which he shall have been adjudicated in any proceeding not to have
acted in good faith in the reasonable belief that his action was in the best
interest of the corporation or to the extent that such matter relates to service
with respect to an employee benefit plan, in the best interests of the
participants or beneficiaries of such employee benefit plan.
The absence of any express provision for indemnification shall not limit any
right of indemnification existing independently of this section.
A corporation shall have power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or other agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or other agent of another organization or with
respect to any employee benefit plan, against any liability incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability.
II-1
<PAGE>
In addition, pursuant to its Articles and By-Laws, the Company shall
indemnify its directors and officers against expenses (including judgments or
amounts paid in settlement) incurred in any action, civil or criminal, to which
any such person is a party by reason of any alleged act or failure to act in his
capacity as such, except as to a matter as to which such director or officer
shall have been finally adjudged not to have acted in good faith in the
reasonable belief that his action was in the best interests of the corporation.
The underwriters also will agree to indemnify the directors and officers of
the Company against certain liabilities as set forth in Section 8 of the
Underwriting Agreement (see Exhibit 1.1).
The Company has purchased insurance with respect to, among other things, the
liabilities that may arise under the statutory provisions referred to above. The
directors and officers of the Company also are insured against certain
liabilities, including certain liabilities arising under the Securities Act of
1933, as amended, which might be incurred by them in such capacities and against
which they are not indemnified by the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS: The following is a list of exhibits filed as part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
- --------- --------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Stock Purchase Agreement, dated as of March 19, 1996, by and between the Company
and United Healthcare Services, Inc.
2.2 Agreement and Plan of Merger, dated as of October 28, 1996, by and among the
Company, PAI Acquisition Corp., Prompt Associates, Inc., and certain other
signatories thereto.
3.1 Restated Articles of Organization of the Company (incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement No. 333-03253).
3.2 Form of Articles of Amendment to the Articles of Organization of the Company
(incorporated by reference to Exhibit 3.2 of the Company's Registration
Statement No. 333-03253).
3.3 By-Laws of the Company, as amended and restated (incorporated by reference to
Exhibit 3.4 of the Company's Registration Statement No. 33-90426).
4.1 Specimen stock certificate representing the shares of Common Stock (incorporated
by reference to Exhibit 4.1 of the Company's Registration Statement No.
33-90426).
4.2 Registration Rights Agreement, dated as of March 8, 1994, among the Company, J.
H. Whitney & Co., Whitney 1990 Equity Fund, L.P., Whitney Subordinated Debt
Fund, L.P., First Union Corporation, Lois E. Silverman and Donald J. Larson
(incorporated by reference to Exhibit 10.7 of the Company's Registration
Statement No. 33-90426).
4.3 Registration Rights Agreement dated October 24, 1995, by and among the Company,
Michael J. Spilde and Laurence G. Ernst (incorporated by reference to Exhibit
4.3 of the Company's Registration Statement No. 333-03253).
4.4 Form of Registration Rights Agreement by and among the Company and the
shareholders of QMC3, Inc. (incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement No. 333-03253).
5.1 Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation, as to the
legality of the securities being registered.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP with respect to Prompt Associates, Inc.
23.3 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included in
Exhibit 5.1).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
- --------- --------------------------------------------------------------------------------
<C> <S>
24.1 Power of Attorney (included on the signature page hereto).
27.1 Financial Data Schedule.
</TABLE>
Schedules not listed above have been omitted because they are not applicable
or the required information is included in the combined financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended,
shall be deemed to be part of this Registration Statement as of the time it
was declared effective.
2. For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE public offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boston, Commonwealth of Massachusetts, on the 7th day
of November, 1996.
CRA MANAGED CARE, INC.
By: /s/ Donald J. Larson
-----------------------------------------
DONALD J. LARSON
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Donald J. Larson and William Laverack, Jr., and
each of them, with the power to act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or in his name, place and stead, in any and all capacities to sign any
and all amendments or post-effective amendments to this Registration Statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents or either of them, or their or his substitutes, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ Donald J. Larson President, Chief Executive November 7, 1996
- ------------------------------ Officer and Director
DONALD J. LARSON (principal executive
officer)
/s/ Joseph F. Pesce Senior Vice President-- November 7, 1996
- ------------------------------ Finance and
JOSEPH F. PESCE Administration, Chief
Financial Officer and
Treasurer (principal
financial and accounting
officer)
/s/ Lois E. Silverman Chairman of the Board of November 7, 1996
- ------------------------------ Directors
LOIS E. SILVERMAN
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ Jeffrey R. Jay Director November 7, 1996
- ------------------------------
JEFFREY R. JAY
/s/ William Laverack, Jr. Director November 7, 1996
- ------------------------------
WILLIAM LAVERACK, JR.
/s/ George H. Conrades Director November 7, 1996
- ------------------------------
GEORGE H. CONRADES
/s/ Mitchell T. Rabkin Director November 7, 1996
- ------------------------------
MITCHELL T. RABKIN
</TABLE>
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To CRA Managed Care, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of CRA Managed Care, Inc. included in this registration
statement and have issued our report thereon dated January 23, 1996. Our audit
was made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in Item 16(b) is the responsibility of the
Company's management and is presented for purposes 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.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 23, 1996
S-1
<PAGE>
SCHEDULE II
CRA MANAGED CARE, INC.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO DEDUCTIONS BALANCE AT
AT BEGINNING COSTS AND FROM END
OF PERIOD EXPENSES RESERVES OF PERIOD
------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
1993................................................... $ 65,000 $ 15,000 $ -- $ 80,000
1994................................................... 80,000 353,000 53,000 380,000
1995................................................... 380,000 186,000 136,000 430,000
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE PAGE
- --------- ------------------------------------------------------------------------------ ---------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
2.1 Stock Purchase Agreement, dated as of March 19, 1996, by and between the
Company and United Healthcare Services, Inc.
2.2 Agreement and Plan of Merger, dated as of October 28, 1996, by and among the
Company, PAI Acquisition Corp., Prompt Associates, Inc., and certain other
signatories thereto.
3.1 Restated Articles of Organization of the Company (incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement No. 333-03253).
3.2 Form of Articles of Amendment to the Articles of Organization of the Company
(incorporated by reference to Exhibit 3.2 of the Company's Registration
Statement No. 333-03253).
3.3 By-Laws of the Company, as amended and restated (incorporated by reference to
Exhibit 3.4 of the Company's Registration Statement No. 33-90426).
4.1 Specimen stock certificate representing the shares of Common Stock
(incorporated by reference to Exhibit 4.1 of the Company's Registration
Statement No. 33-90426).
4.2 Registration Rights Agreement, dated as of March 8, 1994, among the Company,
J. H. Whitney & Co., Whitney 1990 Equity Fund, L.P., Whitney Subordinated Debt
Fund, L.P., First Union Corporation, Lois E. Silverman and Donald J. Larson
(incorporated by reference to Exhibit 10.7 of the Company's Registration
Statement on No. 33-90426).
4.3 Registration Rights Agreement dated October 24, 1995, by and among the
Company, Michael J. Spilde and Laurence G. Ernst (incorporated by reference to
Exhibit 4.3 of the Company's Registration Statement No. 333-03253).
4.4 Form of Registration Rights Agreement by and among the Company and the
shareholders of QMC3, Inc. (incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement No. 333-03253).
5.1 Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation, as to the
legality of the securities being registered.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP with respect to Prompt Associates, Incorporated.
23.3 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included
in Exhibit 5.1).
24.1 Power of Attorney (included on the signature page hereto).
27.1 Financial Data Schedule
</TABLE>
<PAGE>
Exhibit 1.1
2,000,000
CRA Managed Care, Inc.
Common Stock
($.01 Par Value)
UNDERWRITING AGREEMENT
November __, 1996
Alex. Brown & Sons Incorporated
Dean Witter Reynolds Inc.
Montgomery Securities
J.P. Morgan Securities Inc.
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Gentlemen:
CRA Managed Care, Inc., a Massachusetts corporation (the "COMPANY"), and
certain shareholders of the Company (the "SELLING SHAREHOLDERS") propose to
sell to the several underwriters (the "UNDERWRITERS") named in SCHEDULE I
hereto for whom you are acting as representatives (the "REPRESENTATIVES") an
aggregate of 2,000,000 shares of the Company's Common Stock, $.01 par value
(the "FIRM SHARES"), of which 500,000 shares will be sold by the Company and
1,500,000 shares will be sold by the Selling Shareholders. The respective
amounts of the Firm Shares to be so purchased by the several Underwriters are
set forth opposite their names in SCHEDULE I hereto, and the respective
amounts to be sold by the Selling Shareholders are set forth opposite their
names in SCHEDULE II hereto. The Company and the Selling Shareholders are
sometimes referred to herein collectively as the "SELLERS." The Company also
proposes to sell at the Underwriters' option an aggregate of up to 300,000
additional shares of the Company's Common Stock (the "OPTION SHARES") as set
forth below.
As the Representatives, you have advised the Company and the Selling
Shareholders (a) that you are authorized to enter into this Agreement on
behalf of the several Underwriters, and (b) that the several Underwriters
are willing, acting severally and not jointly, to purchase the numbers of
Firm Shares set forth opposite their respective names in SCHEDULE I, plus
their pro rata portion of the Option Shares if you elect to exercise the
over-allotment option in whole or in part for the accounts of the
<PAGE>
-2-
several Underwriters. The Firm Shares and the Option Shares (to the extent
the aforementioned option is exercised) are herein collectively called the
"SHARES."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
SELLING SHAREHOLDERS.
(a) The Company represents and warrants as of the date hereof, the
Closing Date and the Option Closing Date, as the case may be (as
such dates are hereinafter defined), to each of the Underwriters
as follows:
(i) A registration statement on Form S-3 (File No. 333-[_________])
with respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "ACT"), and the Rules and Regulations (the "RULES AND REGULATIONS") of
the Securities and Exchange Commission (the "COMMISSION") thereunder and
has been filed with the Commissions. The Company has complied with the
conditions for the use of Form S-3. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of the Rules and Regulations) contained therein and the
exhibits, financial statements and schedules, as finally amended and
revised, have heretofore been delivered by the Company to you and, to the
extent applicable, were identical to the electronically transmitted copies
thereof filed with the Commission pursuant to the Commission's Electronic
Data Gathering, Analysis and Retrieval System ("EDGAR"), except to the
extent permitted by Regulation S-T. Such registration statement, together
with any registration statement filed by the Company pursuant to Rule
462(b) of the Act, herein referred to as the "REGISTRATION STATEMENT,"
which shall be deemed to include all information omitted therefrom in
reliance upon Rule 430A and contained in the Prospectus referred to below,
has been declared effective by the Commission under the Act and no post-
effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "PROSPECTUS" means (a) the form of prospectus
first filed by the Company with the Commission pursuant to Rule 424(b) and
430A or (b) the last preliminary prospectus included in the Registration
Statement filed prior to the time it becomes effective or filed pursuant to
Rule 424(a) under the Act that is delivered by the Company to the
Underwriters for delivery to purchasers of the Shares, together with the
term sheet or abbreviated term sheet filed with the Commission pursuant to
Rule 424(b)(7) under the Act. Each preliminary prospectus included in the
Registration Statement prior to the time it becomes effective is herein
referred to as a "PRELIMINARY PROSPECTUS." Any reference herein to the
Registration Statement, any Preliminary Prospectus or to the Prospectus
shall be deemed to refer to and include any documents incorporated by
reference therein, and, in the case of any reference herein to any
Prospectus, also shall be deemed to include any documents incorporated by
reference therein, any supplements or amendments thereto, filed with the
Commission after the date of filing of the Prospectus under Rule 424(b) or
Rule 430A, and prior to the termination of the offering of the Shares by
the Underwriters. For purposes of this Agreement, all references to the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement to any of the foregoing, shall be deemed to include
the respective copies thereof filed with the Commission pursuant to EDGAR.
(ii) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the Commonwealth of
Massachusetts, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement. Each of the subsidiaries of the Company as listed in EXHIBIT A
hereto (collectively,
<PAGE>
-3-
the "SUBSIDIARIES") has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement. The Subsidiaries are the only subsidiaries, direct or
indirect, of the Company. The Company and each of the Subsidiaries are
duly qualified to transact business in all jurisdictions in which the
conduct of their business requires such qualification and where the
failure to be so qualified would have a material adverse effect on the
business or results of operations of the Company or the Subsidiaries.
The outstanding shares of capital stock of each of the Subsidiaries have
been duly authorized and validly issued, are fully paid and
non-assessable and are owned by the Company free and clear of all
liens, encumbrances and equities and claims; and no options, warrants or
other rights to purchase, agreements or other obligations to issue or
other rights to convert any obligations into shares of capital stock or
ownership interests in the Subsidiaries are outstanding.
(iii) The outstanding shares of Common Stock of the Company,
including all shares to be sold by the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; the
portion of the Shares and the Option Shares, if any, to be issued and
sold by the Company have been duly authorized and when issued and paid for
as contemplated herein will be validly issued, fully paid and non-
assessable; and no preemptive rights of stockholders exist with respect to
any of the Shares or the issue and sale thereof. Neither the filing of
the Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the registration
of any shares of Common Stock.
(iv) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(v) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares
nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and
will conform to, the requirements of the Act and the Rules and Regulations.
The documents incorporated by reference in the Prospectus, at the time
filed with the Commission conformed, in all respects to the requirements of
the Securities Exchange Act of 1934 or the Act, as applicable, and the
rules and regulations of the Commission thereunder. The Registration
Statement and any amendment thereto do not contain, and will not contain,
any untrue statement of a material fact and do not omit, and will not omit,
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. The Prospectus and any
amendments and supplements thereto do not contain, and will not contain,
any untrue statement of material fact; and do not omit, and will not omit,
to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; PROVIDED, HOWEVER, that the Company makes
no representations or warranties as to information contained in or omitted
from the Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives, specifically for use in the preparation thereof.
<PAGE>
-4-
(vi) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth or
incorporated by reference in the Registration Statement, present fairly the
financial position and the results of operations and cash flows of the
Company and the consolidated Subsidiaries, at the indicated dates and for
the indicated periods. Such financial statements and related schedules
have been prepared in accordance with generally accepted principles of
accounting, consistently applied throughout the periods involved, except as
disclosed herein, and all adjustments necessary for a fair presentation of
results for such periods have been made. The summary financial and
statistical data included or incorporated by reference in the Registration
Statement presents fairly the information shown therein and such data has
been compiled on a basis consistent with the financial statements presented
therein and the books and records of the Company. The pro forma financial
statements and other pro forma financial information included in the
Registration Statement and the Prospectus present fairly the information
shown therein, have been prepared in accordance with the Commission's rules
and guidelines with respect to pro forma financial statements, have been
properly compiled on the pro forma bases described therein, and, in the
opinion of the Company, the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions or circumstances referred to therein.
(vii) Arthur Andersen LLP, who have certified certain of the
financial statements filed with the Commission as part, or incorporated by
reference in, of the Registration Statement, are independent public
accountants as required by the Act and the Rules and Regulations.
(viii) There is no action, suit, claim or proceeding pending or, to
the knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise which
if determined adversely to the Company or any of its Subsidiaries might
result in any material adverse change in the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and of the Subsidiaries or to
prevent the consummation of the transactions contemplated hereby, except as
set forth in the Registration Statement.
(ix) The Company and the Subsidiaries have good and marketable title
to all of the properties and assets reflected in the financial statements
(or as described in the Registration Statement) hereinabove described,
subject to no lien, mortgage, pledge, charge or encumbrance of any kind
except those reflected in such financial statements (or as described in the
Registration Statement) or which are not material in amount. The Company
and the Subsidiaries occupy their leased properties under valid and binding
leases conforming in all material respects to the description thereof set
forth in the Registration Statement.
(x) The Company and the Subsidiaries have filed all Federal, State,
local and foreign income tax returns which have been required to be filed
and have paid all taxes indicated by said returns and all assessments
received by them or any of them to the extent that such taxes have become
due. All tax liabilities have been adequately provided for in the
financial statements of the Company.
(xi) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has
not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Company and its Subsidiaries, whether or
not occurring in the
<PAGE>
-5-
ordinary course of business, and there has not been any material
transaction entered into or any material transaction that is probable of
being entered into by the Company or the Subsidiaries, other than
transactions in the ordinary course of business and changes and
transactions described in the Registration Statement, as it may be
amended or supplemented. The Company and the Subsidiaries have no
material contingent obligations which are not disclosed in the Company's
financial statements which are included in the Registration Statement.
(xii) Neither the Company nor any of the Subsidiaries is or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Charter or By-laws or under any agreement, lease,
contract, indenture or other instrument or obligation to which it is a
party or by which it, or any of its properties, is bound and which default
is of material significance in respect of the condition, financial or
otherwise of the Company and its Subsidiaries or the business, management,
properties, assets, rights, operations, condition (financial or otherwise)
or prospects of the Company and the Subsidiaries. The execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated and the fulfillment of the terms hereof will not conflict with
or result in a breach of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any Subsidiary is a party, or of the
Charter or By-laws of the Company or any order, rule or regulation
applicable to the Company or any Subsidiary of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(xiii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
(xiv) The Company and each of the Subsidiaries owns or possesses
adequate licenses or other rights to use all patents, patent applications,
trademarks, trademark applications, service marks, service mark
applications, trade names, copyrights, manufacturing processes, formulae,
trade secrets and know-how or other information (collectively,
"INTELLECTUAL PROPERTY") described in the Prospectus as owned by or used by
the Company or the Subsidiaries or which is necessary to the conduct of its
business as now conducted by the Company or the Subsidiaries as described
in the Prospectus. The Company is not aware of any infringement of or
conflict with the rights of claims or others with respect to any of the
products or Intellectual Property of the Company or the Subsidiaries which
could have a material adverse effect on the business or financial condition
of the Company or the Subsidiaries. The Company is not aware of any
infringement of any of the Intellectual Property rights of the Company or
the Subsidiaries by any third party which could have a material adverse
effect on the business or financial condition of the Company or the
Subsidiaries.
(xv) The Company and each the Subsidiaries is conducting its business
in compliance with all the laws, rules and regulations of the jurisdictions
in which it is they are conducting business, except where the failure to so
comply would not have, singly or in the aggregate, a material adverse
effect on the business or financial condition of the Company or the
Subsidiaries.
<PAGE>
-6-
Without limiting the foregoing, the Company and each of the Subsidiaries
holds and is operating in compliance with all licenses, authorizations,
consents, approvals, certificates and permits (individually, a "PERMIT")
from any regulatory body or administrative agency or other governmental
body having jurisdiction including, without limitation, those Federal
and state workers' compensation laws that are applicable to the
operations of the Company or the Subsidiaries as now conducted or
proposed to be conducted as described in the Prospectus, all of which
Permits are current, except where the failure to so hold or comply with
any Permit would not have, singly or in the aggregate, a material
adverse effect on the business or financial condition of the Company or
the Subsidiaries. The Company is not aware, nor has it received any
notice of, any pending or threatened proceedings, or any circumstances
which could lead them to believe that any such proceedings are imminent,
relating to the revocation or modification of any such Permit or
Approval which, singly or in the aggregate if the subject of an
unfavorable decision, ruling or finding, could have a material adverse
effect on the business or financial condition of the Company or the
Subsidiaries.
(xvi) Neither the Company, nor to the Company's knowledge, any of
its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of
the Shares. The Company acknowledges that the Underwriters may engage in
passive market making transactions in the Shares on the Nasdaq National
Market in accordance with Rule 10b-6A under the Exchange Act.
(xvii) Neither the Company nor any Subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act
of 1940 (the "1940 ACT") and the rules and regulations of the Commission
thereunder.
(xviii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions
are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xix) The Company and each of its Subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their
respective properties and as is customary for companies engaged in similar
industries.
(xx) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"CODE"); and
<PAGE>
-7-
each "pension plan" for which the Company would have any liability that
is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by
action or by failure to act, which would cause the loss of such
qualification.
(xxi) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and the
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after
the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"DEPARTMENT"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located in
Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to
the Department.
(b) Each of the Selling Shareholders severally represents and
warrants as follows:
(i) Such Selling Shareholder now has and at the Closing Date (as
such date is hereinafter defined), will have good and marketable title
to the Firm Shares to be sold by such Selling Shareholder, free and
clear of any liens, encumbrances, equities and claims, and full right,
power and authority to effect the sale and delivery of such Firm Shares;
and upon the delivery of, against payment for, such Firm Shares pursuant
to this Agreement, the Underwriters will acquire good and marketable
title thereto, free and clear of any liens, encumbrances, equities and
claims.
(ii) Such Selling Shareholder has full right, power and authority to
execute and deliver this Agreement, the Power of Attorney and Custody
Agreement referred to below and to perform its obligations under such
Agreements. The execution and delivery of this Agreement and the
consummation by such Selling Shareholder of the transactions herein
contemplated and the fulfillment by such Selling Shareholder of the terms
hereof will not require any consent, approval, authorization, or other
order of any court, regulatory body, administrative agency or other
governmental body (except as may be required under the Act, state
securities laws or Blue Sky laws) and will not result in a breach of any of
the terms and provisions of, or constitute a default under, organizational
documents of such Selling Shareholder, if not an individual, or any
indenture, mortgage, deed of trust or other agreement or instrument to
which such Selling Shareholder is a party, or of any order, rule or
regulation applicable to such Selling Shareholder of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(iii) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted,
or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Common Stock of the
Company and, other than as permitted by the Act, the Selling Shareholder
will not distribute any prospectus or other offering material in connection
with the offering of the Shares.
(iv) Without having undertaken to determine independently the
accuracy or completeness of either the representations and warranties of
the Company contained herein or the information contained in the
Registration Statement, such Selling Shareholder has no reason
<PAGE>
-8-
to believe that the representations and warranties of the Company
contained in this Section 1 are not true and correct, is familiar with
the Registration Statement and has no knowledge of any material fact,
condition or information not disclosed in the Registration Statement
which has adversely affected or may adversely affect the business of the
Company or any of the Subsidiaries; and the sale of the Firm Shares by
such Selling Shareholder pursuant hereto is not prompted by any
information concerning the Company or any of the Subsidiaries which is not
set forth in the Registration Statement or the documents incorporated by
reference therein. The information pertaining to such Selling Shareholder
under the caption "Selling Shareholders" in the Prospectus is complete and
accurate in all material respects.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the
Sellers agree to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of [NET PRICE] per
share, the number of Firm Shares set forth opposite the name of each
Underwriter in SCHEDULE I hereof, subject to adjustments in accordance with
Section 9 hereof. The number of Firm Shares to be purchased by each
Underwriter from each Seller shall be as nearly as practicable in the same
proportion to the total number of Firm Shares being sold by each Seller as
the number of Firm Shares being purchased by each Underwriter bears to the
total number of Firm Shares to be sold hereunder. The obligations of the
Company and of each of the Selling Shareholders shall be several and not
joint.
(b) Certificates in negotiable form for the total number of the
Shares to be sold hereunder by the Selling Shareholders have been placed in
custody with CRA Managed Care, Inc. as custodian (the "CUSTODIAN") pursuant
to the Power of Attorney and Custody Agreement (the "Power of Attorney and
Custody Agreement") executed by each Selling Shareholder for delivery of
all Firm Shares to be sold hereunder by the Selling Shareholders. Each
of the Selling Shareholders specifically agrees that the Firm Shares
represented by the certificates held in custody for the Selling
Shareholders under the Power of Attorney and Custody Agreement are subject
to the interests of the Underwriters hereunder, that the arrangements
made by the Selling Shareholders for such custody are to that extent
irrevocable, and that the obligations of the Selling Shareholders
hereunder shall not be terminable by any act or deed of the Selling
Shareholders (or by any other person, firm or corporation including the
Company, the Custodian or the Underwriters) or by operation of law
(including the death of an individual Selling Shareholder or the
dissolution of a corporate Selling Shareholder) or by the occurrence of any
other event or events, except as set forth in the Power of Attorney and
Custody Agreement. If any such event should occur prior to the delivery to
the Underwriters of the Firm Shares hereunder, certificates for the Firm
Shares shall be delivered by the Custodian in accordance with the terms
and conditions of this Agreement as if such event has not occurred. The
Custodian is authorized to receive and acknowledge receipt of the proceeds
of sale of the Shares held by it against delivery of such Shares.
(c) Payment for the Firm Shares to be sold hereunder is to be made by
wire transfer in same-day funds, payable to the order of the Company for
the shares to be sold by it and to the order of "CRA Managed Care, Inc.,
as Custodian" for the shares to be sold by the Selling Shareholders, in
each case against delivery of certificates therefor to the Representatives
for the several accounts of the Underwriters. Such payment and delivery
are to be made at the offices of
<PAGE>
-9-
Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore,
Maryland, at 10:00 a.m., Baltimore time, on the third business day after
the date of this Agreement or at such other time and date not later than
five business days thereafter as you and the Company shall agree upon,
such time and date being herein referred to as the "CLOSING DATE." (As
used herein, "BUSINESS DAY" means a day on which the New York Stock
Exchange is open for trading and on which banks in New York are open for
business and not permitted by law or executive order to be closed.) The
certificates for the Firm Shares will be delivered in such denominations
and in such registrations as the Representatives request in writing not
later than the second full business day prior to the Closing Date, and
will be made available for inspection by the Representatives at least
one business day prior to the Closing Date.
(d) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions
herein set forth, the Company hereby grants an option to the several
Underwriters to purchase the Option Shares at the price per share as set
forth in the first paragraph of this Section 2. The option granted
hereby may be exercised in whole or in part by giving written notice (i)
at any time before the Closing Date and (ii) only once thereafter within
30 days after the date of this Agreement, by you, as Representatives of
the several Underwriters, to the Company setting forth the number of
Option Shares as to which the several Underwriters are exercising the
option, the names and denominations in which the Option Shares are to be
registered and the time and date at which such certificates are to be
delivered. The time and date at which certificates for Option Shares are
to be delivered shall be determined by the Representatives but shall not
be earlier than three nor later than 10 full business days after the
exercise of such option, nor in any event prior to the Closing Date
(such time and date being herein referred to as the "OPTION CLOSING
DATE"). If the date of exercise of the option is three or more days
before the Closing Date, the notice of exercise shall set the Closing
Date as the Option Closing Date. The number of Option Shares to be
purchased by each Underwriter shall be in the same proportion to the
total number of Option Shares being purchased as the number of Firm
Shares being purchased by such Underwriter bears to the total number of
Firm Shares, adjusted by you in such manner as to avoid fractional
shares. The option with respect to the Option Shares granted hereunder
may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters. You, as Representatives of the several
Underwriters, may cancel such option at any time prior to its expiration
by giving written notice of such cancellation to the Company. To the
extent, if any, that the option is exercised, payment for the Option
Shares shall be made on the Option Closing Date in New York Clearing
House funds by certified or bank cashier's check drawn to the order of
the Company for the Option Shares to be sold by it against delivery of
certificates therefor at the offices of Alex. Brown & Sons Incorporated,
135 East Baltimore Street, Baltimore, Maryland.
<PAGE>
-10-
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it
advisable to do so. The Firm Shares are to be initially offered to the
public at the initial public offering price set forth in the Prospectus.
The Representatives may from time to time thereafter change the public
offering price and other selling terms. To the extent, if at all, that any
Option Shares are purchased pursuant to Section 2 hereof, the Underwriters
will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with
a Master Agreement Among Underwriters entered into by you and the several
other Underwriters.
4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS.
(a) The Company covenants and agrees with the several Underwriters
that:
(i) The Company will (A) prepare and timely file with the Commission
under Rule 424(b) of the Rules and Regulations a Prospectus containing
information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Rules and
Regulations, and (B) not file any amendment to the Registration Statement
or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not
in compliance with the Rules and Regulations. To the extent applicable,
the copies of the Registration Statement and each amendment thereto
(including all exhibits filed therewith), any Preliminary Prospectus or
Prospectus (in each case, as amended or supplemented) furnished to the
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(ii) The Company will advise the Representatives promptly (A) when
the Registration Statement or any post-effective amendment thereto shall
have become effective, (B) of receipt of any comments from the Commission,
(C) of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus and to obtain
as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may
<PAGE>
-11-
reasonably have designated in writing and will make such applications,
file such documents, and furnish such information as may be reasonably
required for that purpose, provided the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service
of process in any jurisdiction where it is not now so qualified or
required to file such a consent. The Company will, from time to time,
prepare and file such statements, reports, and other documents, as are
or may be required to continue such qualifications in effect for so long
a period as the Representatives may reasonably request for distribution
of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request. The Company will deliver to
the Representatives at or before the Closing Date, four signed copies of
the Registration Statement and all amendments thereto including all
exhibits filed therewith, and will deliver to the Representatives such
number of copies of the Registration Statement, but without exhibits, and
of all amendments thereto, as the Representatives may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "EXCHANGE ACT"),
and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus
is required by law to be delivered by an Underwriter or dealer, any event
shall occur as a result of which, in the judgment of the Company or in the
reasonable opinion of the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend
or supplement the Prospectus to comply with any law, the Company promptly
either (i) will prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the Prospectus or
(ii) prepare and file with the Commission an appropriate filing under the
Exchange Act which shall be incorporated by reference in the Prospectus so
that the Prospectus as so amended or supplemented will not, in the light of
the circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earning statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earning statement shall
satisfy the requirements of Section 11(a) of the Act and Rule 158 of the
Rules and Regulations and will advise you in writing when such statement
has been so made available.
(vii) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of
all other documents, reports and information furnished by the Company to
its stockholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Exchange Act. The Company will deliver to the Representatives similar
reports with respect to significant subsidiaries, as that term is defined
in the Rules and Regulations, which are not
<PAGE>
-12-
consolidated in the Company's financial statements. To the extent
applicable, such reports or documents shall be identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(viii) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible into
or exchangeable or exercisable for shares of Common Stock or derivative
of Common Stock (or agreement for such) will be made for a period of 90
days after the date of this Agreement, directly or indirectly, by the
Company otherwise than hereunder or with the prior written consent of
Alex. Brown & Sons Incorporated, except that the Company may, without such
consent, issue shares upon the exercise of options outstanding on the date
of this Agreement issued pursuant to the Company's stock option plans.
(ix) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on the National Association of Securities Dealers
Automated Quotations ("NASDAQ") National Market.
(x) The Company has caused each director and certain specified
shareholders of the Company to furnish to you, on or prior to the
date of this agreement, a letter or letters, in form and substance
satisfactory to the Underwriters, pursuant to which each such person shall
agree not to: (A) offer to sell, contract to sell, transfer or otherwise
dispose of, directly or indirectly, any shares of Common Stock, any
options, rights or warrants to purchase any shares of Common Stock
(including any stock appreciation right, or similar right with an exercise
or conversion privilege at a price related to, or derived from, the market
price of the Common Stock) or any securities convertible into or
exchangeable for shares of Common Stock owned directly by such person or
with respect to which such person has the power of disposition (including,
without limitation, shares of Common Stock which such person may be deemed
to beneficially own in accordance with the rules and regulations
promulgated under the Exchange Act); or (B) engage in any hedging
transactions with respect to the Common Stock that may have an impact on
the market price of the Common Stock for a period beginning on the date of
such letters and expiring 90 days following the date the Registration
Statement is declared effective by the Commission (the "LOCKUP PERIOD"),
directly or indirectly ("LOCKUP AGREEMENTS"); PROVIDED, HOWEVER, such
officers, directors and specified shareholders shall be permitted to make
the following transfers: (i) transfers of up to an aggregate of 50,000
shares of Common Stock made by gift, PROVIDED the donee thereof agrees in
writing to be bound by the terms hereof; (ii) transfers to the transferor's
affiliates, as such term is defined in Rule 405 promulgated under the
Securities Act, PROVIDED that each transferee agrees in writing to be bound
by the terms hereof; (iii) transfers made with the prior written consent of
Alex. Brown & Sons Incorporated; and (iv) transfers pursuant to the
Registration Statement.
(xi) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of
the proceeds therefrom as may be required in accordance with Rule 463 under
the Act.
(xii) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Subsidiaries to register as an
investment company under the 1940 Act.
<PAGE>
-13-
(xiii) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common
Stock.
(xiv) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
(b) Each of the Selling Shareholders covenants and agrees with the
several Underwriters that:
(i) Such Selling Shareholder will not: (A) offer to sell,
contract to sell, transfer or otherwise dispose of, directly or
indirectly, any shares of Common Stock, any options, rights or
warrants to purchase any shares of Common Stock (including any stock
appreciation right, or similar right with an exercise or conversion
privilege at a price related to, or derived from, the market price of
the Common Stock) or any securities convertible into or exchangeable
for shares of Common Stock owned directly by such Selling Shareholder
or with respect to which such Selling Shareholder has the power of
disposition (including, without limitation, shares of Common Stock
which such Selling Shareholder may be deemed to beneficially own in
accordance with the rules and regulations promulgated under the
Exchange Act; or (B) engage in any hedging transactions with respect
to the Common Stock that may have an impact on the market price of the
Common Stock during the Lockup Period, directly or indirectly, by such
Selling Shareholder otherwise than hereunder or with the prior written
consent of Alex. Brown & Sons Incorporated; PROVIDED, HOWEVER, such
Selling Shareholder shall be permitted to make the following
transfers: (i) transfers of up to an aggregate of 50,000 shares of
Common Stock made by gift, PROVIDED the donee thereof agrees in
writing to be bound by the terms hereof; (ii) transfers to the
transferor's affiliates, as such term is defined in Rule 405
promulgated under the Securities Act, PROVIDED that each transferee
agrees in writing to be bound by the terms hereof; (iii) transfers
made with the prior written consent of Alex. Brown & Sons
Incorporated; and (iv) transfers pursuant to the Registration
Statement.
(ii) In order to document the Underwriters' compliance
with the reporting and withholding provisions of the Tax Equity and
Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax
Compliance Act of 1983 with respect to the transactions herein
contemplated, each of the Selling Shareholders agrees to deliver to
you prior to or at the Closing Date a properly completed and executed
United States Treasury Department Form W-9 (or other applicable form
or statement specified by Treasury Department regulations in lieu
thereof).
(iii) Such Selling Shareholder will not take, directly
or indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of any securities of the
Company.
<PAGE>
-14-
5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company and the Selling Shareholders
under this Agreement, including, without limiting the generality of the
foregoing, the following: accounting fees of the Company; the fees and
disbursements of counsel for the Company and the Selling Shareholders; the
cost of printing and delivering to, or as requested by, the Underwriters
copies of the Registration Statement, Preliminary Prospectuses, the
Prospectus, this Agreement, the Agreement among Underwriters, the
Underwriters' Selling Memorandum, the Underwriters' Questionnaire, the
Underwriters' Invitation Letter, the Power of Attorney, the Additional
Listing Application, the Blue Sky Survey and any supplements or amendments
thereto; the filing fees of the Commission; the filing fees and expenses
(including fees and disbursements of counsel to the Underwriters) incident
to securing any required review by the NASD of the terms of the sale of the
Shares; the Additional Listing Fee of the Nasdaq National Market; and the
expenses, including the fees and disbursements of counsel for the
Underwriters, incurred in connection with the qualification of the Shares
under State securities or Blue Sky laws. The Selling Shareholders have
agreed with the Company to reimburse the Company for a portion of such
expenses. To the extent, if at all, that any of the Selling Shareholders
engage special legal counsel to represent them in connection with this
offering, the fees and expenses of such counsel shall be borne by such
Selling Shareholder. Any transfer taxes imposed on the sale of the Shares
to the several Underwriters will be paid by the Sellers pro rata. The
Company agrees to pay all costs and expenses of the Underwriters, including
the fees and disbursements of counsel for the Underwriters, incident to the
offer and sale of directed shares of the Common Stock by the Underwriters
to employees and persons having business relationships with the Company and
its Subsidiaries. The Company shall not, however, be required to pay for
any of the Underwriters' expenses (other than those related to
qualification under NASD regulation and State securities or Blue Sky laws)
except that, if this Agreement shall not be consummated because the
conditions in Section 6 hereof are not satisfied, or because this Agreement
is terminated by the Representatives pursuant to Section 11 hereof, or by
reason of any failure, refusal or inability on the part of the Company or
the Selling Shareholders to perform any undertaking or satisfy any
condition of this Agreement or to comply with any of the terms hereof on
their part to be performed, unless such failure to satisfy said condition
or to comply with said terms be due to the default or omission of any
Underwriter, then the Company shall reimburse the several Underwriters for
reasonable out-of-pocket expenses, including fees and disbursements of
counsel, reasonably incurred in connection with investigating, marketing
and proposing to market the Shares or in contemplation of performing their
obligations hereunder; but the Company and the Selling Shareholders shall
not in any event be liable to any of the several Underwriters for damages
on account of loss of anticipated profits from the sale by them of the
Shares.
6. CONDITIONS TO OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the
Option Closing Date, as the case may be, of the representations and
warranties of the Company and the Selling Shareholders contained herein,
and to the performance by the Company and the Selling Shareholders of their
covenants and obligations hereunder and to the following additional
conditions:
<PAGE>
-15-
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to the
knowledge of the Company or the Selling Shareholders, shall be contemplated
by the Commission and no injunction, restraining order, or order of any
nature by a Federal or State court of competent jurisdiction shall have
been issued as of the Closing Date or Option Closing Date, as the case may
be, which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Hutchins,
Wheeler & Dittmar, A Professional Corporation, counsel for the Company and
the Selling Shareholders, dated the Closing Date or the Option Closing
Date, as the case may be, addressed to the Underwriters (and stating that
it may be relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the
Commonwealth of Massachusetts, with corporate power and authority to
own or lease its properties and conduct its business as now conducted
and described in the Registration Statement; each of the Subsidiaries
has been duly organized and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation,
with corporate power and authority to own or lease its properties and
conduct its business now conducted and as described in the
Registration Statement; the Company and each of the Subsidiaries are
duly qualified to transact business in all jurisdictions in which the
conduct of their business requires such qualification, or in which the
failure to qualify would have a materially adverse effect upon the
business of the Company and the Subsidiaries; and the outstanding
shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued and are fully paid and non-assessable
and are owned by the Company or a Subsidiary; and, to the best of such
counsel's knowledge, the outstanding shares of capital stock of each
of the Subsidiaries is owned free and clear of all liens, encumbrances
and equities and claims, and no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to
convert any obligations into any shares of capital stock or of
ownership interests in the Subsidiaries are outstanding.
(ii) The Company has authorized and outstanding
capital stock as set forth under the caption "Capitalization" in the
Prospectus; the authorized shares of the Company's Common Stock have
been duly authorized; the outstanding shares of the Company's Common
Stock, including the Shares to be sold by the Selling Shareholders,
have been duly authorized and validly issued and are fully paid and
non-assessable; all of the Shares conform to the description thereof
contained in the Prospectus; the certificates for the Shares, assuming
they are in the form of the specimen filed with the Commission, are
in due and proper form; the shares of Common Stock, including the
Option Shares, if any, to be sold by the Company pursuant to this
Agreement have been duly authorized and will be validly issued, fully
paid and non-assessable when issued
<PAGE>
-16-
and paid for as contemplated by this Agreement; and no preemptive
rights of stockholders exist with respect to any of the Shares or
the issue or sale thereof.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no outstanding
securities of the Company convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of
capital stock of the Company and there are no outstanding or
authorized options, warrants or rights of any character obligating the
Company to issue any shares of its capital stock or any securities
convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in
the Prospectus, to the knowledge of such counsel, no holder of any
securities of the Company or any other person has the right,
contractual or otherwise, which has not been satisfied or effectively
waived, to cause the Company to sell or otherwise issue to them, or
to permit them to underwrite the sale of, any of the Shares or the
right to have any shares of Common Stock or other securities of the
Company included in the Registration Statement or the right, as a
result of the filing of the Registration Statement, to require
registration under the Act of any shares of Common Stock or other
securities of the Company.
(iv) The Registration Statement has become effective
under the Act and, to the best of the knowledge of such counsel, no
stop order proceedings with respect thereto have been instituted or
are pending or threatened under the Act.
(v) The Registration Statement, all Preliminary
Prospectuses, the Prospectus and each amendment or supplement thereto
and each document incorporated by reference therein comply as to form
in all material respects with the requirements of the Act or the
Securities Exchange Act of 1934, as applicable and the applicable
rules and regulations thereunder (except that such counsel need
express no opinion as to the financial statements and related
schedules or incorporated by reference therein). The conditions for
the use of Form S-3, set forth in the General Instructions thereto,
have been satisfied.
(vi) The statements under the captions "Risk Factors -
Potential Adverse Impact of Government Regulation," "Business -
Government Regulation," and "Description of Capital Stock"
in the Prospectus, insofar as such statements constitute a
summary of documents referred to therein or matters of law, are
accurate summaries and fairly and correctly present the information
called for with respect to such documents and matters; and such
counsel does not know of any Federal or state laws, rules or
regulations relating to the provisions of workers' compensation
managed care services by the Company in the jurisdictions in which
the Company or any Subsidiaries conduct their business which are
required to be described in the Registration Statement or the
Prospectus that are not described as required.
<PAGE>
-17-
(vii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to or incorporated by
reference into the Registration Statement or described in the
Registration Statement or the Prospectus which are not so filed,
incorporated by reference or described as required, and such contracts
and documents as are summarized in the Registration Statement or the
Prospectus are fairly summarized in all material respects.
(viii) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the Company or
any of the Subsidiaries except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and
the consummation of the transactions herein contemplated do not and
will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Charter or By-laws
of the Company, or any agreement or instrument known to such counsel
to which the Company or any of the Subsidiaries is a party or by which
the Company or any of the Subsidiaries may be bound.
(x) This Agreement has been duly authorized, executed
and delivered by the Company.
(xi) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body is necessary in connection
with the execution and delivery of this Agreement and the consummation
of the transactions herein contemplated (other than as may be required
by the NASD or as required by State securities and Blue Sky laws as to
which such counsel need express no opinion) except such as have been
obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a
result of the consummation of the transactions contemplated by this
Agreement, and application of the net proceeds therefrom as described
in the Prospectus, required to register as an investment company under
the 1940 Act.
(xiii) This Agreement has been duly authorized,
executed and delivered on behalf of the Selling Shareholders.
(xiv) Each Selling Shareholder has full legal right,
power and authority, and any approval required by law (other than as
required by State securities and Blue Sky laws as to which such
counsel need express no opinion), to sell, assign, transfer and
deliver the portion of the Shares to be sold by such Selling
Shareholder.
(xv) The Power of Attorney and Custody Agreement
executed and delivered by each Selling Shareholder is valid and
binding.
(xvi) The Underwriters (assuming that they are bona
fide purchasers within the meaning of the Uniform Commercial Code)
have acquired good and marketable title to the Shares being sold by
each Selling Shareholder on the Closing Date, and the Option Closing
Date, as the case may be, free and clear of all liens, encumbrances,
equities and claims.
<PAGE>
-18-
(xvii) Such counsel has not been advised, and based
on (i) a review of the Company's files which have been provided to us,
(ii) inquiry of senior management of the Company and (iii) a review of
the published workers' compensation rules and regulations of the
states set forth on SCHEDULE III hereto, such counsel has no reason
to believe that the Company or any of its Subsidiaries does not hold
all Permits from any regulatory body or administrative agency or other
governmental body having jurisdiction that are applicable to the
operations of the Company or its Subsidiaries as now conducted or
proposed to be conducted as described in the Prospectus, all of which
Permits are current, except where the failure to so hold or comply
with any Permit would not have, singly or in the aggregate, a material
adverse effect on the business or financial condition of the Company
or its Subsidiaries. To the knowledge of such counsel, there are no
proceedings, pending or threatened, relating to the revocation or
modification of any such Permit which, singly or in the aggregate if
the subject of an unfavorable decision, ruling or finding, could have
a material adverse effect on the business or financial condition of
the Company or its Subsidiaries.
In rendering such opinion Hutchins, Wheeler & Dittmar, A Professional
Corporation, may rely as to matters governed by the laws of states other
than Massachusetts or Federal laws on local counsel in such jurisdictions
and as to the matters set forth in subparagraphs (xiii), (xiv) and (xv) on
opinions of other counsel representing the respective Selling Shareholders,
provided that in each case Hutchins, Wheeler & Dittmar, A Professional
Corporation, shall state that they believe that they and the Underwriters
are justified in relying on such other counsel. In addition to the matters
set forth above, such opinion shall also include a statement to the effect
that nothing has come to the attention of such counsel which leads them to
believe that (i) the Registration Statement, at the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and (ii) the Prospectus, or any supplement thereto, on the
date it was filed pursuant to the Rules and Regulations and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, schedules and
statistical information therein). With respect to such statement,
Hutchins, Wheeler & Dittmar, A Professional Corporation, may state that
their belief is based upon the procedures set forth therein, but is without
independent check and verification.
(c) The Representatives shall have received from Testa, Hurwitz &
Thibeault, LLP, counsel for the Underwriters, an opinion dated the Closing
Date or the Option Closing Date, as the case may be, substantially to the
effect specified in subparagraphs (ii), (iii), and (iv) of Paragraph (b) of
this Section 6, and that the Company is a duly organized and validly
existing corporation under the laws of the Commonwealth of Massachusetts.
In rendering such opinion Testa, Hurwitz & Thibeault, LLP may rely as to
all matters governed other than by the laws of the Commonwealth of
Massachusetts or Federal laws on the opinion of counsel referred to in
Paragraph (b) of this Section 6. In addition to the matters set forth
above, such opinion shall also include a statement to the effect that
nothing has come to the attention of such counsel which leads them to
believe that (i) the Registration Statement, or any amendment thereto, as
of the
<PAGE>
-19-
time it became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act)
and as of the Closing Date or the Option Closing Date, as the case may
be, contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or
omitted to state a material fact, necessary in order to make the
statements therein, in the light of the circumstances under which they
are made, not misleading (except that such counsel need express no view
as to financial statements, schedules and statistical information
therein). With respect to such statement Testa, Hurwitz & Thibeault,
LLP may state that their belief is based upon the procedures set forth
therein, but is without independent check and verification.
(d) The Representatives shall have received at or prior to the
Closing Date from Testa, Hurwitz & Thibeault, LLP a memorandum or summary,
in form and substance satisfactory to the Representatives, with respect to
the qualification for offering and sale by the Underwriters of the Shares
under the State securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.
(e) You shall have received, on each of the date hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case may
be, in form and substance satisfactory to you, of Arthur Andersen LLP
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating that in their opinion the financial statements and schedules
examined by them and included in the Registration Statement comply in form
in all material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations; and containing such
other statements and information as is ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates
of the Chief Executive Officer and the Chief Financial Officer of the
Company to the effect that, as of the Closing Date or the Option Closing
Date, as the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective
under the Act and no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for such
purpose have been taken or are, to his knowledge, contemplated by the
Commission;
(ii) He does not know of any litigation instituted or
threatened against the Company of a character required to be disclosed
in the Registration Statement which is not so disclosed; he does not
know of any material contract required to be filed as an exhibit to
the Registration Statement which is not so filed; and the
representations and warranties of the Company contained in Section 1
hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
<PAGE>
-20-
(iii) All filings required to have been made pursuant
to Rules 424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration
Statement and the Prospectus and, in his opinion, as of the effective
date of the Registration Statement, the statements contained in the
Registration Statement were true and correct, and such Registration
Statement and Prospectus did not omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading, and, in his opinion, since the
effective date of the Registration Statement, no event has occurred
which should have been set forth in a supplement to or an amendment of
the Prospectus which has not been so set forth in such supplement or
amendment; and
(v) Since the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not
been any material adverse change or any development involving a
prospective material adverse change in or affecting the condition,
financial or otherwise, of the Company and its Subsidiaries or the
earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries, whether or not arising in the ordinary
course of business;
(vi) All of the representations and warranties of the
Company contained in this Underwriting Agreement are true and correct
on and as of the date hereof and on and as of the Closing Date or the
Option Closing Date, as the case may be, with the same force and
effect as if made on and as of the Closing Date or the Option Closing
Date, as the case may be, except for representations and warranties
made as of a specific date, which were true and correct as of such
date;
(vii) Each of the conditions specified in Section 6 of
this Underwriting Agreement has been, as of the Closing Date or the
Option Closing Date, as the case may be, satisfied in all respects;
and
(viii) The Company has performed and/or complied with
all of its agreements and covenants required to be performed or
complied with under this Underwriting Agreement as of or prior to the
Closing Date or the Option Closing Date, as the case may be.
(g) The Representatives shall have received on the Closing Date a
certificate of each Selling Shareholder to the effect that, as of the
Closing Date each such Selling Shareholder shall represent as follows:
(i) All of the representations and warranties of
such Selling Shareholder contained in this Underwriting Agreement
are true and correct on and as of the date hereof and on and as of
the Closing Date with the same force and effect as if made on and
as of the Closing Date except for representations and warranties
made as of a specific date, which were true and correct as of such
date; and
<PAGE>
-21-
(ii) Such Selling Shareholder has performed and/or
complied with all of such Selling Shareholder's agreements and
covenants required to be performed or complied with under this
Underwriting Agreement as of or prior to the Closing Date.
(h) The Company and the Selling Shareholders shall have furnished to
the Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein
and related matters as the Representatives may reasonably have requested.
(i) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the Nasdaq National Market.
(j) The Lockup Agreements described in Section 4 (a)(x) are in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in
all material respects satisfactory to the Representatives and to Testa,
Hurwitz & Thibeault, LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representatives by notifying the Company of such termination in
writing or by telegram at or prior to the Closing Date or the Option
Closing Date, as the case may be.
In such event, the Selling Shareholders, the Company and the
Underwriters shall not be under any obligation to each other (except to the
extent provided in Sections 5 and 8 hereof).
7. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE SELLING
SHAREHOLDERS.
The obligations of the Company and the Selling Shareholders to sell
and deliver the portion of the Shares required to be delivered as and when
specified in this Agreement are subject to the conditions that at the
Closing Date or the Option Closing Date, as the case may be, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and in effect or proceedings therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company and the Selling Shareholders, jointly and severally,
agree to indemnify and hold harmless each Underwriter and each person, if
any, who controls any Underwriter within the meaning of the Act, against
any losses, claims, damages or liabilities to which such Underwriter or any
such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any
untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, or (ii) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; and will reimburse
each Underwriter and each such controlling person upon
<PAGE>
-22-
demand for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating
or defending any such loss, claim, damage or liability, action or
proceeding and expenses reasonably incurred in responding to a subpoena
or governmental inquiry related to the offering of the Shares, whether
or not such Underwriter or controlling person is a party to any action
or proceeding; PROVIDED, HOWEVER, that the Company and the Selling
Shareholders will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement, or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by or
through the Representatives specifically for use in the preparation
thereof. In no event, however, shall the liability of any Selling
Shareholder for indemnification under this Section 8(a) exceed the
lesser of (i) proportion of the total of such losses, claims, damages or
liabilities indemnified or contributed against equal to the proportion
of the total Shares sold hereunder which is being sold by such Selling
Shareholder, or (ii) the proceeds received by such Selling Shareholder
from the Underwriters in the offering. This indemnity agreement will
be in addition to any liability which the Company or the Selling
Shareholders may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement, the Selling Shareholders, and each
person, if any, who controls the Company or the Selling Shareholders within
the meaning of the Act, against any losses, claims, damages or liabilities
to which the Company or any such director, officer, Selling Shareholder or
controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto, or (ii) the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made; and will reimburse any legal or
other expenses reasonably incurred by the Company or any such director,
officer, Selling Shareholder or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action
or proceeding; PROVIDED, HOWEVER, that each Underwriter will be liable in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission has been made
in the Registration Statement, any Preliminary Prospectus, the Prospectus
or such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to this Section 8, such person (the "INDEMNIFIED PARTY")
shall promptly notify the person against whom such indemnity may be sought
(the "INDEMNIFYING PARTY") in writing. No indemnification provided for in
Section 8(a) or (b) shall be available to any party who shall fail to give
notice as provided in this Section 8(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from
any liability which it or they may have to the indemnified party for
contribution or otherwise than on
<PAGE>
-23-
account of the provisions of Section 8(a) or (b). In case any such
proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In
any such proceeding, any indemnified party shall have the right to
retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay as incurred the fees and
expenses of the counsel retained by the indemnified party in the event
(i) the indemnifying party and the indemnified party shall have mutually
agreed to the retention of such counsel or (ii) the named parties to any
such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the
reasonable fees and expenses of more than one separate firm for all such
indemnified parties. Such firm shall be designated in writing by you in
the case of parties indemnified pursuant to Section 8(a) and by the
Company and the Selling Shareholders in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written
consent but if settled with such consent or if there be a final judgment
for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of
such settlement or judgment. In addition, the indemnifying party will
not, without the prior written consent of the indemnified party, settle
or compromise or consent to the entry of any judgment in any pending or
threatened claim, action or proceeding of which indemnification may be
sought hereunder (whether or not any indemnified party is an actual or
potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of
each indemnified party from all liability arising out of such claim,
action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling Shareholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however,
the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under Section 8(c) above, then each indemnifying party
shall contribute to such amount paid or payable by such indemnified party
in such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company and the Selling
Shareholders on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, (or actions or proceedings in respect
thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Shareholders on
the one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Shareholders
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The
<PAGE>
-24-
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company or the Selling Shareholders on the
one hand or the Underwriters on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this
Section 8(d) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this Section 8(d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) referred to
above in this Section 8(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, and
(ii) no person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation, and (iii)
no Selling Shareholder shall be required to contribute any amount in excess
of the lesser of (A) that proportion of the total of such losses, claims,
damages or liabilities indemnified or contributed against equal to the
proportion of the total Shares sold hereunder which is being sold by such
Selling Shareholder, or (B) the proceeds received by such Selling
Shareholder from the Underwriters in the offering. The Underwriters'
obligations in this Section 8(d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon him or it by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any
such proceeding in which such other contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers,
or any person controlling the Company, shall be entitled to the benefits of
the indemnity, contribution and reimbursement agreements contained in this
Section 8.
9. DEFAULT BY UNDERWRITERS.
<PAGE>
-25-
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such
date (otherwise than by reason of any default on the part of the Company or
a Selling Shareholder), you, as Representatives of the Underwriters, shall
use your reasonable efforts to procure within 36 hours thereafter one or
more of the other Underwriters, or any others, to purchase from the Company
and the Selling Shareholders such amounts as may be agreed upon and upon
the terms set forth herein, the Firm Shares or Option Shares, as the case
may be, which the defaulting Underwriter or Underwriters failed to
purchase. If during such 36 hours you, as such Representatives, shall not
have procured such other Underwriters, or any others, to purchase the Firm
Shares or Option Shares, as the case may be, agreed to be purchased by the
defaulting Underwriter or Underwriters, then (a) if the aggregate number
of shares with respect to which such default shall occur does not exceed
10% of the Firm Shares or Option Shares, as the case may be, covered
hereby, the other Underwriters shall be obligated, severally, in proportion
to the respective numbers of Firm Shares or Option Shares, as the case may
be, which they are obligated to purchase hereunder, to purchase the Firm
Shares or Option Shares, as the case may be, which such defaulting
Underwriter or Underwriters failed to purchase, or (b) if the aggregate
number of shares of Firm Shares or Option Shares, as the case may be, with
respect to which such default shall occur exceeds 10% of the Firm Shares or
Option Shares, as the case may be, covered hereby, the Company and the
Selling Shareholders or you as the Representatives of the Underwriters will
have the right, by written notice given within the next 36-hour period to
the parties to this Agreement, to terminate this Agreement without
liability on the part of the non-defaulting Underwriters or of the Company
or of the Selling Shareholders except to the extent provided in Section 8
hereof. In the event of a default by any Underwriter or Underwriters, as
set forth in this Section 9, the Closing Date or Option Closing Date, as
the case may be, may be postponed for such period, not exceeding seven
days, as you, as Representatives, may determine in order that the required
changes in the Registration Statement or in the Prospectus or in any other
documents or arrangements may be effected. The term "UNDERWRITER" includes
any person substituted for a defaulting Underwriter. Any action taken
under this Section 9 shall not relieve any defaulting Underwriter from
liability in respect of any default of such Underwriter under this
Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to Alex.
Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland
21202, Attention: Steven R. Schuh; with a copy to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202,
Attention: General Counsel; if to the Company or the Selling Shareholders,
to CRA Managed Care, Inc., 312 Union Wharf, Boston, Massachusetts 02109,
Attention: Donald J. Larson, with a copy to James Westra, Hutchins,
Wheeler & Dittmar, A Professional Corporation, 101 Federal Street, Boston,
Massachusetts 02110.
11. TERMINATION.
This Agreement may be terminated by you by notice to the Company as
follows:
<PAGE>
-26-
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change
in or affecting the condition, financial or otherwise, of the Company and
its Subsidiaries or the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company and its Subsidiaries, whether or not arising in the ordinary course
of business, (ii) any outbreak or escalation of hostilities or declaration
of war or national emergency or other national or international calamity or
crisis or change in economic or political conditions if the effect of such
outbreak, escalation, declaration, emergency, calamity, crisis or change on
the financial markets of the United States would, in your reasonable
judgment, make it impracticable to market the Shares or to enforce
contracts for the sale of the Shares, or (iii) suspension of trading in
securities generally on the New York Stock Exchange or the American Stock
Exchange or limitation on prices (other than limitations on hours or
numbers of days of trading) for securities on either such Exchange, (iv)
the enactment, publication, decree or other promulgation of any federal or
state statute, regulation, rule or order of any court or other governmental
authority which in your opinion materially and adversely affects or may
materially and adversely affect the business or operations of the Company,
(v) declaration of a banking moratorium by United States or New York State
authorities, (vi) the suspension of trading of the Company's common stock
by the Commission on the Nasdaq National Market or (vii) the taking of any
action by any Federal or state or local governmental body or agency in
respect of its monetary or fiscal affairs which in your reasonable opinion
has a material adverse effect on the securities markets in the United
States; or
(c) as provided in Sections 6 and 9 of this Agreement.
This Agreement also may be terminated by you, by notice to the
Company as to any obligation of the Underwriters to purchase the Option
Shares, upon the occurrence at any time prior to the Option Closing Date
of any of the events described in subparagraph (b) above or as provided
in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Selling Shareholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person
will have any right or obligation hereunder. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign merely
because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company, the Selling Shareholders and the Underwriters acknowledge
and agree that the only information furnished or to be furnished by any
Underwriter to the Company for inclusion in any Prospectus or the
Registration Statement consists of the information set forth in the last
paragraph on the front cover page (insofar as such information relates to the
<PAGE>
-27-
Underwriters), information provided in connection with Item 502(d) of
Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements contained
in this Agreement and the representations, warranties and covenants in this
Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of
any Underwriter or controlling person thereof, or by or on behalf of the
Company or its directors or officers and (c) delivery of and payment for the
Shares under this Agreement; the other covenants of the Company and the
Selling Shareholders in this Agreement shall remain in full force and effect
regardless of (a) any investigation made by or on behalf of any underwriter
or controlling person and (b) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Shareholders, the
Company and the several Underwriters in accordance with its terms.
It is understood that your acceptance of this letter on behalf of each of
the Underwriters is pursuant to the authority set forth in a form of Agreement
among Underwriters, the form of which shall be submitted to the Company for
examination, upon request, but without warranty on your part as to the authority
of the signers thereof.
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Shareholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-Fact to take such
action.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
-28-
Very truly yours,
CRA MANAGED CARE, INC.
By: ______________________________________
Donald J. Larson, President
Selling Shareholders listed on SCHEDULE II
By: ______________________________________
Donald J. Larson, Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
ALEX. BROWN & SONS INCORPORATED
DEAN WITTER REYNOLDS INC.
MONTGOMERY SECURITIES
J. P. MORGAN & CO.
As Representatives of the several
Underwriters listed on Schedule I
By: Alex. Brown & Sons Incorporated
By: _________________________________________
Patrick A. O'Shea, Authorized Officer
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------------
Alex. Brown & Sons Incorporated
Dean Witter Reynolds Inc.
Montgomery Securities
J.P. Morgan & Co.
------------
------------
Total 2,000,000
<PAGE>
SCHEDULE II
SCHEDULE OF SELLING SHAREHOLDERS
Number of Firm Shares
Selling Shareholder to be Sold
------------------- ---------------------
The Silverman 1996
Grantor Retained Annuity Trust 175,000
Donald J. Larson 158,634
J.H. Whitney & Co. and affiliates 1,074,296
Kimberly A. Sutphin 25,000
Henry J. Roth 35,000
Howard J. Entin 10,000
Ryan J. Conlon 7,000
John Eric Griffiths 5,000
Paul M. Baker 5,729
John Sbarbaro 2,500
Nick Hilger 1,841
---------
Total 1,500,000
---------
---------
<PAGE>
SCHEDULE III
STATES
California
Colorado
Connecticut
Florida
Illinois
Maine
Massachusetts
Michigan
New Jersey
New York
North Carolina
Ohio
Pennsylvania
Tennessee
Texas
Utah
Virginia
Washington
<PAGE>
EXHIBIT A
SUBSIDIARIES
CRA Managed Care of Washington, Inc.
(formerly known as Alta Pacific Corporation)
FOCUS Healthcare Management, Inc.
3
QMC , Inc.
Prompt Associates, Inc.
<PAGE>
EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
CRA Managed Care, Inc.
AND
United Healthcare Services, Inc.
March 19, 1996
<PAGE>
TABLE OF CONTENTS
--------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Article I -- List of Defined Terms.................................... 1
Article II -- Sale of Shares and Closing.............................. 2
2.1 -- Purchase and Sale.......................................... 2
2.2 -- Purchase Price............................................. 2
2.3 -- The Closing................................................ 2
Article III -- Representations and Warranties of Buyer................ 3
3.1 -- Organization............................................... 3
3.2 -- Authority Relative to this Agreement....................... 3
3.3 -- Brokers and Finders........................................ 4
3.4 -- Accuracy of Representations and Warranties................. 4
3.5 -- Funding of the Transaction................................. 4
Article IV -- Representations and Warranties of Seller................ 4
4.1 -- Organization............................................... 4
4.2 -- Subsidiaries............................................... 5
4.3 -- Capitalization of the Company.............................. 5
4.4 -- Governmental Authorization and Regulations................. 5
4.5 -- Authority Relative to this Agreement....................... 5
4.6 -- Financial Statements....................................... 6
4.7 -- Employment Understandings and Labor Relations.............. 7
4.8 -- Absence of Certain Changes or Events....................... 7
4.9 -- Employee Benefit Plans..................................... 9
4.10 -- Litigation and Liabilities................................ 10
4.11 -- Compliance with Laws and Orders........................... 10
4.12 -- Tax Returns and Reports................................... 11
4.13 -- Insurance................................................. 12
4.14 -- No Defaults............................................... 13
4.15 -- Brokers and Finders....................................... 13
4.16 -- Real Estate............................................... 13
4.17 -- Contracts................................................. 14
4.18 -- Bank Accounts, Guarantees and Powers...................... 15
4.19 -- Intellectual Property Rights.............................. 15
4.20 -- Insider Interests......................................... 16
4.21 -- Absence of Certain Business Practices..................... 16
4.22 -- No Interest in Competitors................................ 16
4.23 -- Disclosure................................................ 16
4.24 -- Genesys................................................... 17
4.25 -- Accuracy of Representations and Warranties................ 17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Article V -- Covenants................................................ 18
5.1 -- Affirmative Covenants of the Seller........................ 18
5.2 -- Negative Covenants of the Seller........................... 18
5.3 -- Access and Information..................................... 21
5.4 -- Additional Arrangements.................................... 21
5.5 -- Continuing Nature of Representations and Warranties........ 22
5.6 -- Tax Matters................................................ 22
5.7 -- Appropriate Action; Consents; Filings...................... 24
5.8 -- Company Employees.......................................... 24
5.9 -- Employee Benefits.......................................... 25
5.10 -- Employment Agreements..................................... 26
5.11 -- Indemnification........................................... 26
5.12 -- Survival of Indemnifications, Representations and
Warranties....................................................... 28
5.13 -- Funding of the Transaction................................ 28
5.14 -- Insurance................................................. 29
5.15 -- Network Access............................................ 29
5.16 -- Audited Financials........................................ 29
5.17 -- Trademarks................................................ 29
5.18 -- Cost Reimbursement Agreement.............................. 29
Article VI -- Closing Conditions...................................... 30
6.1 -- Conditions to Each Party's Obligation...................... 30
6.2 -- Conditions to Obligation of the Seller..................... 31
6.3 -- Conditions to Obligations of Buyer......................... 31
Article VII -- Termination, Amendment and Waiver...................... 32
7.1 -- Termination................................................ 32
7.2 -- Effect of Termination...................................... 33
7.3 -- Fees and Expenses.......................................... 33
7.4 -- Amendment.................................................. 33
7.5 -- Waiver..................................................... 34
Article VIII -- General Provisions.................................... 34
8.1 -- Notice of Breach........................................... 34
8.2 -- Publicity.................................................. 34
8.3 -- Assignment................................................. 34
8.4 -- Interpretation............................................. 34
8.5 -- Notices.................................................... 34
8.6 -- Separability............................................... 35
8.7 -- Specific Performance....................................... 36
8.8 -- Entire Agreement........................................... 36
8.9 -- Governing Law.............................................. 36
8.10 -- Dispute Resolution and Remedies........................... 36
8.11 -- Counterparts.............................................. 36
8.12 -- No Third Party Benefit.................................... 36
Exhibit A............................................................. 38
Exhibit B............................................................. 39
</TABLE>
(Copies of attachments to this agreement will be furnished by the Company
upon request.)
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------------
This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of March 19, 1996
is made and entered into by and between CRA Managed Care, Inc., a Massachusetts
corporation ("Buyer"), and United Healthcare Services, Inc. (formerly known as
UHC Management Company, Inc.), a Minnesota corporation ("Seller").
WHEREAS, Seller owns 100 shares of common stock, par value $.0005 per share,
of FOCUS Healthcare Management, Inc. a Tennessee corporation (the "Company"),
constituting all of the issued and outstanding shares of capital stock of the
Company (such shares being referred to as the "Common Stock").
WHEREAS, Seller desires to sell, and Buyer desires to purchase, the Common
Stock on the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
ARTICLE I
LIST OF DEFINED TERMS
------------------------
For purposes of this Agreement, the following terms shall be defined as
follows:
A. "AFFILIATE" shall mean with respect to any person (as hereinafter
defined), any person that directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common control
with, such person.
B. "COMMON STOCK" shall mean the Company's common shares, $.0005 par value
per share.
C. "DISCLOSURE SCHEDULE" shall mean the documents prepared and delivered by
the Company upon the execution of this Agreement with respect to its
representations and warranties under this Agreement.
D. "PERSON" shall mean an individual, a group, a corporation, a
partnership, an association, a trust or any other entity or organization.
E. "SUBSIDIARY" shall mean any corporation or partnership of which at least
50% of the outstanding voting securities or ownership interests are
directly or indirectly owned by the Company. Unless the context otherwise
requires, the terms "the Company" shall include
1
<PAGE>
such entities and their respective Subsidiaries. For purposes of this
Agreement, unless otherwise provided for, Genesys Cost Management
Systems, Inc. ("Genesys") shall not be deemed to be a Subsidiary of the
Company.
F. "TO THE KNOWLEDGE OF" shall mean, to the extent related to the
representations and warranties made in Articles III and IV, information
which is known or should have been known by the officers of the Seller or
the Buyer, as the case may be, listed on Exhibit A to this Agreement, as
such knowledge has been obtained in the normal conduct of the business
and following, unless otherwise stated, a reasonable investigation or
inquiry by Buyer or Seller, as the case may be, for the express purpose
of making such representations and warranties.
ARTICLE II
SALE OF SHARES AND CLOSING
-------------------------------
Section 2.1 Purchase and Sale. Seller agrees to sell to Buyer, and Buyer
------------------------------
agrees to purchase from Seller, all of the right, title and interest in and to
all of the outstanding Common Stock of the Company (the "Common Stock") on the
terms and subject to the conditions set forth in this Agreement.
Section 2.2 Purchase Price. The purchase price for the Common Stock is
---------------------------
$21,000,000 (Twenty-one million dollars) (the "Purchase Price").
Section 2.3 The Closing.
- ------------------------
(a) The closing of the transactions contemplated by this Agreement (the
"Closing") will take place at the offices of Hutchins, Wheeler & Dittmar, at
10:00 a.m. on April 1, 1996 (the "Closing Date"), or at such other place and at
such other date as is mutually agreeable to Buyer and Seller. The purchase and
sale of the Common Stock will be effective as of 5:00 p.m. EST on the Closing
Date or such other date designated by the parties.
(b) Subject to the conditions set forth in this Agreement, the parties agree
that at the Closing:
(i) Buyer shall deliver to Seller the Purchase Price by Federal Funds
wire transfer of immediately available funds to the account designated by
Seller;
(ii) Seller shall deliver to Buyer a stock certificate, free and clear
of all liens and encumbrances and restrictions, evidencing the Common Stock
and registered in Buyer's name;
2
<PAGE>
(iii) Each of the parties shall deliver to the other the documents
required to be delivered pursuant to Agreement; and
(iv) Buyer shall pay to Seller $12,000 (Twelve thousand dollars) in
consideration of certain agreements of Seller made pursuant to Section
5.8 herein.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
-----------------------------------------------
Buyer represents and warrants to the Seller as follows that, except as set
forth in a Disclosure Schedule:
Section 3.1 Organization. Buyer is a corporation duly incorporated, validly
-------------------------
existing and in good standing under the laws of its jurisdiction of
incorporation and has the requisite corporate power to carry on its respective
business as it is now being conducted.
Section 3.2 Authority Relative to this Agreement.
- -------------------------------------------------
(a) Buyer has the requisite corporate power to enter into this Agreement and
to carry out its obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized, to the extent required, by the Board of Directors of Buyer, and
no other corporate proceedings on the part of Buyer are necessary to authorize
the execution, delivery and performance of this Agreement, and the transactions
contemplated by hereby and thereby. This Agreement has been duly and validly
executed and delivered by Buyer and is a valid and binding obligation of Buyer
enforceable against it in accordance with its terms.
(b) Buyer is not subject to or obligated under:
(i) any charter or by-law;
(ii) to the knowledge of Buyer, any provision of any material contract,
mortgage, indenture, lease or other instrument or agreement or any material
license, franchise or permit; or
(iii) any material order or decree,
which would be breached or violated or in respect of which a right of
acceleration would be created adversely affecting its ability to comply with its
obligations and commitments hereunder, by its executing, delivering and carrying
out this Agreement.
(c) To the knowledge of Buyer:
3
<PAGE>
(i) there is no legal impediment to the execution and delivery of this
Agreement by Buyer and
(ii) except as referred to herein, and except for compliance with the
provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"H-S-R Act"), (x) there is no legal impediment to the consummation of the
transactions contemplated hereby by Buyer, (y) no filing, notice to, or
registration with, or authorization, consent or approval of, any public
body or authority and (2) no notice to, consent or approval of any third
party or entity, is necessary for the consummation by Buyer of the
transactions contemplated hereby.
Section 3.3 Brokers and Finders. No broker, finder or financial advisor is
--------------------------------
acting or has acted on behalf of Buyer or is entitled to receive any brokerage
fees, commissions, finders' fees or financial advisory fees in connection with
the transactions contemplated herein.
Section 3.4 Accuracy of Representations and Warranties. No representation
-------------------------------------------------------
or warranty made by Buyer to the Seller in this Agreement is false or misleading
with respect to any material fact, or omits or fails to state a material fact
necessary to make the statements contained therein not misleading.
Section 3.5 Funding of the Transaction. Buyer will have sufficient cash on
---------------------------------------
hand and available through bank facilities in effect and approved for the
purchase of the Common Stock to pay the Purchase Price as required by this
Agreement without any contingency or approval by a third party.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
------------------------------------------------
Except as set forth and described in the Disclosure Schedule (which shall
specifically reference the applicable Section of this Agreement), the Seller
represents and warrants to Buyer as follows:
Section 4.1 Organization. The Company is a corporation duly incorporated,
-------------------------
validly existing and in good standing under the laws of the State of Tennessee
and has the requisite corporate power to carry on its business as it is now
being conducted. The Company is duly qualified and licensed to conduct business
as a foreign corporation, and is in good standing in each jurisdiction where the
character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary other than where failure to be so
qualified would not materially adversely effect the Company's ability to carry
on its business as currently conducted. All jurisdictions where the Company or
any Subsidiary is required to be or is qualified to do business as a foreign
corporation due to the nature of its operations are listed in Section 4.1 of the
Disclosure
4
<PAGE>
Schedule. The Company has previously furnished to Buyer true and complete copies
of the articles of incorporation and by-laws, each as amended to date, of the
Company.
Section 4.2 Subsidiaries. The Company has no Subsidiaries.
-------------------------
Section 4.3 Capitalization of the Company.
- ------------------------------------------
(a) As of the date of this Agreement, the authorized capital stock of the
Company consists of the following:
(i) 20,000,000 shares of Common Stock, of which:
(1) 100 shares are issued and outstanding and owned by the Seller;
(2) 19,999,900 shares are reserved for future issuance.
(ii) 102,000 shares of Preferred Stock, par value .01, none of which is
issued or outstanding
All of the issued and outstanding shares of Common Stock are duly authorized,
validly issued, fully paid and non-assessable and free of preemptive rights. At
Closing there will be, no options, warrants, rights, agreements, commitments or
outstanding securities obligating the Company to issue, transfer or sell, or to
redeem, purchase or otherwise acquire, directly or indirectly, any shares of
Common Stock and no obligations to issue, transfer or sell any Shares of Common
Stock. All of the Common Stock is held by the Seller and the Seller will
transfer the Common Stock to the Buyer free and clear of all liens, encumbrances
and restrictions.
Section 4.4 Governmental Authorization and Regulations. Section 4.4 of the
-------------------------------------------------------
Disclosure Schedule lists all material governmental licenses, permits,
certificates, consents, certificates of authority, bonds, orders or other
approvals currently held by the Company. The Company holds all governmental
licenses, permits, certificates, consents, certificates of authority, bonds,
orders, approvals and other authorizations, whether foreign, federal, state or
local, necessary for the operation of its business, as currently conducted and
as contemplated by this Agreement to be conducted and to own, hold under lease
or operate its properties where the absence of such items would have a material
adverse effect on the business or financial condition of Company.
Section 4.5 Authority Relative to this Agreement.
- -------------------------------------------------
(a) Seller has the requisite corporate power to enter into this Agreement
and to carry out its obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby and have
been duly authorized, to the extent required, by the Board of Directors of the
Seller and, no other corporate proceedings on the part of the Seller
5
<PAGE>
will be necessary to authorize this Agreement, and the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by the
Seller and is a valid and binding obligation of the Seller enforceable against
the Seller in accordance with its terms.
(b) The Seller is not subject to or obligated under:
(i) its charter or bylaws;
(ii) any provision of any material obligation or right, whether a
contract, mortgage, indenture, lease or other instrument or agreement or any
license, franchise or permit; or
(iii) any order or decree, which, to the knowledge of Seller, would be
breached or violated in any material respect or in respect of which a right
of acceleration or termination would be created, adversely affecting its
ability to comply with its obligations and commitments hereunder, by the
execution, delivery and carrying out of this Agreement.
(c) To the knowledge of the Seller:
(i) there is no legal impediment to the Company's execution and delivery
of this Agreement; and
(ii) except as referred to herein or in the Disclosure Schedules, and
except for compliance with the provisions of the H-S-R Act, (x) there is no
legal impediment to the Company's consummation of the transactions
contemplated hereby, and (y) no filing or registration with, or
authorization, consent or approval of, any public body or authority and no
consent or approval of any third party or entity, is necessary for the
consummation by the Company of the transactions contemplated hereby.
Section 4.6 Financial Statements.
- ---------------------------------
(a) Section 4.6(a) of the Disclosure Schedule sets forth the unaudited
balance sheet of the Company as of December 31, 1994 and the unaudited income
statement for the year then ended (the "1994 Financials") and unaudited balance
sheet as of December 31, 1995 and the unaudited income statement for the year
then ended (the "1995 Financials"). The 1994 Financials and the 1995 Financials
are sometimes collectively referred to as the "Financial Statements".
(b) The Financial Statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis (except as
may be indicated in any audited financial statements or in the notes thereto)
and fairly present the financial position of the Company as at the dates thereof
and the results of their operations and changes in financial position for the
periods then ended.
6
<PAGE>
(c) The accounts receivable balance and related reserve for doubtful
accounts shown on the Financial Statements are reported in accordance with GAAP
and as of the date of this Agreement, the Company has no knowledge that any such
receivables are currently not collectible in the normal course of business
consistent with past practice, except to the extent reserved against as being
uncollectible.
Section 4.7 Employment Understandings and Labor Relations.
- ----------------------------------------------------------
(a) There are no written or oral employment agreements or contracts relating
to employment to which the Company is a party or for which the Company has any
liability. Each of the written contracts or agreements is, to the knowledge of
the Company, valid, binding and enforceable in accordance with its terms, and
none of the parties thereto is, to the knowledge of the Company, in default of
any of its obligations thereunder.
(b) Section 4.7(b) of the Disclosure Schedule contains a complete listing of
all unfair labor practice complaints, labor disturbances or other controversies
respecting employment, whether pending or, to the knowledge of the Company,
threatened, or proposed against the Company, or to the best of Seller's
knowledge, any current employee, officer, or director. The Company is in
material compliance with all laws materially affecting employment and employment
practices, terms and conditions of employment and wages and hours and is not
engaged in any unfair labor practice. The Company is not a party to or bound by
any collective bargaining agreement with any labor union or organization nor, to
the knowledge of the Company, are any of its employees represented by any labor
union or organization. To the knowledge of the Company there are no union
organization attempts underway with respect to the employees of the Company. To
the knowledge of the Company, no employee of the Company is subject to any
secrecy or noncompetition agreement or any agreement or restriction of any kind
with any third party that would impede in any material way the ability of such
employee to carry out fully all activities of such employee in furtherance of
the business of the Company.
(c) Section 4.7(c) of the Disclosure Schedule contains a complete listing of
all written or oral agreements or understandings relating to individuals or
entities providing services to the Company as independent contractors and which
provide for annual payments in excess of $100,000.00.
Section 4.8 Absence of Certain Changes or Events. Except as described in
-------------------------------------------------
the Financial Statements (or in the notes thereto), or as otherwise agreed to in
this Agreement or in writing by Buyer, since the date of the 1995 Financials:
(a) the Company has conducted its business only in ordinary and usual
course;
(b) there has not been any material adverse change in the condition
(financial or otherwise), results of operations, businesses, properties, assets,
liabilities or earnings of the
7
<PAGE>
Company taken as a whole and the Company is not aware of any information
(excluding public information regarding economic conditions and similar matters
of general application) which reasonably could be expected to result therein;
(c) neither the Seller nor the Company has entered into any employment or
severance agreements, or granted any increase in compensation, bonuses,
severance pay, or other employee benefits, payable to or with respect to any
Company Employee (as defined in Section 5.8 of this Agreement), except for any
increase in compensation granted in the ordinary course of business consistent
with past practices for the Company Employees or as required under Sections 5.8
or 5.9 of this Agreement.
(d) the Company has not made any loans or advances to any officer, director,
shareholder or Affiliate of the Company (except for ordinary travel and business
expense payments);
(e) the Company has not declared or paid, or accrued any liability for the
payment of, any dividends or made any other distributions to its shareholders
with respect to shares of Common Stock;
(f) the Company has not entered into any material commitment or transaction
(including without limitation any borrowing or capital expenditure) other than
in the ordinary course of business;
(g) there has not been any material change in the accounting methods or
practices followed by the Company except as required by GAAP and disclosed to
Buyer;
(h) the Company has not incurred any debt, liability or obligation, whether
accrued, absolute, contingent or otherwise, which is material to the business or
financial condition of the Company other than in the ordinary course of
business;
(i) the Company has not sold, assigned, transferred or granted any exclusive
license with respect to any trademark, trade name, service mark, copyright,
trade secret or other intangible asset;
(j) the Company has not issued, redeemed or repurchased any stock, bond or
other corporate security;
(k) the Company has not experienced any material damage, theft or loss;
(l) the Company has not relinquished any material contract or contract
right;
(m) the Company has not entered into any commitment (contingent or
otherwise) to do any of the foregoing.
8
<PAGE>
Section 4.9 Employee Benefit Plans.
- ------------------------------------
(a) Section 4.9(a) of the Disclosure Schedule sets forth any pension,
retirement, savings, disability, medical, dental, health, life, severance pay,
Internal Revenue Code Section 125 "cafeteria" or "flexible benefit", vacation
pay, sick pay, stock purchase, stock option, deferred compensation, incentive
compensation, fringe benefit, stay-with-bonus, change of control agreement or
other employee benefit plan, program or arrangement (including without
limitation, any employee pension benefit plan as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and any
employee welfare benefit plan as defined in Section 3(1) of ERISA), under which
Company Employees (as defined in Section 5.8 of this Agreement) are entitled to
participate or benefit, whether or not any of the foregoing is funded and
whether insured or self-funded (the "Employee Benefit Plans").
(b) Each Employee Benefit Plan maintained by the Seller in connection with
the Company is in substantial compliance with applicable law and has been
administered and operated in all material respects in accordance with its terms.
Each Plan which is intended to be "qualified" within the meaning of Section
401(a) of the Internal Revenue Code of 1986, as amended, has received a
favorable determination letter from the Internal Revenue Service and no event
has occurred and no condition exists which could reasonably be expected to
result in the revocation of any such determination.
(c) A true and complete copy of each Employee Benefit Plan, and where
applicable, a copy of the most recent IRS Form 5500 annual report, IRS
determination letter, trust agreement or other funding arrangement, and summary
plan description with respect to each such Employee Benefit Plan has been
furnished to Buyer.
(d) None of the Employee Benefit Plans provide benefits with respect to
current or former Company Employees (or their beneficiaries) beyond their
retirement or other termination of employment, other than (i) coverage for
benefits mandated by applicable law, (ii) death benefits or retirement benefits
under an employee pension benefit plan (as defined by section 3(2) of ERISA),
(iii) benefits, the full cost of which is borne by the current or former Company
Employee, or beneficiary; or (iv) severance or disability plans identified on
Section 4.9(a) of the Disclosure Schedule.
(e) None of the Employee Benefit Plans is or has been subject to Title IV of
ERISA. None of the Seller, the Company, or any entity required to be aggregated
with the Seller or the Company for purposes of section 414 of the Code or
section 4001 of ERISA has (while so aggregated) terminated an employee pension
benefit plan (as defined in section 3(2) of ERISA) that is or has been subject
to Title IV of ERISA, nor has any such employee pension benefit plan ever been
the subject of termination proceedings by the Pension Benefit Guaranty
Corporation. No Person has engaged in any transaction in connection with any
Employee Benefit Plan that
9
<PAGE>
could reasonably be expected to result in the imposition of a penalty pursuant
to section 502(i) of ERISA, damages pursuant to section 409 of ERISA, or a tax
pursuant to section 4975(a) of the Code. No liability, claim, action, or
litigation has been incurred, made, commenced, or threatened in connection with
any Employee Benefit Plan against the Company, its officers, or directors, or
any Employee Benefit Plan, or any fiduciary or administrator thereof (other than
for routine claims for benefits and administrative expenses payable in the
ordinary course).
(f) All required contributions to, and all payments with respect to, the
Employee Benefit Plans have been timely made.
(g) The consummation of the transactions contemplated by this Agreement will
not (i) entitle any current or former Company Employee to any severance or
termination pay, or (ii) accelerate the time of payment or vesting, or increase
the amount of compensation due any such Company Employee, except as specifically
provided in Sections 5.8 and 5.9 of this Agreement with respect to Seller's
401(k) Plan (as defined in Section 5.8).
Section 4.10 Litigation and Liabilities.
- -----------------------------------------
(a) Section 4.10 of the Disclosure Schedule lists and briefly describes all
claims, actions, suits, disputes, proceedings or governmental or regulatory
investigations involving, pending or, to the knowledge of the Company threatened
against the Company. Except as noted in Section 4.10 of the Disclosure Schedule,
none of the matters listed therein may reasonably be expected to have a
materially adverse effect upon the Company's operations as currently conducted.
(b) To the knowledge of the Seller, there are no judgments, consents,
decrees, injunctions or any other judicial or administrative mandates
outstanding against the Company.
Section 4.11 Compliance with Laws and Orders.
- ----------------------------------------------
(a) The Company is in compliance in all material respects with all laws,
regulations and orders and governing instruments applicable to it and to the
conduct of its business and the Company has not received any notice of any
material noncompliance with any laws, regulations and orders and governing
instruments applicable to it and the conduct of its business, and
(b) The Company is not in default under, and no event has occurred which,
with the lapse of time or action by a third party, could result in the default
under, the terms of any judgment, order, writ, decree, permit or license of any
agency of any government or court, whether federal, state, municipal or local
and whether at law or in equity except where such default would not materially
adversely effect the Company's ability to carry on its business as it is now
being conducted.
10
<PAGE>
Section 4.12 Tax Returns and Reports.
- --------------------------------------
(a) All federal, state, local and foreign tax returns, declarations, report
estimates, statements and information return required to be filed in respect of
Taxes, as defined in Section (m) below ("Tax Returns") required to be filed for
the periods through the Closing Date by the Company have been or will be filed
with the appropriate governmental authorities in all jurisdictions in which such
Tax Returns are required to be filed, and all such Tax Returns and reports
properly reflect in all material respects the taxes, reporting requirements and
responsibilities of the Company for the periods shown thereon. All Taxes shown
to be due by the Tax Returns, or which are otherwise claimed to be due, to any
taxing authority from the Company have been paid or provided for. All Taxes
required to be withheld, collected or deposited by the Company have been timely
withheld, collected, or deposited and, to the extent required, have been paid to
the relevant Tax Authority. The liabilities for Taxes, other than deferred Tax
liabilities, provided for in the Financial Statements are in all material
respects sufficient for payment of all unpaid Taxes accrued for or applicable to
the Company through the periods reflected in such Financial Statements. The
Company has not received any notice of audit, assessment or investigation by the
Internal Revenue Service or any other taxing authority in connection with any
Tax Returns and there are no pending tax examinations of or Tax claims asserted
against the Company, or any of its properties. There are no Tax liens on any of
the properties or assets of the Company or its Subsidiaries except for liens of
current Taxes not yet due and payable. The Company has not waived any law or
regulation fixing, or consented to the extension of, any period of time for
assessment of any Taxes which waiver or consent is currently in effect.
(b) The Company is not a party to any agreement, contract, arrangement or
plan that has resulted or would result in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code.
(c) The Company has not received any outstanding subpoenas or requests for
information with respect to any federal income tax returns of the Company or the
Taxes reflected on such returns.
(d) No consent under Section 341(f) of the Code has been filed with respect
to the Company.
(e) The Company has not been at any time a member of any partnership or
joint venture or the holder of a beneficial interest in any trust for any period
for which the statute of limitations for any Tax potentially applicable as a
result of such membership or holding has not expired.
(f) The Company was not acquired in a qualified stock purchase under Section
338(d)(3) of the Code and no elections under Section 338(g) of the Code,
protective carryover basis
11
<PAGE>
elections, offset prohibition elections or other deemed or actual elections
under Section 338 of the Code are applicable to the Company or any Subsidiaries.
(g) The Company is not nor has been subject to the provisions of Section
1503(d) of the Code.
(h) There are no outstanding waivers or agreements extending the statute of
limitations for any period with respect to any Tax, other than real or personal
property Taxes; to which the Company may be subject.
(i) The Company has provided to Buyer a complete and accurate list of
locations by city and state or country in which the Company presently does
business, is qualified to do business or files any state, local or foreign
income, payroll or franchise tax returns.
(j) The Company's net operating losses have been limited under Section 382
of the Code, as described in the Disclosure Schedule, as a result of changes in
ownership of the Common Stock or Preferred Stock occurring prior to Closing.
(k) The Company has no liability for the Taxes of any person other than the
Seller and its affiliates (i) under Regulation Section 1.1502-6 (or any similar
provision of state, local or foreign law), (ii) as a transferee or successor,
(iii) by contract, or (iv) otherwise.
(l) Seller is a wholly-owned subsidiary of the "common parent" of an
"affiliated group" of corporations (as those terms are used in section 1504(a)
of the Code and the Treasury regulations promulgated under section 1502 of the
Code) that includes the Company (the "Seller Group"). The Seller and the Company
will be included in the consolidated federal income Tax Return filed by Seller's
owner for the Taxable Period including the Closing Date.
(m) For purposes of this Agreement, the term "Taxes" means all taxes,
charges, fees, levies or other assessments, including, without limitation, all
net income, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll employment, social security,
unemployment, excise, estimated, severance, stamp, occupation, property or other
taxes, customs duties, fees assessments or charges of any kind whatsoever,
including, without limitation, all interest and penalties thereon and additions
to tax or additional amounts imposed by any taxing authority, domestic or
foreign, upon the Company or any subsidiary.
Section 4.13 Insurance. Section 4.13 of the Disclosure Schedule contains a
------------------------
list of all the insurance policies maintained by or on behalf of the Company, on
its respective properties, assets, business, operations or personnel. To the
knowledge of the Company, its business operations and all insurable properties
and assets are insured in all material respects for their benefit against all
risks that are customarily insured against in the industry and that are usually
insured against by
12
<PAGE>
businesses operating similar businesses or properties in the localities where
such businesses or properties are located, in each case:
(a) under policies issued by insurers of recognized responsibility, in such
amounts with such deductibles and against such risks and losses as are, in the
reasonable opinion of the Seller, adequate for the business engaged in by the
Company, or
(b) by self-insurance or self-retention by the Company as described in the
Disclosure Schedule.
All such policies are in full force and effect and neither the Company is in
default (A) thereunder in any manner which could result in the denial of
coverage or cancellation of a policy, or (B) in the payment of any premium.
Except for the Texas Association of School Boards litigation, there currently is
no outstanding material claim with respect to such insurance coverage. Neither
the Company nor any Subsidiary has received notification of, and, to the
knowledge of the Company, no grounds exist for, the cancellation or proposed
cancellation of any such policies. To the knowledge of the Company there is no
reason why any such policies would not be valid, binding and enforceable in all
material respects, except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors' rights
generally and except that the availability of equitable remedies, including
specific performance, is subject to the discretion of the court before which any
proceeding thereof may be brought. The Company has not failed to give any notice
or present any claim thereunder in accordance with such policies, such as would
permit the insurer to deny coverage under such policies.
Section 4.14 No Defaults. The Company is not nor, to the Company's
--------------------------
knowledge is any other party thereto, in material violation or breach of, and,
to the knowledge of the Seller, no event exists which constitutes or would
(after notice or lapse of time or both) constitute a material default (or give
rise to any right of termination, cancellation or acceleration) under, any of
the terms, conditions or provisions of any Company Contract, (as defined in
Section 4.17).
Section 4.15 Brokers and Finders. No broker, finder or financial advisor
----------------------------------
is acting or has acted on behalf of Seller or is entitled to receive any
brokerage fees, commissions, finders' fees or financial advisory fee in
connection with the transactions contemplated herein.
Section 4.16 Real Estate.
- --------------------------
(a) The Company does not own any real property. The leased property listed
in Section 4.16 of the Disclosure Schedule constitutes all of the real property,
in excess of 5,000 square feet, occupied by the Company (the "Real Property").
The Real Property has access sufficient for the conduct of the Company's
business as now conducted or as presently proposed to be conducted to public
roads and to all utilities, including electricity, sanitary and storm sewer,
potable water,
13
<PAGE>
natural gas and other utilities, used in the operation of the business of
the Company at that location.
(b) To the knowledge of the Seller, the leases described in Section 4.16 the
Disclosure Schedule are in full force and effect, and the Company holds a valid
and existing leasehold interest under each of the leases for the term set forth
in Section 4.16(b) of the Disclosure Schedule. The Company has delivered to
Buyer complete and accurate copies of each of the leases described in Section
4.16 of the Disclosure Schedule, and none of such leases has been modified in
any material respect, except to the extent that such modifications are disclosed
by the copies delivered to Buyer. The Company is not in material default, and to
the knowledge of the Company no circumstances exist which, if unremedied, would,
either with or without notice or the passage of time or both, result in the
Company's material default under any of such leases; nor, to the knowledge of
the Seller, is any other party to any of such leases in material default.
(c) The buildings, machinery, equipment and other tangible assets used in
the conduct of the Company's business are in good condition and repair, ordinary
wear and tear excepted, and are usable in the ordinary course of business. There
are no material defects in such assets or other conditions relating thereto
which, in the aggregate, materially adversely affect the operation value of such
assets. The Company owns, or leases under valid leases, all buildings,
machinery, equipment and other tangible assets reasonably necessary for the
conduct of its business.
(d) The Company is not in violation in any material respect of any
applicable zoning ordinance or other law, regulation or requirement including
laws relating to hazardous waste disposal, relating to the operation of any
properties used in the operation of its business, and the Company has not
received any notice of any such violation, or the existence of any condemnation
proceeding with respect to any of the Real Property, except, in each case, with
respect to violations or proceedings the potential consequences of which do not
or will not materially impair the use of any of the Company's Real Property.
Section 4.17 Contracts.
- ------------------------
(a) Section 4.17(a) of the Disclosure Schedule sets forth as of the date of
this Agreement a list of each contract or agreement of the Company including,
without limitation, contracts or agreements between the Company, on the one
hand, and any person or entity, on the other hand (together with the contracts
and agreements listed in Section 4.17(b) of the Disclosure Schedule, the
"Company Contracts"):
(i) involving an aggregate payment or commitment per contract or
agreement on the part of either of the parties thereto of more than $100,000
during the 12-month period ended December 31, 1995;
(ii) concerning a material partnership or joint venture with another
person;
14
<PAGE>
(iii) pursuant to which assets or services are provided to or from an
affiliate in excess of $10,000 in any 12-month period; or
(iv) which is otherwise material to the Company.
To the Company's knowledge, all the Company Contracts are valid and in full
force and effect on the date hereof. Correct and complete copies of all written
Company Contracts have been made available to Buyer and the terms of all oral
Company Contracts have been disclosed to Buyer.
(b) Section 4.17(b) of the Disclosure Schedule lists each Company Contract
to which the Company or any Subsidiary is a party and which limits the right of
the Company prior to the Closing Date or any of its subsidiaries at or after the
Closing Date, to engage in, or to compete with any person in, any business,
including each contract or agreement containing exclusivity provisions
restricting the geographical area in which, or the method by which, any business
may be conducted by the Company prior to the Closing Date, or Buyer or any of
its subsidiaries after the Closing Date.
(c) As of the date of this Agreement, to the knowledge of the Company, the
relationships of the Company with their customers are good commercial working
relationships. During 1995, no material customer of the Company or its
Subsidiaries has canceled or otherwise terminated its relationship with the
Company or such Subsidiaries and to the Company's knowledge no material customer
of the Company or any Subsidiary currently intends to cancel or otherwise
terminate its relationship with the Company or its Subsidiaries.
Section 4.18 Bank Accounts, Guarantees and Powers. Section 4.18 of the
---------------------------------------------------
Disclosure Schedule sets forth:
(a) a list of all accounts maintained by the Company at any bank or other
financial institution;
(b) all agreements or commitments of the Company guaranteeing the payment of
money or the performance of other obligations or contracts by any third persons
(other than endorsements of negotiable instruments in the ordinary course of the
Company's or any Subsidiary's business); and
(c) the names of all persons, firms, associations, corporations or business
organizations holding general or special powers of attorney from the Company or
any Subsidiary together with a summary of the terms thereof.
Section 4.19 Intellectual Property Rights. Section 4.19 of the Disclosure
-------------------------------------------
Schedule sets forth (a) all material patents, trademarks, service marks,
tradenames, slogans, registered copyrights, and
15
<PAGE>
commercially significant unregistered copyrights owned, used, or licensed by the
Company (the "Marks and Rights"), including all titles, registration numbers,
application numbers, dates of registration and application, inventors, licensor,
and licensees, as applicable; and (b) all litigation and claims currently
outstanding or brought or made by the Company or by a third party against the
Company since January 1, 1994, involving the Marks and Rights or trade secrets,
including all conflicting claims of ownership and claims of infringement of the
Marks and Rights or the trade secrets. The Company or Seller's parent company
owns or possesses the right to use all Marks and Rights Company currently uses,
and to the knowledge of the Company, there are no conflicts with the rights of
others with respect to such use.
Section 4.20 Insider Interests. No present officer or director or employee
--------------------------------
of the Company (a) owns, directly or indirectly, in whole or in part, any of the
material properties used in the business of the Company, (b) has received a loan
or advance from the Company (other than with respect to business and travel
expenses) which is currently outstanding, (c) has the right to borrow from the
Company (other than with respect to business travel), (d) has any obligation to
make any loan to the Company, or (e) has any other material business
relationship with the Company other than in his or her capacity as an officer,
director, shareholder, employee, health care provider, provider of legal
services or subscriber.
Section 4.21 Absence of Certain Business Practices. Neither the Company
----------------------------------------------------
nor, to the knowledge of the Company, any officer, employee or agent of the
Company, nor any other person or entity acting on its behalf, has, directly or
indirectly, given or agreed to give any gift or similar benefit to any customer,
supplier or governmental employee or other person who is or may be in a position
to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (a) might subject the
Company, to any material damage or penalty or to any material civil, criminal or
governmental litigation or proceeding, (b) if not given in the past, might have
materially adversely affected the assets, business or operations of the Company
as reflected in the Financial Statements, or (c) if not continued in the future,
might materially adversely affect the Company's assets, business or operations
or which might subject the Company to suit or penalty in any private or
governmental litigation or proceeding.
Section 4.22 No Interest in Competitors. No officer, director or, to the
-----------------------------------------
knowledge of the Seller, employee of the Company directly or indirectly owns any
interest in, or controls or is a participant in or consultant to, any
corporation, partnership, limited partnership, joint venture, association or
other entity which is a competitor, landlord, or tenant of the Company, other
than an ownership interest involving less than five percent (5%) of the equity
securities of any entity which is traded on a recognized stock exchange or
quoted on a consolidated reporting system.
Section 4.23 Disclosure. To the knowledge of the Seller, it has not
-------------------------
withheld any material facts relating to the ongoing business or financial
condition of the Company from Buyer, and copies of all documents which have been
delivered or made available to Buyer are true, correct and
16
<PAGE>
complete copies thereof, and include all material amendments, supplements or
modifications thereto or material waivers thereunder.
Section 4.24 Genesys.
- ----------------------
(a) Section 4.24(a) of the Disclosure Schedule sets forth with respect to
Genesys as of January 28, 1994:
(i) the authorized capital stock;
(ii) the number of shares issued and outstanding;
(iii) the identity of the holders of all such shares of issued and
outstanding shares of stock; and
(iv) the number of shares held in treasury of Genesys.
As of the date hereof, all of the shares of capital stock of Genesys held by the
Company are duly authorized, validly issued, fully paid and non-assessable.
(b) Genesys ceased all active business operations on July 31, 1993, and
since that time has had no ongoing business operations and is currently
inactive.
(c) The Amended and Restated Stockholder Agreement, dated as of December 31,
1992, by and between the Company and Corporate Systems, Ltd. (the "Stockholder
Agreement"), a copy of which has been delivered to Buyer and which is listed in
the Disclosure Schedule, is valid, in full force and effect and has not been
superseded or amended in any way.
(d) The cessation of Genesys' operations was performed in material
compliance with
(i) all applicable laws and regulations, including requirements relating
to regulatory approvals or notifications and employee terminations; and
(ii) all applicable client or provider agreements and employee benefit
plans or programs.
(e) Other than compliance with the Stockholder Agreement, the Company has no
current or future obligations, financial or otherwise, whether accrued or not,
known or unknown, with respect to Genesys or its prior business or employees.
Section 4.25 Accuracy of Representations and Warranties. No representation
---------------------------------------------------------
or warranty made by the Seller and Buyer in this Agreement is false or
misleading with respect to any material fact,
17
<PAGE>
or omits or fails to state a material fact necessary to make the statements
contained therein not misleading.
ARTICLE V
COVENANTS
-----------
Section 5.1 Affirmative Covenants of the Seller. The Seller hereby
-------------------------------------------------
covenants and agrees that, unless otherwise agreed in writing by Buyer or as
otherwise contemplated by this Agreement, from the date hereof through the
Closing Date, the Company will:
(a) Operate its business in the ordinary and usual course and consistent
with past practices;
(b) Use best efforts to preserve intact its business organization and
assets, maintain its rights and franchises, retain the services of its
respective officers and key employees and maintain the relationships with its
respective customers and suppliers;
(c) Use best efforts to keep in full force and effect its property and
liability insurance and bonds comparable in amount and scope of coverage to that
currently maintained; and
(d) Confer with Buyer at its request to report operational matters and
general status of the ongoing operations of the business of the Company. The
Company shall promptly inform Buyer of any unexpected emergency or other change
in the normal course of business or in the operations of the business, of any
investigation or review pending or threatened by any governmental entity and of
submissions to the Company's Board of Directors involving any material business,
asset or property, and of any material litigation, investigation, review or
audit instituted or threatened by any party, and shall keep Buyer fully informed
of developments with respect to such events and permit Buyer's representatives
access to all materials prepared by, or delivered to, the Company in connection
therewith.
Section 5.2 Negative Covenants of the Seller. Except as expressly
----------------------------------------------
contemplated by this Agreement or as otherwise agreed to in writing by Buyer,
from the date hereof through the Closing Date, the Seller covenants that the
Company shall not do any of the following:
(a) amend its charter or bylaws;
(b) except for the payment of bonuses for 1995 performance (which are funded
by Seller), increase the compensation payable or to become payable to any
director, officer or employee (including any Company Employee), except for
increases in salary or wages payable or to become payable in the ordinary course
of business and consistent with past practice for Company Employees;
18
<PAGE>
(c) grant or increase any severance or termination pay (other than pursuant
to the normal severance policy of the Company in effect on the date of this
Agreement as disclosed to Buyer on Disclosure Schedule 4.9(a)) to, or enter into
any severance agreement;
(d) enter into any employment agreement except in accordance with Section
5.8 of this Agreement;
(e) establish, adopt, enter into or amend any employee benefit plan, program
or arrangement, except as may be required to comply with applicable law, or as
required under Section 5.8 of this Agreement with respect to the Company's
adoption of Seller's 401(k) Plan;
(f) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock;
(g) redeem, purchase or otherwise acquire any shares of its capital stock or
any securities or obligations convertible into or exchangeable for any shares of
its capital stock, or any options, warrants or conversion or other rights to
acquire any shares of its capital stock or obligations;
(h) effect any reorganization or recapitalization;
(i) split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in lieu
of or in substitution for, shares of its or its respective Subsidiaries' capital
stock;
(j) issue, deliver, award, grant, or sell, or authorize the issuance,
delivery, award, grant or sale (including the grant of any security interests,
liens, claims, pledges, limitations in voting rights, charges or other
encumbrances) of, any shares of any class of its capital stock (including shares
held in treasury), any securities convertible into or exercisable or
exchangeable for any such shares, or any rights, warrants or options to acquire
any such shares or amend or otherwise modify the terms of any such rights,
warrants or options the effect of which shall be to make such terms more
favorable to the holders thereof;
(k) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets of any other person (other than the purchase of assets from
suppliers or vendors in the ordinary course of business and consistent with past
practice);
(l) sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose
of, or agree to sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of any material amount of
19
<PAGE>
any of its assets, except for dispositions in the ordinary course of business
and consistent with past practice;
(m) initiate, solicit or encourage (including by way of furnishing
information or assistance) any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Competing Transaction
(as such term is defined below), or authorize any of the officers or directors
of the Company to take any such action, and the Company shall use its reasonable
efforts to cause the directors, officers, employees, agents, and representatives
of the Company (including, without limitation, any investment banker, financial
advisor, attorney or accountant retained by the Seller) not to take any such
action. Seller shall promptly notify Buyer if any such inquiries or proposals
are received by the Company or any of its or their other respective officers,
directors, investment bankers, financial advisors, attorneys, accountants or
other representatives; PROVIDED, HOWEVER, that nothing in this Section 5.2(m)
shall limit the Seller from taking any actions required of it by applicable law.
For purposes of this agreement, "Competing Transaction" shall mean any of
the following involving the Company (other than the transactions contemplated by
this Agreement):
(i) any merger, consolidation, share exchange, business combination or
other similar transaction;
(ii) any sale, lease, mortgage, pledge, transfer or other disposition of
twenty percent or more of the assets of the Company in a single transaction;
(iii) any person shall have acquired beneficial ownership or the right to
acquire beneficial ownership of, or any "group" (as such term is defined
under Section 13(d) of the Securities Exchange Act of 1934) shall have been
formed which beneficially owns or has right to acquire beneficial ownership
of twenty percent or more of the then outstanding shares of capital stock of
the Company; or
(iv) any agreement to, or public announcement by the Seller of a
proposal, plan or intention to, do any of the foregoing;
(n) make or rescind any express or deemed election relating to Taxes, settle
or compromise any claim, action, suit, litigation, proceeding, arbitration,
investigation, audit or controversy relating to Taxes, or change any of its
methods of reporting income or deductions for federal income tax purposes from
those employed in the preparation of the federal income tax returns for the
taxable year ending December 31, 1995, except in either case as may be required
by law, the IRS, or GAAP;
(o) incur any obligation for borrowed money or purchase money indebtedness,
whether or not evidenced by a note, bond, debenture or similar instrument;
20
<PAGE>
(p) fail to maintain its books and records in the ordinary and usual course
of business in accordance with past practices, except for such changes as are
necessary to comply with GAAP or regulatory accounting principles, consistently
applied;
(q) make any investment of a capital nature in excess of $50,000 singly or
$250,000 in the aggregate, either by purchasing stock or securities,
contributions to capital, property transfers or otherwise, or by the purchase of
any property or assets of any other individual, firm or corporation, except
transactions in the ordinary course of business;
(r) enter into any new material lease, amend or modify the terms of any
existing material lease, or terminate any existing material lease;
(s) release or relinquish any material contract rights or forgive any
indebtedness without Buyer's consent;
(t) increase the compensation to be paid to any provider or group of
providers, except in the ordinary course of business;
(u) make any loans or advances to any officer, director, shareholder or
Affiliate of the Company (except for ordinary travel and business expense
payments);
(v) engage in any transaction or take any other action which would cause or
result in a breach of any representation or warranty of the Seller set forth in
Article IV hereof; and
(w) agree in writing or otherwise to any of the foregoing.
Section 5.3 Access and Information.
- ------------------------------------
(a) Seller shall afford to Buyer, and their respective affiliates and
accountants, counsel, other representatives, and prospective lenders and
investors and investor representatives access during normal business hours
throughout the period prior to the Closing Date to all of Company's officers,
directors, employees, properties, offices, books, contracts, commitments and
records (including but not limited to Tax Returns and Regulatory filings) and
the Company shall use its best efforts to cause access to accountants' work
papers, during such period, shall furnish promptly to any of them all other
information concerning its business, properties and personnel as may be
reasonably requested in writing. No investigation by Buyer prior to or following
the execution of this Agreement shall affect the representations and warranties
of the Company as contained herein.
Section 5.4 Additional Arrangements. Subject to the terms and conditions
-------------------------------------
of this Agreement, each of the parties agrees to use all reasonable efforts to
take, or cause to be taken, all action and
21
<PAGE>
to do, or cause to be done, as promptly as practicable, all things necessary,
proper or advisable under applicable laws and regulations to assure the
satisfaction of each condition to, and to consummate and make effective, the
transactions contemplated by this Agreement, including using its best efforts to
obtain all necessary waivers, consents and approvals.
Section 5.5 Continuing Nature of Representations and Warranties. The
-----------------------------------------------------------------
Seller agrees, until the earlier of the Closing Date or termination of this
Agreement, to provide Buyer with notice of any material information which comes
to the knowledge of the Seller and which affects the truth and accuracy, or
continuing truth and accuracy, of the warranties and representations made by the
Seller herein or which has the effect of rendering any of the covenants
contained in this Article VI incapable of performance. Buyer agrees, until the
earlier of the Closing Date or termination of this Agreement, to provide the
Seller with notice of any material information which comes to the knowledge of
Buyer and which affects the truth and accuracy, or continuing truth and
accuracy, of the warranties and representations made by Buyer herein.
Section 5.6 Tax Matters. Following the date of this Agreement:
-------------------------
(a) Seller shall file any Tax Returns, elections or information statements
with respect to any liabilities for Taxes of the Company or other matters
relating to Taxes of the Company which, pursuant to applicable law must be filed
for taxable years ending on or prior to Closing. Buyer agrees to cooperate with
Seller for the purpose of completing and filing such returns. Seller shall have
the sole right and responsibility to respond to and resolve any Tax audits
related to taxable years ending on or prior to Closing and shall be responsible
for any additional Tax liabilities related to Tax periods ending on or before
Closing and shall receive any Tax refunds or reductions related to Tax periods,
other than refunds attributable to the carry-back of Tax attributes, such as
loss carryovers from a Tax period after the Closing Date. Buyer will provide any
necessary information and other reasonable assistance to Seller for the purpose
of responding to and resolving such audits. Buyer shall be responsible for all
Tax filings and for all Tax liabilities relating to the Company for periods
commencing after the Closing Date.
(b) Any Tax sharing agreement between or among the Seller Group and the
Company is terminated as of the Closing Date and will have no further effect for
any taxable year (whether the current year, a future year, or a past year).
(c) Seller will immediately pay to the Buyer any Tax refund (or reduction in
Tax liability) resulting from a carryback of a postacquisition Tax attribute of
the Company into a Seller consolidated federal or state Tax Return, when such
refund or reduction is realized by the Seller group. Seller will cooperate with
the Company in obtaining such refunds (or reduction in Tax liability), including
through the filing of amended Tax returns or refund claims.
22
<PAGE>
(d) Seller will not elect to retain any net operating loss carryovers or
capital loss carryovers of the Company under Regulation Section 1.1502-20(g)
without Buyer's written approval.
(e) All transfer, documentary, sales, use, stamp, registration and other
such Taxes and fees (including any penalties and interest) incurred in
connection with this Agreement (including any New York State Gains Tax, New York
City Transfer Tax and any similar tax imposed in other states or subdivisions),
shall be paid by Seller when due, and Seller will, at its own expense, file all
necessary Tax Returns and other documentation with respect to all such transfer,
documentary, sales, use, stamp, registration and other Taxes and fees, and if
required by applicable law, Buyer will, and will cause its affiliates to, join
in the execution of any such Tax Returns and other documentation.
(f) For purposes of Section 5.6 and 5.11, where applicable law permits, the
Closing Date shall be treated by Buyer and Seller as the end of a taxable year,
and in any case where applicable law does not permit the Company to treat the
Closing Date as the end of a taxable year of the Company, then whenever it is
necessary to calculate the liability for income or franchise taxes of the
Company for a portion of a taxable year, such determination will (unless
otherwise agreed to in writing by Seller and Buyer) be determined by a closing
of the Company's books at the end of the Closing Date. In order appropriately to
apportion any Taxes, other than income or Closing Date, (i) AD VALOREM Taxes
(including, without limitation, real and personal property Taxes) will be
accrued on a monthly basis over the period for which the Taxes are levied, or if
it cannot be determined over what period the Taxes are being levied, over the
fiscal period of the relevant taxing authority, in each case irrespective of the
lien or assessment date of such Taxes, and (ii) franchise and other privilege
Taxes not measured by income will be accrued on a monthly basis over the period
in which the privilege relates.
(g) Buyer will make no election under Section 338(h)(10) of the Internal
Revenue Code without the written approval of Seller. If, notwithstanding this
provision, Buyer makes such an election, Buyer shall fully reimburse Seller any
additional tax liability or costs incurred by Seller as a result of such
election by Buyer. Seller shall provide necessary information and other
reasonable assistance to Buyer for purposes of making a permitted election under
this Section.
(h) Buyer will make no election without Seller's written approval to ratably
allocate income and expenses pursuant to Regulation Section 1.1502-76(b)(2)(ii).
Both Buyer and Seller agree to work together to determine if said election is
advantageous for both parties.
(i) Any intercompany balances due to Seller from the Company which are not
paid prior to the Closing Date shall be canceled and treated by Seller as an
additional capital contribution to Company by Seller.
23
<PAGE>
Section 5.7 Appropriate Action; Consents; Filings.
- --------------------------------------------------
(a) Buyer and Seller shall use all reasonable efforts to
(i) take, or cause to be taken, all appropriate action, and do, or cause
to be done, all things necessary, proper or advisable under applicable law
or otherwise to consummate and make effective the transactions contemplated
by this Agreement as promptly as practicable;
(ii) obtain from any governmental entities any consents, licenses,
permits, waivers, approvals, authorizations or orders required to be
obtained or made by Seller, Buyer, or the Company or any of their respective
Subsidiaries in connection with the authorization, execution and delivery of
this Agreement and the consummation of the transactions contemplated herein,
including; and
(iii) make all necessary filings, and thereafter make any other required
submissions, with respect to this Agreement required under (A) the H-S-R
Act, and (B) any other applicable law; PROVIDED that, Buyer, and Seller
shall cooperate with each other in connection with the making of all such
filings, including providing copies of all non-confidential portions of such
documents to the non-filing party and its advisors prior to filing and to
discuss additions, deletions or changes suggested in connection therewith.
The Seller and Buyer shall furnish to each other all information required
for any application or other filings to be made pursuant to the rules and
regulations of any applicable law in connection with the transactions
contemplated by this Agreement.
(b) The Disclosure Schedule identifies each of the Company Contracts which
would require notice of or consent of a third party in order to maintain the
Company's relationship with such party or to avoid the Company's being in breach
or default under such Contract, including any policies of insurance. Any such
notices and consents or approvals shall be obtained prior to Closing unless (x)
the failure to deliver such notice and obtain all such consents would not
materially affect the Company's business or its ability to consummate the
transactions contemplated in this Agreement, or (y) Buyer is advised of and
consents in writing to the foregoing failure to deliver such notices or receive
such consents.
(c) From the date of this Agreement until the Closing Date, the Company
shall promptly notify Buyer in writing of any pending or, to the knowledge of
the Company, threatened action, proceeding or investigation by a governmental
entity or any other person (i) challenging or seeking damages in connection with
this transaction, or (ii) seeking to restrain or prohibit the consummation of
the transaction contemplated by this Agreement or otherwise limit the right of
Buyer to own or operate all or any portion of the businesses or assets of the
Company.
Section 5.8 Company Employees. As of the date hereof, the Company has no
------------------------------
employees. Seller shall cause the Company to hire on an at-will basis effective
as of the business day immediately
24
<PAGE>
preceding the Closing Date those employees of Seller assigned to the Company,
which employees have been selected by Buyer, and listed in Section 5.8 of the
Disclosure Schedule and such other individuals as may be designated as Company
employees by mutual written agreement between the Seller and the Buyer prior to
the Closing Date ("Company Employees"). Section 5.8 also sets forth those active
employees of Seller who previously rendered services related to the Company
which Buyer has selected to not be hired by the Company. Those employees marked
on Section 5.8 of the Disclosure Schedule with an asterisk are temporary
employees and are not entitled to participate in Seller's Severance Plan. Seller
shall also cause the Company to become a participating employer under the United
HealthCare Corporation 401(k) Savings Plan ("Seller's 401(k) Plan") as of the
business day immediately preceding the Closing Date with respect to the Company
Employees. On and after the Closing Date, Buyer shall cause the Company to
continue to employ the Company Employees (subject to the Company's right to
terminate any such Company Employee or any subsequently hired individual at
will), subject to the following terms and conditions: (i) effective as of the
Closing Date, Buyer or the Company shall cause the Company Employees to be
covered by a medical (and dental) plan without limitations based upon
pre-existing conditions; (ii) for purposes of any employee benefit plan,
program, or arrangement maintained by Buyer or the Company for the Company
Employees ("Buyer's Plan") on and after the Closing Date (including any 401(k)
Plan ("Buyer's 401(k) Plan")) any years of eligibility service or vesting
service credited to such Company Employees under the Employee Benefit Plans as
of the Closing Date shall be treated as eligibility or vesting service under
Buyer's Plan; and (iii) if Buyer or Company does terminate the employment of any
Company Employee prior to the date which is sixty (60) days after Closing Date,
Buyer shall provide to any such terminated Company Employee severance benefits
which are substantially similar to the benefits such individual would have
received under Seller's severance program. Seller agrees to provide Buyer within
sixty (60) days of the Closing Date such information as Buyer shall reasonably
request in order to implement the provisions of this Section 5.8, including the
years of eligibility and vesting service credited to the Company Employees under
the Employee Benefit Plans.
Section 5.9 Employee Benefits. Effective as of the Closing Date, the
------------------------------
Company shall not be a participating employer in any Employee Benefit Plan. No
portion of the assets of any Employee Benefit Plan, heretofore sponsored or
maintained by the Seller for the Company Employees (and no amount attributable
to any such Employee Benefit Plan), shall be transferred to the Company, and the
Company shall not be required to sponsor or contribute to any such Employee
Benefit Plan after the Closing Date. With respect to Seller's 401(k) Plan,
Seller shall authorize lump sum distributions of vested benefits to Company
Employees in connection with the transaction contemplated under this Agreement
pursuant to Section 401(k)(10) of the Internal Revenue Code. Effective as of
Closing Date, Seller shall treat the Company Employees who are participants in
Seller's 401(k) Plan as of Closing Date as being 100% vested in all
contributions and earnings under such plan. The amounts payable to the Company
Employees on account of all benefit arrangements (including, but not limited to,
all accrued, but unpaid sick leave) shall be either maintained in such Employee
Benefit Plans or paid to the Company Employees, in each
25
<PAGE>
case, in accordance with the applicable Employee Benefit Plan documents. The
Seller shall not be liable for any claim for insurance, reimbursement or other
benefits incurred after the Closing Date.
Section 5.10 Employment Agreements. Prior to the Closing Date, Buyer may
-----------------------------------
negotiate to enter into an employment agreement with the individual listed on
Exhibit B.
Section 5.11 Indemnification.
- -----------------------------
(a) Seller agrees to indemnify Buyer and the Company from all costs and
expenses, including reasonable attorneys' and auditors' fees, relating to or
resulting from suits, claims, liability, judgments, investigations, loss,
penalties, fines or damage, of any type and whether asserted by or incurred as a
result of action by a governmental body or a private party, asserted against or
incurred by the Buyer or Company as a result of the matters described below (the
"Claims"), provided that Buyer gives written notice of the facts giving rise to
and the alleged basis for such Claim and, if known or reasonably ascertainable,
the amount of the liability asserted or which may be asserted by reason thereof,
during the period following the Closing specified below:
(i) Any inaccurate or erroneous representation or warranty,
misrepresentation, breach of warranty or nonfulfillment of any covenant or
agreement to be performed by the Seller or Company under this Agreement at
or prior to the Closing Date or from any misrepresentation by the Company in
or omission by the Seller or Company from the Disclosure Schedule pursuant
to this Agreement;
(ii) (1) Any and all Taxes of the Company for all tax periods ending on
or before the Closing Date;
(2) Taxes attributable to other members of an affiliated group (as
defined in Section 1504(a) of the Code or any analogous provision under
foreign, state or local law) to which the Company has belonged on or
prior to the Closing Date attributable to any Tax period.
(3) Any and all Taxes incurred in connection with or arising out of
any inaccuracy; breach, or nonfulfillment by the Seller of any
representation, consent, covenant or agreement of the Seller made in this
Agreement including, without limitation, Section 4.12, 5.6 and Article V
hereof.
(4) Taxes arising out of, resulting from or attributable to a Section
338(h)(10) Election by Seller.
(iii) Claims relating to or resulting from any litigation or disputes
with respect to the operation of the Company prior to the date of this
Agreement.
26
<PAGE>
(iv) Claims relating to any employee benefit plan, program or
arrangement maintained or contributed to by the Seller or any entity which
is or has been aggregated with the Seller or the Company for purposes of
section 414 of the Code or section 4001 of ERISA, including any Claims
relating to or arising from the Seller's transfer of the Company Employees
to the Company under Section 5.8 of this Agreement, but excluding Claims
relating to any employee benefit plan, program or arrangement maintained or
contributed to by the Buyer or the Company after the Closing Date.
(v) Claims relating to or resulting from any litigation or dispute with
respect to Genesys, including but not limited to the lawsuit involving the
Texas Association of School Boards ("Genesys Claims").
(b) Buyer agrees to indemnify Seller from all costs and expenses, including
reasonable attorneys' and auditors' fees, relating to or resulting from suits,
claims, liability, judgments, investigations, loss, penalties, fines or damage,
of any type and whether asserted by or incurred as a result of action by a
governmental body or a private party, asserted against or incurred by the Buyer
or the Seller, as the case may be, as a result of the matters described below
(the "Claims"), provided that the Seller gives written notice of the facts
giving rise to and the alleged basis for such Claim and, if known or reasonably
ascertainable, the amount of the liability asserted or which may be asserted by
reason thereof, during the period following the Closing specified below:
(i) Any inaccurate or erroneous representation or warranty,
misrepresentation, breach of warranty or nonfulfillment of any covenant or
agreement to be performed under this Agreement at or prior to the Closing
Date or from any misrepresentation in or omission from the Disclosure
Schedule pursuant to this Agreement;
(ii) (1) Any and all Taxes of the Buyer for all tax periods beginning
after the Closing Date;
(2) Any and all Taxes incurred in connection with or arising out of
any inaccuracy, breach, or nonfulfillment by the Buyer of any
representation, consent, covenant or agreement of the Buyer made in this
Agreement including, without limitation, Section 3.4.
(3) Taxes arising out of, resulting from or attributable to a Section
338(h)(10) Election by Buyer.
(iii) Claims relating to or resulting from any litigation or disputes
with respect to the operation of the Company or Buyer after the date of this
Agreement.
(c) In the event of the assertion of a Claim which may give rise to a claim
for indemnification hereunder, the indemnified party shall notify the other
party as stated above, and Claims shall not include any such matters as to which
proper notice is not given within the
27
<PAGE>
following periods after Closing: (x) fifteen (15) months for Claims
described in subparagraphs (a)(i) and (b)(i) above; (y) three (3) years for
claims described in subparagraphs (a)(ii), (a)(iii), (a)(iv), (b)(ii) and
(b)(iii) above; and (z) no limit on the time in which Genesys Claims may be
asserted. As soon as practical after becoming aware of a Claim subject to
indemnification under this Agreement, the indemnified party shall provide the
other party with written notice stating the nature, basis and (to the extent
known or reasonably estimated) amount thereof. In the event an indemnified party
becomes aware of a Claim it shall promptly notify the other party and seek
instructions as to the defense thereof. The indemnifying party shall control the
defense and settlement of any Claim. The indemnifying party shall keep the
indemnified party apprised of the status of such Claim, shall consult with the
indemnified party as appropriate as to the handling of a Claim and shall not
unreasonably refuse to defend, compromise or settle any Claim. The indemnified
party shall cooperate fully in the defense of any Claim, including but not
limited to the defense of the Texas Association of School Board litigation. The
indemnifying party shall reimburse the indemnified party for the reasonable cost
of such cooperation. The indemnified party shall have the right at its own
expense to employ separate counsel to monitor such Claim.
(d) The first $5,000 (including the reasonable cost of defense thereof) of
any Claim individually, or an aggregate of $25,000 for multiple Claims each of
which is less than $5,000 shall be the responsibility of the indemnified party.
Once the $5,000 limit for an individual Claim or the $25,000 limit for multiple
Claims in the aggregate is reached, the full amount of all Claims (including the
reasonable costs of defense thereof) shall be paid by the indemnifying party. To
the extent that a Claim has been paid for by an insurance payment on behalf of
or insurance recovery on behalf of the Company payment shall not be the
responsibility of the indemnifying party. To the extent that a Claim has been
reserved against in the Company's Financial Statements (by means of a liability
accrual or payable or a valuation allowance or reserve against current assets),
Seller shall have no liability.
(e) Any indemnification paid under this Section 5.11 shall, as to the extent
permitted by law, be an adjustment to the Purchase Price.
Section 5.12 Survival of Indemnifications, Representations and Warranties.
--------------------------------------------------------------------------
All statements made by the Seller and the Company herein or in the
Disclosure Schedule shall be deemed representations and warranties of the
Company, and all representations, warranties and agreements made by any party to
this Agreement shall not be deemed to be waived or otherwise affected by any
investigation made by any other party. The representations and warranties of the
parties contained herein shall survive the Closing for the time periods set
forth in Section 5.11(c).
Section 5.13 Funding of the Transaction. Buyer shall maintain sufficient
----------------------------------------
cash on hand and available through bank facilities in effect and approved for
the purchase of the Common Stock to pay the Purchase Price as required by this
Agreement without any contingency or approval by a third party.
28
<PAGE>
Section 5.14 Insurance. Effective as of the Closing Date, the Seller shall
------------------------
terminate all insurance coverage with respect to the Company, at which time it
will be the exclusive responsibility of the Buyer or the Company to provide
insurance coverage with respect to the Company and its operations. Subject to
commercial availability, from and after the Closing Date, the Seller, at
Seller's expense, shall maintain for the benefit of the Company until the
expiration of all applicable periods of limitation under relevant statutes of
limitations the right to file claims against insurance with respect to a
pre-Closing Date acts or omissions of the Company, its officers and directors
and employees, in amounts and in such types as which insure the Company, its
officers and directors and employees, immediately prior to the Closing Date.
Section 5.15 Network Access. Consistent with the letter dated February 23,
-----------------------------
1996 from Gregg Strott to Tom Cox regarding MetraComp, Buyer shall use its best
efforts to cause Company to continue to perform after the Closing Date in
accordance with the provisions of such letter.
Section 5.16 Audited Financials. At its expense, the Buyer shall use its
---------------------------------
best efforts to arrange to have the Company's balance sheet as of December 31,
1993, and related statement of income for the year then ended, the 1994
Financials and the 1995 Financials audited by Arthur Andersen, Boston, prior to
March 31, 1996. These audited financial statements shall be referred to as the
"1993 Audited Financials", "1994 Audited Financials" and "1995 Audited
Financials", respectively. The Seller shall cooperate with this audit of the
Company's financial statements.
Section 5.17 Trademarks. Prior to the Closing, Seller shall have caused
-------------------------
all of the service marks listed on Disclosure Schedule 4.19 to be assigned to
the Company.
Section 5.18 Cost Reimbursement Agreement.
- -------------------------------------------
(a) Prior to the Closing Date, Seller and Company shall, consistent with
past practices, comply with the terms of the Cost Reimbursement Agreement, dated
January 28, 1994 between the Company and Seller ("Cost Reimbursement Agreement")
including the practice whereby the Seller processes expenses incurred in the
operation of the Company and Seller receives all available funds paid to the
Company to be applied to reimburse Seller for all expenses incurred on behalf of
the Company, including any balances due Seller for prior periods. This practice
of processing expenses and applying funds received against amounts due to the
Seller shall be referred to as the "Settlement".
(b) Buyer and Seller agree that if the Closing Date is on or prior to April
5, 1996, the last Settlement prior to Closing will take place on March 29, 1996.
Specifically for the March 29, 1996 settlement, Seller will:
(i) process for payment all invoices received by its Accounts Payable
Department from the Company on March 29, 1996. Responsibility for payment of
these invoices will be
29
<PAGE>
retained by the Seller and added to the intercompany payable balance due
Seller from Company as of the Closing Date;
(ii) be responsible for payment of the April 5, 1996 payroll which
covers services provided to Company by the Seller's employees for the two
week period ended March 29, 1996 and added to the intercompany payable
balance due Seller from Company; and
(iii) withdraw via Federal wire transfer all available funds from the
Company's bank accounts on March 29, 1996 and deducted from the intercompany
payable balance due Seller from Company.
All invoices for expenses not processed by Seller on or before March 29,
1996, whether the related expenses were incurred prior to or after March 29,
1996 shall become the financial responsibility of the Buyer. Buyer shall be
responsible for payment of salary and related expenses for Company Employees for
March 30, 1996 and thereafter. Seller will cease daily withdrawal of available
funds from Company bank accounts after March 29, 1996.
(c) If the Closing Date is after April 5, 1996, then the last Settlement
prior to Closing shall take place on the last business day of a month, or such
other date as the parties shall mutually agree upon using procedure consistent
with those described above.
ARTICLE VI
CLOSING CONDITIONS
----------------------
Section 6.1 Conditions to Each Party's Obligation. The respective
---------------------------------------------------
obligations of each party pursuant to this Agreement shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) No temporary, preliminary or permanent injunction or other order by any
federal or state court which prevents the consummation of the transaction
contemplated by this Agreement shall have been issued and remain in effect;
(b) No action shall have been taken nor any statute, rule, regulation or
executive order have been enacted, promulgated or enforced by any court or the
government (or any governmental body or agency) that makes the consummation of
the transaction contemplated by this Agreement illegal;
(c) The applicable waiting period, if any, under the H-S-R Act shall have
expired or been terminated;
30
<PAGE>
(d) Any third party consents and governmental, regulatory or administrative
consents, approvals or notices necessary for the Company, Seller or Buyer to
consummate the transaction contemplated by this Agreement shall have been
received or given, as appropriate, and filings made;
(e) No suit, action or other proceeding or investigation shall, to the
knowledge of the Company or to the knowledge of Seller or Buyer, be threatened
or pending by any third party questioning the legality of this Agreement, or the
consummation of the transactions contemplated hereby in whole or in part; and
Section 6.2 Conditions to Obligation of the Seller. The obligation of the
-----------
Company pursuant to this Agreement shall be subject to the fulfillment at or
prior to the Closing Date of the following additional conditions (unless waived
by the Company):
(a) The representations and warranties of Buyer contained in this Agreement
shall be true in all material respects on and as of the Closing Date with the
same force and effect as though made on and as of such date and time, except as
affected by the transactions contemplated hereby and except that any such
representation and warranty made as of a specified date shall have been true on
and as of such date;
(b) Buyer shall in all material respects have performed each obligation and
agreement and complied with each covenant to be performed or complied with by it
hereunder on or before the Closing Date;
(c) The Seller shall have received such closing certificates of Buyer and of
governmental authorities as are customary for the type of transaction
contemplated and which are satisfactory to the Company's counsel; and
(d) The Seller shall have received a legal opinion from counsel to the Buyer
in form reasonably satisfactory to the Seller.
Section 6.3 Conditions to Obligations of Buyer. The obligations of Buyer
------------------------------------------------
pursuant to this Agreement shall be subject to the fulfillment at or prior to
the Closing Date of the following additional conditions (unless waived
by Buyer):
(a) The representations and warranties of the Seller contained in this
Agreement and as limited, modified or supplemented by the Disclosure Schedule,
shall be true in all material respects on and as of the Closing Date with the
same force and effect as through made on and as of such date and time, except as
affected by the transactions contemplated hereby and except that any such
representation or warranty made as of a specified date shall have been true on
and as of such date;
31
<PAGE>
(b) The Company shall in all material respects have performed each
obligation and agreement and complied with each covenant to be performed or
complied with by it hereunder on or before the Closing Date;
(c) Buyer shall have received such closing certificates of the Seller and of
governmental authorities as are customary for the type of transaction
contemplated and which are satisfactory to Buyer's counsel;
(d) Since the date of this Agreement and prior to Closing, there shall have
been no material adverse change in the condition (financial or otherwise),
assets, liabilities, earnings, business or of the Company;
(e) Company shall have received the resignations of each of the members of
Boards of Directors and the officers of the Company, in each case to be
effective as of the date immediately following the Closing Date;
(f) The Buyer shall have received a legal opinion from counsel to the Seller
and the Company in form reasonably satisfactory to the Buyer;
(g) The Seller and Company shall have terminated, as of the Closing Date,
the Cost Reimbursement Agreement such that neither the Seller or Company will
have any further obligation under the Cost Reimbursement Agreement, including
but not limited to payment of any intercompany balance as of the Closing Date;
(h) Buyer shall have received the audited 1993, 1994 and 1995 Audited
Financial Statements, as provided for in Section 5.16, and, with respect to the
1994 and 1995 Audited Financial Statements, Arthur Andersen shall have issued an
unqualified opinion, without material adverse audit adjustments; provided that
any necessary audit adjustments for restatement of restructuring expenses shall
not be considered a material adverse audit adjustment; and
(i) Seller shall have caused the assignment to Company all rights in the
service marks listed on Disclosure Schedule 4.19.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
-----------------------------------------
Section 7.1 Termination. This Agreement may be terminated and the
-------------------------
transaction abandoned at any time prior to the Closing Date:
(a) by mutual written consent of the parties;
32
<PAGE>
(b) by any party, by notice to the other parties, if at any time prior to
the Closing Date,
(i) another party shall have materially breached its representations,
warranties or covenants contained herein and, upon receiving notice, is
unwilling or unable to remedy such breach within ten (10) days following
receipt by the breaching party of notice of such breach from the
non-breaching party; provided that, in the case of any such breach that is
susceptible of cure but that cannot with diligence be cured within such ten
(10) day period, if the party in breach shall promptly have commenced to
cure the same and shall thereafter prosecute the curing thereof with
reasonable diligence, the period within which such breach may be cured shall
be extended by the shorter of thirty (30) days or for such further period as
shall be necessary for the curing thereof with reasonable diligence, or
(c) By any party, if the transaction contemplated by this Agreement shall
not have been consummated prior to May 31, 1996, provided that no party who has
caused such transaction not to have been consummated may terminate this
Agreement pursuant to this clause (c).
Section 7.2 Effect of Termination. In the event of the termination of this
-----------------------------------
Agreement under Section 7.1, this Agreement shall have no further force or
effect and there shall be no further obligation hereunder on the part of Buyer
and Seller or their respective officers or directors, except for compliance with
the provisions of any and all confidentiality agreements executed by Buyer or
any of its Affiliates and the Seller prior to the execution of this Agreement,
and claims for breach of this Agreement.
Section 7.3 Fees and Expenses.
- -------------------------------
(a) The Buyer shall pay all H-S-R Act filing fees. All other Expenses
incurred by the Buyer shall be borne solely and entirely by the Buyer and all
Expenses of the Company, the Seller and their affiliates shall be borne by the
Seller. For the purposes of this paragraph, apportionment of salaries for time
spent by Company Employees as part of their duties for the Company shall not be
considered Expenses.
(b) "Expenses" as used in this Agreement shall include all reasonable
out-of-pocket expenses (including, without limitation, all fees and expenses of
counsel, accountants, investment bankers, experts and consultants to a party
hereto and its Affiliates) incurred by a party or on its behalf in connection
with or related to the authorization, preparation, negotiation, execution and
performance of this Agreement and all other matters related to the closing of
the transactions contemplated herein.
Section 7.4 Amendment. This Agreement may not be amended except by an
-----------------------
instrument in writing signed on behalf of each of the parties.
33
<PAGE>
Section 7.5 Waiver. At any time prior to the Closing Date, any term,
-------------------
provision or condition of this Agreement may be waived in writing (or the time
for performance of any of the obligations or other acts of the other parties may
be extended) by the party which is, or the party the shareholders of which are,
entitled to the benefits thereof. Any agreement on the part of a party to any
such extension or waiver, shall be valid if set forth in an instrument in
writing signed on behalf of such party by a duly authorized officer.
ARTICLE VIII
GENERAL PROVISIONS
----------------------
Section 8.1 Notice of Breach. Each party will promptly give written notice
-----------------------------
to the other parties upon becoming aware of the occurrence, or impending or
threatened occurrence, of any event which would cause or constitute a material
breach of any of its representations, warranties or covenants contained or
referred to in this Agreement and will use its best efforts to prevent or
promptly remedy the same.
Section 8.2 Publicity. So long as this Agreement is in effect, neither the
----------------------
Seller, Company nor the Buyer, or any of their respective Affiliates, shall
issue or cause the publication of any press release or other public announcement
with respect to this Agreement without prior consultation with the other party,
except as may be required by law.
Section 8.3 Assignment. Buyer shall have the right to assign to one or more
-----------------------
of its Affiliates all but not less than all of its rights together with all of
its obligations under this Agreement. Buyer may not otherwise assign this
Agreement or any of its rights or obligations hereunder without prior written
consent of the Seller. The Seller may not assign this Agreement or any of its
rights hereunder without the prior written consent of Buyer. Notwithstanding any
assignment by Buyer, Buyer shall continue to be liable under this Agreement to
the same extent as if the assignment were not made to the extent Buyer's
assignee fails to perform or comply with any provision of this Agreement.
Section 8.4 Interpretation. The headings contained in this Agreement are
---------------------------
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. The Disclosure Schedule shall be deemed to be
a part of this Agreement.
Section 8.5 Notices. All notices and other communications hereunder shall
--------------------
be in writing and shall be deemed to have been duly given when delivered
personally or by cable, telex, telecopier or telegram or by certified mail
(return receipt requested) to the parties at the following addresses (or at such
other addresses for a party as shall be specified by like notice):
34
<PAGE>
(a) To Seller:
United Healthcare Services, Inc.
300 Opus Center
9900 Bren Road East
Minnetonka, Minnesota 55343
Attention: William W. McGuire, M.D.
Telecopier No.: (612) 936-0044
With copies to:
United HealthCare
8330 Boone Boulevard, Suite 300
Vienna, Virginia 22182
Attention: James M. Michener
Telecopier No.: (703) 918-4057
(b) To Buyer:
CRA Managed Care, Inc.
312 Union Wharf
Boston, Massachusetts 02109
Attention: John McCarthy
Telecopier No.: (617) 367-8519
With copies to:
Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, Massachusetts 02110
Attention: James Westra, Esq.
Telecopier No.: (617) 951-1295
Section 8.6 Separability. Any term or provision of this Agreement which is
-------------------------
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
35
<PAGE>
Section 8.7 Specific Performance. Each of Seller and Buyer acknowledge that
---------------------------------
(a) they will not have any adequate remedy at law if the other fails to
perform any of its obligations hereunder; and
(b) each shall have the right, in addition to any other rights it may have,
to obtain in any court of competent jurisdiction injunctive relief to restrain
any breach or threatened breach or otherwise specifically to enforce any of the
obligations of the other under this Agreement if the other shall fail to perform
any of its obligations hereunder.
Section 8.8 Entire Agreement. This Agreement shall be construed together to
-----------------------------
constitute the entire agreement and to supersede all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof and thereof.
Section 8.9 Governing Law. This Agreement shall be governed by, and
--------------------------
construed and enforced in accordance with, the laws of the State of Minnesota
without giving effect to the conflict of law principles thereof.
Section 8.10 Dispute Resolution and Remedies. Any dispute arising between
---------------------------------------------
the parties relating to this Agreement or the transactions contemplated hereby,
including any dispute relating to termination of this Agreement, shall be
resolved by binding arbitration pursuant to the Rules of the American
Arbitration Association. In no event may the arbitration be initiated more than
one year after the date one party first gave written notice of the dispute to
the other party. The arbitrators shall have no power to award any punitive or
exemplary damages or to ignore or vary the terms of this Agreement and shall be
bound by controlling law. The provisions of this Section 8.10 shall survive any
termination of this Agreement.
Section 8.11 Counterparts. This Agreement may be executed in one or more
--------------------------
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the same
instrument.
Section 8.12 No Third Party Benefit. This Agreement is solely for the
------------------------------------
benefit of, and shall be enforceable by and against only, the parties and their
respective successors, and permitted assigns, and does not and shall not be
construed to confer on or provide to any other person any obligations,
privileges, rights or remedies.
[INTENTIONALLY LEFT BLANK]
36
<PAGE>
IN WITNESS WHEREOF, the Seller and Buyer have caused this Agreement to be
signed by their respective officers thereunto duly authorized all as of the date
first written above.
UNITED HEALTHCARE SERVICES, INC.
By: /s/ David P. Koppe
---------------------------
Its: CFO
---------------------------
CRA MANAGED CARE, INC.
By: /s/ Donald J. Larson
---------------------------
Its: CEO
---------------------------
37
<PAGE>
AGREEMENT AND PLAN OF MERGER
AMONG
CRA MANAGED CARE, INC.,
PAI ACQUISITION CORP.
(A WHOLLY OWNED SUBSIDIARY OF CRA MANAGED CARE, INC.),
PROMPT ASSOCIATES, INC.
AND
THE OTHER SIGNATORIES HERETO
DATED AS OF
OCTOBER 28, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
DEFINITIONS...............................................................1
ARTICLE II
THE MERGER................................................................6
2.01. The Merger......................................................6
(a) THE MERGER.................................................6
(b) EFFECTIVE TIME.............................................6
2.02. SURVIVING CORPORATION...........................................7
(a) CERTIFICATE OF INCORPORATION...............................7
(b) BYLAWS.....................................................7
(c) DIRECTORS AND OFFICERS.....................................7
2.03. THE CLOSING.....................................................7
2.04. CONVERSION OF COMMON STOCK AND PREFERRED STOCK;
OPTIONS; TREASURY STOCK.........................................7
(a) COMMON STOCK...............................................7
(b) PREFERRED STOCK............................................7
(c) OPTIONS....................................................7
(d) TREASURY STOCK.............................................8
2.05. DELIVERIES BY THE COMPANY TO THE BUYER..........................8
2.06. DELIVERIES BY CRA TO THE COMPANY................................8
2.07. ACTIONS OF THE SURVIVING CORPORATION............................9
(a) CERTIFICATE OF MERGER......................................9
(b) PAYMENT OF CASH PURCHASE PRICE.............................9
(c) ESCROW.....................................................9
(d) CANCELLATION OF CERTIFICATES AND OPTION AGREEMENTS.........9
2.08. ADJUSTMENT OF CASH PURCHASE PRICE...............................9
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................11
3.01. ORGANIZATION...................................................11
3.02. AUTHORIZATION OF TRANSACTION...................................11
3.03. NON-CONTRAVENTION..............................................11
3.04. OWNERSHIP OF STOCK.............................................12
3.05. TITLE TO TANGIBLE ASSETS.......................................12
3.06. FINANCIAL STATEMENTS...........................................12
3.07. LEGAL COMPLIANCE...............................................12
3.08. TAX MATTERS....................................................12
3.09. REAL PROPERTY..................................................14
3.10. CONTRACTS......................................................14
3.11. LITIGATION.....................................................14
3.12. EMPLOYEE BENEFITS..............................................15
(i)
<PAGE>
3.13. INTELLECTUAL PROPERTY..........................................16
3.14. SUBSIDIARIES...................................................16
3.15. INSURANCE......................................................16
3.16. AFFILIATED TRANSACTIONS........................................16
3.17. BROKERS' FEES..................................................17
3.18. UNDISCLOSED LIABILITIES........................................17
3.19. SUBSEQUENT EVENTS..............................................17
3.20. DISCLOSURE.....................................................18
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
AND THE OPTIONHOLDERS....................................................18
4.01. ORGANIZATION OF CERTAIN STOCKHOLDERS...........................18
4.02. AUTHORIZATION OF TRANSACTION...................................19
4.03. NON-CONTRAVENTION..............................................19
4.04. OWNERSHIP OF STOCK AND OPTIONS.................................19
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BUYER AND CRA......................19
5.01. ORGANIZATION...................................................19
5.02. AUTHORIZATION OF TRANSACTION...................................19
5.03. NON-CONTRAVENTION..............................................20
5.04. LITIGATION.....................................................20
5.05. INVESTMENT.....................................................20
5.06. BROKERS' FEES..................................................20
ARTICLE VI
COVENANTS................................................................20
6.01. TAX MATTERS....................................................20
(a) TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE..........20
(b) TAX PERIODS BEGINNING BEFORE AND ENDING AFTER
THE CLOSING DATE...............................................21
(c) REFUNDS...................................................21
(d) COOPERATION ON CERTAIN TAX MATTERS........................22
(e) COOPERATION REGARDING GOVERNMENTAL CERTIFICATES...........22
(f) COOPERATION REGARDING REPORTING OBLIGATIONS...............22
6.02. FURTHER ASSURANCES.............................................22
6.03. BOOKS AND RECORDS; PERSONNEL...................................22
6.04. WAIVER OF APPRAISAL RIGHTS.....................................23
6.05. EMPLOYEE BONUSES...............................................23
6.06. ESTIMATED CLOSING DATE WORKING CAPITAL STATEMENT...............23
ARTICLE VII
INDEMNIFICATION..........................................................23
7.01. INDEMNIFICATION BY THE STOCKHOLDERS AND OPTIONHOLDERS..........23
7.02. INDEMNIFICATION BY THE BUYER AND CRA...........................24
(ii)
<PAGE>
7.03. SURVIVAL.......................................................24
7.04. LIMITATIONS ON INDEMNITY CLAIMS................................24
7.05. NOTICE AND OPPORTUNITY TO DEFEND...............................26
ARTICLE VIII
STOCKHOLDER REPRESENTATIVE...............................................27
ARTICLE IX
MISCELLANEOUS............................................................28
9.01. NO THIRD-PARTY BENEFICIARIES...................................28
9.02. ENTIRE AGREEMENT...............................................28
9.03. SUCCESSION AND ASSIGNMENT......................................28
9.04. COUNTERPARTS...................................................28
9.05. HEADINGS.......................................................28
9.06. NOTICES........................................................28
9.07. GOVERNING LAW..................................................30
9.08. AMENDMENTS AND WAIVERS.........................................30
9.09. SEVERABILITY...................................................30
9.10. CERTAIN TAXES..................................................30
9.11. CONSTRUCTION...................................................31
9.12. EXPENSES.......................................................31
9.13. GENDER, NUMBER.................................................31
(iii)
<PAGE>
EXHIBITS
Exhibit A -- Allocable Percentages
Exhibit B -- Selling Percentages
Exhibit 2.01(b) -- Certificate of Merger
ATTACHMENTS
Disclosure Schedule
(Copies of attachments to this agreement will be furnished by the Company
upon request.)
(iv)
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is entered into
as of October 28, 1996 by and among CRA Managed Care, Inc., a Massachusetts
corporation ("CRA"), PAI Acquisition Corp., a newly formed Delaware corporation
and a wholly owned subsidiary of CRA (the "BUYER"), Prompt Associates, Inc., a
Delaware corporation (the "COMPANY"), Summit Ventures II, L.P. ("SV-II"), Summit
Investors II, L.P. ("SI-II"), James T. Roberto ("ROBERTO"), Michael Thalasinos
("THALASINOS"), Richard Proctor ("PROCTOR" and together with SV-II, SI-II,
Roberto and Thalasinos, the "STOCKHOLDERS"), Robert Patterson, John Bonkoske,
Renee Flaherty, John Ward, Richard Gabel, Lloyd Roberts, Brad Hansen, Ann Pope,
Adele Hansen, Sharon Breon, Pat Wolfe, Vicki Cerva-Mousley, Charlie Ricevuto,
Paul Glover and Stephen Coady. Capitalized terms used herein are defined in
Article I of this Agreement.
WHEREAS, CRA, the Buyer, the Company, the Stockholders and the
Optionholders desire that the Buyer merge with and into the Company upon the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
covenants and indemnitees herein contained, the Parties agree as follows:
ARTICLE I
DEFINITIONS
"ACCOUNTANTS" means any nationally recognized firm of independent
certified public accountants, excluding Arthur Andersen and Ernst & Young LLP.
"ACTUAL CLOSING DATE WORKING CAPITAL STATEMENT" means a statement
setting forth the Company's Total Current Assets and Total Current Liabilities
as of the Closing Date, which statement shall be prepared in a manner consistent
with the preparation of the Company's unaudited balance sheet as of September
30, 1996; PROVIDED, HOWEVER, that the percentage for allowances in respect of
chargebacks, bad debts and adjustments to accounts receivable shall be the same
as the percentage for allowances in respect of chargebacks, bad debts and
adjustments to accounts receivable used in such unaudited balance sheet as of
September 30, 1996.
"ACTUAL WORKING CAPITAL AMOUNT" means the difference between (a) the
amount of Total Current Assets set forth on the Actual Closing Date Working
Capital Statement and (b) the amount of Total Current Liabilities set forth on
the Actual Closing Date Working Capital Statement.
"AFFILIATE" means as to any Person, any other Person directly or
indirectly controlling, controlled by or under common control with that Person.
<PAGE>
"AFFILIATED GROUP" means any affiliated group within the meaning of
Section 1504(a) of the Code or any similar group defined under a similar
provision of state, local, or foreign law.
"AGREEMENT" has the meaning set forth in the preface hereof.
"ALLOCABLE PERCENTAGE" means, with respect to any Stockholder, the
percentage set forth next to such Stockholder's name on EXHIBIT A hereto.
"ASSETS" has the meaning set forth in Section 3.05 hereof.
"BASKET" has the meaning set forth in Section 7.04(a) hereof.
"BUSINESS DAY" means a day other than Saturday, Sunday and any other
day on which commercial banks in Boston, Massachusetts are authorized or
required to close.
"BUYER" has the meaning set forth in the preface hereof.
"BUYER INDEMNITEES" has the meaning set forth in Section 7.01 hereof.
"CAP" has the meaning set forth in Section 7.04(a) hereof.
"CASH PURCHASE PRICE" means $30,000,000.
"CERTIFICATE OF MERGER" has the meaning set forth in Section 2.01(b)
hereof.
"CLOSING" has the meaning set forth in Section 2.03 hereof.
"CLOSING DATE" has the meaning set forth in Section 2.03 hereof.
"CODE" means the Internal Revenue Code of 1986, as amended and the
regulations promulgated thereunder.
"COMMON SHARES" has the meaning set forth in Section 3.04(b) hereof.
"COMMON STOCK" has the meaning set forth in Section 3.04(b) hereof.
"COMPANY" has the meaning set forth in the preface hereof.
"COMPANY INDEMNITEES" has the meaning set forth in Section 7.02
hereof.
"CRA" has the meaning set forth in the preface hereof.
"DAMAGES" has the meaning set forth in Section 7.01 hereof.
"DISCLOSURE SCHEDULE" has the meaning set forth in Section 3.01
hereof.
-2-
<PAGE>
"EFFECTIVE TIME" has the meaning set forth in Section 2.01(b) hereof.
"EMPLOYEE BENEFIT PLAN" means (a) each "employee benefit plan" (as
such term is defined in Section 3(3) of ERISA) contributed to, maintained or
sponsored by the Company, and (b) each other retirement, savings, deferred
compensation, severance, stock, performance, bonus, cafeteria, incentive,
vacation or holiday pay, travel, fringe benefit, disability, life or other
insurance, or other employee benefit plan or arrangement contributed to,
maintained or sponsored by the Company.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESCROW AMOUNT" means $554,728.
"ESTIMATED CLOSING DATE WORKING CAPITAL STATEMENT" means a statement
delivered at the Closing setting forth the Company's good faith estimate of the
Company's Total Current Assets and Total Current Liabilities as of the Closing
Date, which statement shall be prepared in a manner consistent with the
preparation of the Company's unaudited balance sheet as of September 30, 1996;
PROVIDED, HOWEVER, that the percentage for allowances in respect of chargebacks,
bad debts and adjustments to accounts receivable shall be the same as the
percentage for allowances in respect of chargebacks, bad debts and adjustments
to accounts receivable used in such unaudited balance sheet as of September 30,
1996.
"EXERCISE PRICE" means, with respect to an Option, the price per share
of Common Stock the applicable Optionholder must pay to the Company upon
exercise of such Option.
"FINANCIAL STATEMENTS" has the meaning set forth in Section 3.06
hereof.
"GAAP" means United States generally accepted accounting principles as
in effect for the period for which it is referred to herein.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereof.
"INCOME TAX" means any federal, state, local, or foreign income tax,
including any interest, penalty, or addition thereto, whether disputed or not.
"INCOME TAX RETURN" means any return, declaration, report, claim for
refund, or information return or statement relating to Income Taxes, including
any schedule or attachment thereto.
"INDEBTEDNESS FOR MONEY BORROWED" means indebtedness incurred by the
Company for borrowed money but does not include accounts payable or other
accruals in the ordinary course of business.
"INDEMNIFYING PARTY" has the meaning set forth in Section 7.05(a)
hereof.
-3-
<PAGE>
"INTELLECTUAL PROPERTY RIGHTS" means all of the following used by,
owned by, issued to or licensed to the Company: (i) patents and patent
applications, and any reissuances, continuations, continuations-in-part,
revisions, extensions or reexaminations thereof; (ii) trademarks, service marks,
trade dress, logos, trade names and corporate names, together with all goodwill
associated therewith; (iii) copyrights and copyrightable works; mask works; and
registrations, applications and renewals for any of the foregoing; (iv) trade
secrets; (v) computer software; and (vi) all copies and tangible embodiments of
the foregoing (in whatever form or medium).
"KNOWLEDGE" means (a) with respect to the Company, the actual
knowledge of Roberto or Robert Patterson, and (b) with respect to the Buyer or
CRA, the actual knowledge of any of Donald J. Larson, John McCarthy or Joseph F.
Pesce.
"LIEN" means any mortgage, pledge, lien, charge, security interest,
adverse claim, option, right, restriction on transfer or other encumbrance of
any nature.
"MATERIAL ADVERSE EFFECT" means (a) when used in Article III hereof, a
material adverse effect on the operations, assets, liabilities or condition
(financial or otherwise) of the Company or on the ability of the Company to
consummate the transactions contemplated by this Agreement and (b) when used in
Article IV hereof, a material adverse effect on the ability of a Stockholder or
Optionholder to consummate the transactions contemplated by this Agreement.
"MERGER" has the meaning set forth in Section 2.01(a) hereof.
"OBJECTION PERIOD" has the meaning set forth in Section 2.08(b).
"OPTION" means the option to acquire shares of Common Stock granted to
an Optionholder pursuant to such Optionholder's Option Agreement.
"OPTION AGREEMENTS" means (a) the Time Accelerated Stock Option
Agreement dated December 29, 1994 between the Company and Roberto, and (b) the
Stock Option Agreements between the Company and each of Robert Patterson, John
Bonkoske, Renee Flaherty, John Ward, Richard Gabel, Lloyd Roberts, Brad Hansen,
Ann Pope, Adele Hansen, Sharon Breon, Pat Wolfe, Vicki Cerva-Mousley, Charlie
Ricevuto, Paul Glover and Stephen Coady entered into pursuant to the Company's
1995 Stock Option Plan.
"OPTIONHOLDER" means each of Roberto, Robert Patterson, John Bonkoske,
Renee Flaherty, John Ward, Richard Gabel, Lloyd Roberts, Brad Hansen, Ann Pope,
Adele Hansen, Sharon Breon, Pat Wolfe, Vicki Cerva-Mousley, Charlie Ricevuto,
Paul Glover and Stephen Coady, each in his or her capacity as an Optionholder.
"OPTION SHARES" has the meaning set forth in Section 2.04(c)(ii)
hereof.
"PARTY" means any of CRA, the Buyer, the Company, the Stockholders or
the Optionholders.
-4-
<PAGE>
"PERSON" means an individual, a partnership, a corporation, an
association, a limited liability company, a joint stock company, a trust, a
joint venture, an unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"PREFERRED SHARES" has the meaning set forth in Section 3.04(a)
hereof.
"PROCTOR" has the meaning set forth in the preface hereof.
"PURCHASE PRICE DECREASE" has the meaning set forth in Section
2.08(a)(ii) hereof.
"PURCHASE PRICE INCREASE" has the meaning set forth in Section
2.08(a)(i) hereof.
"PURCHASE PRICE PER SHARE" means the quotient of (a) the sum of (i)
the difference between (A) the Cash Purchase Price and (B) the sum of (1) the
product of (x) $100 and (y) the number of Preferred Shares outstanding
immediately prior to the Effective Time and (2) the Escrow Amount, and (ii)
$81,444.50 divided by (b) 554,728.
"ROBERTO" has the meaning set forth in the preface hereof.
"SELLING PERCENTAGE" means, with respect to any Stockholder or
Optionholder, the percentage set forth next to such Stockholder's or
Optionholder's name on EXHIBIT B hereto.
"SEPTEMBER FINANCIALS" means the unaudited balance sheet of the
Company as of September 30, 1996 and the unaudited statements of operations,
stockholders' equity (deficiency) and cash flows of the Company for the nine
months then-ended.
"SERIES A PREFERRED STOCK" has the meaning set forth in Section
3.04(a) hereof.
"SHARES" means, collectively, the Preferred Shares and the Common
Shares.
"SI-II" has the meaning set forth in the preface hereof.
"STOCKHOLDER REPRESENTATIVE" has the meaning set forth in Article VIII
hereof.
"STOCKHOLDERS" has the meaning set forth in the preface hereof.
"SUBSIDIARY" means any corporation or partnership of which securities
or other ownership interests representing more than fifty percent of the
ordinary voting power or more than fifty percent of the general partnership
interests are owned, directly or indirectly, by the Company.
"SURVIVING CORPORATION" has the meaning set forth in Section 2.01(a)
hereof.
"SV-II" has the meaning set forth in the preface hereof.
-5-
<PAGE>
"TAX" means any federal, state, local or foreign income, gross
receipts, franchise, estimated, alternative minimum, add-on minimum, sales, use,
transfer, registration, value added, excise, natural resources, severance,
stamp, occupation, premium, windfall profit, environmental, customs, duties,
real property, personal property, capital stock, social security, unemployment,
disability, payroll, license, employee or other withholding, back-up withholding
or other tax, of any kind whatsoever, including any interest, penalties or
additions to tax or additional amounts in respect of the foregoing (whether
disputed or not).
"TAX RETURNS" means returns, declarations, reports, claims for refund,
amended returns, information returns or other documents (including any related
or supporting schedules, statements or information) filed or maintained or
required to be filed or maintained in connection with (a) the determination,
assessment or collection of Taxes of any party or (b) the administration of any
laws, regulations or administrative requirements relating to any Taxes.
"THALASINOS" has the meaning set forth in the preface hereof.
"TOTAL CURRENT ASSETS" means cash and cash equivalents, accounts
receivable (net of reserves), and prepaid expenses (including prepaid Income
Taxes) (but not including the current portion of the deferred Tax asset).
"TOTAL CURRENT LIABILITIES" means accounts payable, and wages and
vacation payable (but not including the current portion of Taxes payable).
"TRANSFER TAXES" has the meaning set forth in Section 9.10 hereof.
"TRANSFER TAX RETURNS" has the meaning set forth in Section 9.10
hereof.
ARTICLE II
THE MERGER
2.01. The Merger.
(a) THE MERGER. On the terms and subject to the conditions contained
in this Agreement, the Buyer will merge with and into the Company (the "MERGER")
with the Company being the surviving entity of the Merger (the "SURVIVING
CORPORATION"). The Merger shall have the effect set forth in the Delaware
General Corporation Law. The Surviving Corporation may, at any time after the
Effective Time, take any action (including executing and delivering any
document) in the name and on behalf of either the Buyer or the Company in order
to carry out and effectuate the transactions contemplated by this Agreement.
(b) EFFECTIVE TIME. The Merger shall become effective at the time
(the "EFFECTIVE TIME") that the Buyer and the Company file a certificate of
merger in the form attached hereto as EXHIBIT 2.01(B) (the "CERTIFICATE OF
MERGER") with the Secretary of State of the State of Delaware.
-6-
<PAGE>
2.02. SURVIVING CORPORATION.
(a) CERTIFICATE OF INCORPORATION. The Certificate of Merger shall
amend and restate the certificate of incorporation of the Surviving Corporation
in its entirety at and as of the Effective Time to read as did the certificate
of incorporation of the Buyer immediately prior to the Effective Time.
(b) BYLAWS. The bylaws of the Surviving Corporation shall be amended
and restated in their entirety at and as of the Effective Time to read as did
the bylaws of the Buyer immediately prior to the Effective Time.
(c) DIRECTORS AND OFFICERS. The directors and officers of the Buyer
shall become the directors and officers of the Surviving Corporation at and as
of the Effective Time (retaining their respective positions and terms of
office).
2.03. THE CLOSING. The closing (the "CLOSING") of the
transactions contemplated in this Agreement shall take place at the offices of
Hutchins, Wheeler & Dittmar, at 101 Federal Street, Boston, Massachusetts,
commencing at 10:00 a.m., local time on October 28, 1996 (the "CLOSING DATE").
2.04. CONVERSION OF COMMON STOCK AND PREFERRED STOCK; OPTIONS;
TREASURY STOCK.
(a) COMMON STOCK. At and as of the Effective Time, each outstanding
share of Common Stock shall, by virtue of the Merger and without any action on
the part of the holder thereof, be converted into the right to receive, and
become exchangeable for, cash in the amount of the Purchase Price Per Share.
After the Effective Time, no share of Common Stock shall be deemed to be
outstanding or to have any rights other than those set forth in this Section
2.04(a) and Section 2.08.
(b) PREFERRED STOCK. At and as of the Effective Time, each
outstanding share of Series A Preferred Stock shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into the
right to receive, and become exchangeable for, cash in the amount of One Hundred
Dollars ($100) per share. After the Effective Time, no share of Series A
Preferred Stock shall be deemed to be outstanding or to have any rights other
than those set forth in this Section 2.04(b).
(c) OPTIONS. Notwithstanding any provision to the contrary contained
in the Option Agreements, the Company, the Stockholders and the Optionholders
agree that, in consideration of the transactions contemplated by this Agreement,
immediately prior to the Effective Time, each Option shall become fully vested
and immediately exercisable, without any further action on the part of the
Company or the Optionholders. At and as of the Effective Time, each
Optionholder shall be entitled to receive, in respect of his Option, an amount
in cash equal to the product of (i) the Purchase Price Per Share LESS the
Exercise Price for such Option and (ii) the number of shares of Common Stock
issuable upon exercise of such Optionholder's Option (after giving effect to the
first sentence of this Section 2.04(c)) (the "OPTION SHARES"). The Surviving
-7-
<PAGE>
Corporation shall withhold all withholding Taxes applicable to said payments.
After the Effective Time, no Option shall be deemed to be outstanding or to have
any rights other than those set forth in this Section 2.04(c) and Section 2.08.
(d) TREASURY STOCK. Notwithstanding any provision of this Agreement
to the contrary, each share of Common Stock held in the treasury of the Company
immediately prior to the Effective Time shall be canceled and extinguished
without any conversion thereof and no payment shall be made with respect
thereto.
2.05. DELIVERIES BY THE COMPANY TO THE BUYER. At the Closing, the
Company shall deliver or cause to be delivered to the Buyer the following:
(a) certificates executed by the Secretary of the Company certifying
as to resolutions of the board of directors of the Company and the Stockholders
authorizing the execution, delivery and consummation of the transactions
contemplated by this Agreement;
(b) a certificate of the Secretary of the Company certifying as to
the incumbency of the officers of the Company and as to the signatures of such
officers who have executed documents delivered at the Closing on behalf of the
Company;
(c) a certificate, dated within three Business Days of the Closing
Date, of the Secretary of State of the State of Delaware establishing that the
Company is in existence and otherwise is in good standing to transact business
in its state of incorporation;
(d) certificates, dated within twenty days of the Closing Date, of
the Secretaries of State of the states in which the Company is qualified to do
business, to the effect that the Company is qualified to do business and is in
good standing as a foreign corporation in each of such states;
(e) an opinion, dated as of the Closing Date, from Kirkland & Ellis,
special counsel to the Company, in a form reasonably acceptable to CRA and its
counsel;
(f) the Estimated Closing Date Working Capital Statement (which shall
be prepared in good faith by the Company); and
(g) a general mutual release of claims between the Company and each
of Thalasinos and Proctor.
2.06. DELIVERIES BY CRA TO THE COMPANY. At the Closing, CRA shall
deliver or cause to be delivered to the Company the following:
(a) certificates executed by the Secretary of each of the Buyer and
CRA, certifying as to resolutions of the boards of directors of the Buyer and
CRA (on its own behalf and as sole stockholder of the Buyer), as the case may
be, authorizing the execution, delivery and consummation of this Agreement;
-8-
<PAGE>
(b) a certificate of the Secretary of each of the Buyer and CRA
certifying as to the incumbency of the officers of the Buyer or CRA, as
applicable, and as to the signatures of such officers who have executed
documents delivered at the Closing on behalf of the Buyer or CRA, as applicable;
(c) a certificate, dated within three Business Days of the Closing
Date, of the Secretary of State of the State of Delaware establishing that the
Buyer is in existence and otherwise is in good standing to transact business in
its state of incorporation; and
(d) an opinion, dated as of the Closing Date, from Hutchins, Wheeler
& Dittmar, a Professional Corporation, counsel to CRA and the Buyer, in a form
reasonably acceptable to the Company and its special counsel.
2.07. ACTIONS OF THE SURVIVING CORPORATION.
(a) CERTIFICATE OF MERGER. At the Closing, the Buyer and the Company
will file with the Secretary of State of the State of Delaware the Certificate
of Merger.
(b) PAYMENT OF CASH PURCHASE PRICE. At the Effective Time, the
Surviving Corporation shall deliver the cash payments due to each of (i) the
Stockholders pursuant to Sections 2.04(a) and (b) by wire transfer of
immediately available funds to an account designated by such Stockholder and
(ii) the Optionholders pursuant to Section 2.04(c) by wire transfer of
immediately available funds to an account designated by such Optionholder or,
within three Business Days of the Closing Date, by check of the Surviving
Corporation, such means of payment being determined by CRA in its sole
discretion.
(c) ESCROW. On the Closing Date, the Escrow Amount shall be
delivered by the Surviving Corporation, on behalf of the Stockholders and the
Optionholders, by wire transfer of immediately available funds to an account
designated by the Stockholder Representative, to be held by the Stockholder
Representative as escrow agent under an Escrow Agreement dated as of the Closing
Date among the Stockholder Representative, as escrow agent, and the Stockholders
and the Optionholders.
(d) CANCELLATION OF CERTIFICATES AND OPTION AGREEMENTS. In addition,
at the Effective Time, the Company shall deliver or cause to be delivered
certificates evidencing the Shares and the Option Agreements to the Surviving
Corporation for cancellation.
2.08. ADJUSTMENT OF CASH PURCHASE PRICE.
(a) As promptly as practicable, but in any event within thirty (30)
calendar days following the Closing Date, the Surviving Corporation shall
deliver to the Stockholder Representative the Actual Closing Date Working
Capital Statement. The Cash Purchase Price shall be adjusted based on the
Actual Working Capital Amount shown on the Actual Closing Date Working Capital
Statement, as follows:
-9-
<PAGE>
(i) if the Actual Working Capital Amount is in excess of
$500,000, the Cash Purchase Price shall be increased by such excess (the
"PURCHASE PRICE INCREASE"), and within three (3) Business Days after the
later of the expiration of the Objection Period and the date upon which any
disputes are resolved as provided in clause (b) of this Section 2.08, such
Purchase Price Increase shall be paid in cash to the Stockholder
Representative by the Surviving Corporation for distribution among the
Stockholders and Optionholders in accordance with their respective Selling
Percentage; provided, however, that the maximum amount of such Purchase
Price Increase shall be the amount of cash and cash equivalents of the
Company on October 28, 1995 less $50,000; or
(ii) if the Actual Working Capital Amount is less than $500,000,
the Cash Purchase Price shall be reduced by the amount by which such actual
Working Capital Amount is less than $500,000 (the "PURCHASE PRICE
DECREASE"), and within three (3) Business Days after the later of the
expiration of the Objection Period and the date upon which any disputes are
resolved as provided in clause (b) of this Section 2.08, such Purchase
Price Decrease shall be paid in cash to CRA by the Stockholder
Representative from the Escrow Amount on behalf of the Stockholders and the
Optionholders as provided in the Escrow Agreement; PROVIDED that if the
Purchase Price Decrease exceeds the Escrow Amount, such excess shall be
payable by the Stockholders and the Optionholders in accordance with their
respective Selling Percentage. In the event there is a Purchase Price
Decrease pursuant to this Section 2.08 and CRA is not paid from the Escrow
Amount, the Stockholder Representative shall be personally liable to CRA
(which liability shall not be duplicative of its obligations pursuant to
the immediately preceding sentence) for such Purchase Price Decrease;
PROVIDED that the Stockholder Representative shall only be liable, pursuant
to its obligations under this sentence, for an amount equal to the lesser
of (x) such Purchase Price Decrease and (y) the Escrow Amount.
(b) The Stockholder Representative shall have thirty (30) Business
Days after delivery by the Surviving Corporation of the Actual Closing Date
Working Capital Statement (the "OBJECTION PERIOD") to object to any item or
items shown on the Actual Closing Date Working Capital Statement. During the
Objection Period, the Stockholder Representative shall have access to, and shall
be entitled to receive copies of, all work papers of the Surviving Corporation
which were used in the preparation of the Actual Closing Date Working Capital
Statement. If the Stockholder Representative does not object during the
Objection Period, the Actual Closing Date Working Capital Statement received by
the Stockholder Representative shall be conclusive and binding on the parties
hereto and may not be challenged by any of them in any forum. If the
Stockholder Representative does object during the Objection Period, and
thereafter the Stockholder Representative and the Surviving Corporation are
unable to resolve such dispute with respect to the Actual Closing Date Working
Capital Statement within thirty (30) Business Days after delivery by the
Stockholder Representative of its objections, the matter or matters in dispute
shall be submitted to such firm of Accountants as the Surviving Corporation and
the Stockholders Representative may agree. If they cannot so agree, the
Surviving Corporation shall select one such firm and the Stockholder
Representative shall select another, and the two Accountants so chosen shall
select a third firm of Accountants to which such dispute shall be submitted.
The Accountant chosen, whether by agreement of the Surviving Corporation and the
Stockholder Representative or by their
-10-
<PAGE>
respective Accountants, shall be limited to determining a value for those items
on the Actual Closing Date Working Capital Statement that are disputed by the
Surviving Corporation and the Stockholder Representative in accordance with this
Section 2.08(b) and are not resolved by agreement between the Surviving
Corporation and the Stockholder Representative. The decision of such Accountant
shall be conclusive and binding upon the Surviving Corporation and the
Stockholder Representative and may not be challenged by either of them in any
forum, and the fees and costs therefor shall be borne equally by the Surviving
Corporation, on the one hand, and the Stockholders and the Optionholders, on the
other hand (in accordance with their respective Selling Percentage).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Buyer and CRA as
follows:
3.01. ORGANIZATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Section 3.01 of the disclosure schedule attached hereto (the "DISCLOSURE
SCHEDULE") sets forth a list of all jurisdictions in which the Company is
qualified to do business, as well as complete and correct copies of the
certificate of incorporation of the Company and the bylaws of the Company, in
each case with all amendments thereto. The Company is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the ownership, use or occupancy of its assets or the conduct of its
business requires such qualification, EXCEPT where the failure to be so
licensed, qualified or in good standing would not be reasonably likely to have a
Material Adverse Effect.
3.02. AUTHORIZATION OF TRANSACTION. The Company has full power
and authority to execute and deliver this Agreement and to perform its
obligations hereunder. Without limiting the generality of the foregoing, the
board of directors of the Company and the Stockholders have duly authorized the
execution, delivery, and performance of this Agreement by the Company. This
Agreement constitutes the valid and legally binding obligation of the Company,
enforceable against the Company in accordance with its terms and conditions. No
Stockholder has perfected his or its appraisal rights under the Delaware General
Corporation Law with respect to the Merger.
3.03. NON-CONTRAVENTION. Neither the execution and the delivery
of this Agreement, nor the consummation of the transactions contemplated hereby,
will (a) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, or other restriction of any government,
governmental agency, or court to which the Company is subject, (b) violate any
provision of the certificate of incorporation or bylaws of the Company, or (c)
except as set forth in Section 3.03(c) of the Disclosure Schedule, conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any Person the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, contract, lease,
license, instrument, or other arrangement which is required to be disclosed
under Section 3.09 or 3.10 of this Agreement. The Company is not required to
give any notice to, make any filing with, or obtain any authorization, consent,
or approval of any government or governmental agency in order for the Company to
consummate the transactions contemplated by this Agreement, EXCEPT (i) for
filings under the HSR
-11-
<PAGE>
Act, which filings have already been made and with respect to which all
applicable writing periods have expired or been terminated, and the filing of
the Certificate of Merger with the Secretary of State of the State of Delaware,
and (ii) as listed in Section 3.03 of the Disclosure Schedule.
3.04. OWNERSHIP OF STOCK. The authorized capital stock of the
Company consists of (a) 78,000 shares of Series A Preferred Stock, par value
$.001 per share (the "SERIES A PREFERRED STOCK"), all of which were issued and
outstanding prior to the redemption of a certain portion of such shares
immediately prior to the Effective Time (the "PREFERRED SHARES"), and (b)
1,500,000 shares of Common Stock, par value $.001 per share (the "COMMON
STOCK"), of which only 500,000 shares are issued and outstanding (the "COMMON
SHARES"). Except for Options representing 54,728 Option Shares, at the
Effective Time, there will be no outstanding subscriptions, options, warrants,
calls, rights, contracts, commitments, understandings or arrangements relating
to the issuance, sale or transfer of any Series A Preferred Stock or Common
Stock. The Shares are fully paid, nonassessable and free of preemptive rights.
3.05. TITLE TO TANGIBLE ASSETS. The Company has good title to, or
a valid leasehold interest in, the material tangible assets it uses regularly in
the conduct of its business as presently conducted (the "ASSETS"). The Assets
that are owned by the Company are free and clear of Liens, other than the Liens
set forth in Section 3.05 of the Disclosure Schedule.
3.06. FINANCIAL STATEMENTS. Section 3.06 of the Disclosure
Schedule sets forth the following financial statements (collectively the
"FINANCIAL STATEMENTS"): (a) the audited balance sheets of the Company as of
December 31, 1995 and 1994, respectively, and the audited statements of
operations, stockholders' equity (deficiency) and cash flows of the Company for
the fiscal years ended December 31, 1995 and 1994, respectively, and (b) the
September Financials. The Financial Statements (including the notes thereto)
have been prepared in accordance with GAAP applied on a consistent basis
throughout the periods covered thereby and present fairly in all material
respects the financial condition of the Company as of such dates and the results
of operations of the Company for such periods; PROVIDED, HOWEVER, that the
September Financials are subject to normal year-end adjustments and lack
footnotes. Immediately prior to the Effective Time, the Company will have no
Indebtedness for Money Borrowed.
3.07. LEGAL COMPLIANCE. Except as set forth in Section 3.07 of
the Disclosure Schedule, the Company is in material compliance with all
applicable laws (including rules and regulations thereunder) of federal, state,
local, and foreign governments (and all agencies thereof).
3.08. TAX MATTERS.
(a) Except as set forth in Section 3.08(a) of the Disclosure
Schedule, the Company has filed all Income Tax Returns that it was required to
file. All such Income Tax Returns are complete and correct in all material
respects. All Income Taxes owed by the Company, whether or not reflected on
said Income Tax Returns, have been paid.
(b) Section 3.08(b) of the Disclosure Schedule sets forth all Income
Tax Returns filed with respect to the Company for taxable periods ended on or
after December 31, 1992, indicates
-12-
<PAGE>
those Income Tax Returns that have been audited, and indicates those Income Tax
Returns that currently are the subject of audit. The Company has made available
to the Buyer correct and complete copies of all federal Income Tax Returns,
examination reports, and statements of deficiencies assessed against or agreed
to by the Company since December 31, 1992.
(c) Except as set forth in Section 3.08(c) of the Disclosure
Schedule, since June 30, 1992, the Company has not waived any statute of
limitations in respect of Income Taxes or agreed to any extension of time with
respect to an Income Tax assessment, deficiency or liability.
(d) The Company is not a party to any Income Tax allocation or
sharing agreement.
(e) Since June 30, 1992, the Company has not been a member of an
Affiliated Group filing a consolidated federal Income Tax Return.
(f) To the best knowledge of the Company, no claim has ever been made
by any authority in a jurisdiction where the Company does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction.
(g) The Company has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third party.
(h) No officer or director (or employee responsible for Tax matters)
of the Company expects any authority to assess any additional Taxes for any
period for which a Tax Return has been filed. There is no dispute or claim
concerning any Tax liability of the Company whether (i) claimed or raised by any
authority in writing, or (ii) as to which any of the officers and directors (and
any employee responsible for tax matters) of the Company have knowledge based
upon personal contact with any agent of such authority.
(i) The Company has not filed a consent under Section 341(f) of the
Code concerning collapsible corporations.
(j) The Company has not made any payments, and is not a party to any
agreement that, under any circumstances, could obligate it to make any payment
that will not be deductible under Section 280G of the Code or that would be
subject to an excise tax under Section 4999 of the Code.
(k) The Company has disclosed on its Income Tax Returns all positions
taken therein that could give rise to a substantial understatement of federal
Income Tax within the meaning of Section 6662 of the Code.
(l) The Company has no liability for the Taxes of any person under
Treasury Regulation Section 1.1502-6 (or any similar provision of state, local
or foreign law) as a transferee or successor by contract or otherwise.
-13-
<PAGE>
(m) The Company has properly made all required adjustments under
Section 481 of the Code (or any comparable provisions of state, local or foreign
law) by reason of a change in accounting method.
(n) During the period commencing on or about April 23, 1991 and
ending on December 28, 1994, the Company was an S Corporation within the meaning
of Subtitle A, Chapter 1, Subchapter S of the Code for federal Income Tax
purposes.
(o) The Company has not been a United States Real Property Holding
Corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
3.09. REAL PROPERTY. The Company owns no real property. Section
3.09 of the Disclosure Schedule sets forth the addresses and uses of all real
property that the Company leases or subleases, and any Lien on the Company's
leasehold interest therein, specifying in the case of each such lease or
sublease, the name of the lessor or sublessor, as the case may be, and the lease
term. Except as set forth on Section 3.09 of the Disclosure Schedule, to the
Knowledge of the Company, there is no material violation of any law, regulation
or ordinance (including without limitation laws, regulations or ordinances
relating to zoning, city planning or similar matters) relating to any real
property leased or subleased by the Company. The Company is not, and to the
Knowledge of the Company, no other party to any lease referenced in Section 3.09
of the Disclosure Schedule, is in material breach or default, and no event has
occurred which with notice or lapse of time would constitute a material breach
or default by the Company, or to the Company's Knowledge, by any other party,
under any lease listed in Section 3.09 of the Disclosure Schedule.
3.10. CONTRACTS. Section 3.10 of the Disclosure Schedule sets
forth all written contracts and other written agreements (other than leases or
subleases of real property) and all legally binding oral agreements to which the
Company is a party or by which it is subject, the performance of which will
involve consideration in excess of $100,000 per annum and each written contract
or other written agreement and each legally binding oral agreement regarding the
provision of consulting services to the Company under which the Company will pay
consideration in excess of $50,000 per annum. Except as otherwise provided in
Section 3.10 of the Disclosure Schedule, the Company has made available to the
Buyer a correct and complete copy of each written contract or other written
agreement (as amended to date) set forth in Section 3.10 of the Disclosure
Schedule. Each contract or agreement listed in Section 3.10 of the Disclosure
Schedule is a legal, valid, binding, and enforceable obligation of the Company,
and in full force and effect. The Company is not, and to the Company's
Knowledge, except as set forth in Section 3.10 of the Disclosure Schedule, no
other party thereto is, in material breach or default, and no event has occurred
which with notice or lapse of time would constitute a material breach or default
by the Company, or to the Company's Knowledge, by any other party, under any
contract or agreement listed in Section 3.10 of the Disclosure Schedule.
3.11. LITIGATION. Except as set forth in Section 3.11 of the
Disclosure Schedule, there are no claims, actions, suits, arbitrations,
proceedings or investigations pending (or, to the Company's Knowledge
threatened) against the Company which, if adversely determined, would be
-14-
<PAGE>
reasonably likely to result in payments by the Company in excess of $50,000 in
the aggregate for all such claims, actions, suits, arbitrations, proceedings or
investigations, or $10,000 in the case of any individual claim, action, suit,
arbitration, proceeding or investigation, and there are no outstanding court
orders, court decrees, court stipulations or settlement agreements to which the
Company is a party.
3.12. EMPLOYEE BENEFITS.
(a) Section 3.12(a) of the Disclosure Schedule lists or describes
each Employee Benefit Plan.
(b) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) complies in all material respects in form and in
operation with the applicable requirements of ERISA and the Code.
(c) The Company does not maintain, contribute to, or have any
liability or contingent liability with respect to (i) any "employee pension
benefit plan" (as such term is defined in Section 3(2) of ERISA) that is subject
to Section 302 of ERISA or Section 412 of the Code, or (ii) any "multiemployer
plan" (as such term is defined in Section 3(37) of ERISA).
(d) Each Employee Benefit Plan that is intended to be qualified
within the meaning of Section 401(a) of the Code has received a determination
from the Internal Revenue Service that such Employee Benefit Plan is so
qualified, and to the Knowledge of the Company, nothing has occurred which could
cause the loss of such qualification.
(e) The Company has made available to the Buyer current, correct and
complete copies of the plan documents and summary plan descriptions and all
amendments thereto (or to the extent no such copy exists, an accurate written
description thereof), the most recent determination letter received from the
Internal Revenue Service, the most recent Form 5500 Annual Report and all
written trust agreements, insurance contracts and other funding agreements which
implement or are related to each Employee Benefit Plan.
(f) No actions, suits or claims (other than routine claims for
benefits made in the ordinary course of plan administration) are pending with
respect to any Employee Benefit Plan, or, to the Knowledge of the Company,
threatened, and no facts or circumstances exist which could give rise to any
such actions, suits or claims. Neither the Company nor, to the Knowledge of the
Company, any other Person has engaged in a prohibited transaction, as such term
is defined under Section 4975 of the Code or Section 406 of ERISA, or breached
any fiduciary responsibility, which could subject the Company, its officers or
directors to any Taxes, penalties or other liabilities under Section 4975 of the
Code or Sections 409 or 502 of ERISA. To the Knowledge of the Company, the
Employee Benefit Plans are not, and have not been, the subject of any
investigation, examination or audit by the Internal Revenue Service, the United
States Department of Labor or any other governmental agency as to which the
Company has received written notice.
-15-
<PAGE>
(g) Except as required by applicable law, the Company is under no
obligation or liability to provide (i) medical benefits (including through
insurance) to retirees or former employees, officers or directors of the
Company, or their respective dependents, or (ii) life insurance or other death
benefits (including through insurance) to retired or former employees, officers
or directors of the Company, or their respective dependents.
(h) No Employee Benefit Plan is (or at any time was) funded through a
"welfare benefit fund" (as defined in Section 479(a) of the Code). With respect
to any insurance policy that provides or has provided funding for benefits under
any Employee Benefit Plan, (i) there will be no liability of the Company in the
nature of a retroactive or retrospective rate adjustment, loss sharing
arrangement, or other actual or contingent liability as of the Closing Date, and
(ii) to the Knowledge of the Company, no insurance company issuing any such
policy is in receivership, conservatorship, liquidation, or similar proceeding.
3.13. INTELLECTUAL PROPERTY.
(a) Section 3.13(a) of the Disclosure Schedule sets forth a list
that is complete and correct in all material respects of (i) all patented or
registered Intellectual Property Rights and pending applications for
registrations of Intellectual Property Rights owned or filed by or on behalf of
the Company and (ii) all material Intellectual Property Rights that are owned or
licensed by the Company regarding the information contained in the Company's
database.
(b) Except as set forth in Section 3.13(b) of the Disclosure
Schedule, (i) the Company owns and possesses all right, title and interest in
and to, or has valid and enforceable license to use, the Intellectual Property
Rights necessary for the operation of the Company's business as currently
conducted, free and clear of all Liens; (ii) since June 30, 1992, no claim by
any third party contesting the validity, enforceability, use or ownership of any
of the Intellectual Property Rights has been made in writing which is currently
outstanding and, to the Company's Knowledge, no such claim has been threatened;
(iii) since June 30, 1992, the Company has not received any written (or to the
Company's Knowledge unwritten) notices of any infringement or misappropriation
by, or conflict with, any third party with respect to the Intellectual Property
Rights; and (v) to the Company's Knowledge, the Company has not infringed,
misappropriated or otherwise conflicted with any intellectual property rights or
other rights of any third parties.
3.14. SUBSIDIARIES. The Company has no Subsidiaries.
3.15. INSURANCE. Section 3.15 of the Disclosure Schedule sets
forth all insurance policies in effect as of the date of this Agreement covering
general property and liability, auto, crime, errors and omissions, umbrella and
workmen's compensation for the Company.
3.16. AFFILIATED TRANSACTIONS. Except as set forth in Section
3.16 of the Disclosure Schedule, neither the Company nor any of its officers,
directors or Stockholders has a material direct or indirect interest in any
Person which has a material business relationship or arrangement with the
Company. Schedule 3.16 lists all material transactions between the Company and
its officers, directors or Stockholders during the period commencing January 1,
1994 and ending on the date
-16-
<PAGE>
hereof other than transactions in the ordinary course regarding the compensation
of officers for services rendered, reimbursement of expenses or the payment of
directors fees.
3.17. BROKERS' FEES. Except for fees owed to Robertson, Stephens
& Company LLC for which the Stockholders and Optionholders are liable pursuant
to Section 9.12 hereof, the Company has no liability or obligation to pay any
fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement.
3.18. UNDISCLOSED LIABILITIES. Except for those liabilities that
have arisen in the ordinary course of business after December 31, 1995, the
Company does not have any liability, contingent or otherwise, which is not
reflected in or reserved against in the Financial Statements that would
materially and adversely affect the Company's condition (financial or
otherwise).
3.19. SUBSEQUENT EVENTS. Since December 31, 1995 there has not
been any material adverse change in the business, assets, liabilities, condition
(financial or otherwise) or operations of the Company. Except for the
transactions contemplated by this Agreement or as disclosed in Section 3.19 of
the Disclosure Schedule, since September 30, 1996, the Company has conducted its
operations in the ordinary course consistent with past practices and has not:
(i) incurred any Indebtedness for Money Borrowed or
guaranteed any debts, obligations or liabilities, absolute, accrued or
contingent, and whether due or to become due;
(ii) paid any obligation or liability other than in the
ordinary course of business and consistent with past practice, or
discharged or satisfied any Liens other than those securing current
liabilities in the ordinary course of business and consistent with past
practice;
(iii) declared or made any direct or indirect payment, set
aside, or distribution to stockholders, or directly or indirectly
purchased, acquired or redeemed any of its shares of its capital stock or
other securities, or obligated itself to do so;
(iv) mortgaged, pledged or subjected to Lien any of its
property or assets (tangible or intangible, real, personal or mixed),
EXCEPT in the ordinary course of business and consistent with past
practice;
(v) sold, leased, transferred, or otherwise disposed of any
of its properties or assets (real, personal or mixed, tangible or
intangible), EXCEPT in transactions in the ordinary course of business and
consistent with past practice;
(vi) canceled or compromised any debt or claim, or waived or
released any right of material value, EXCEPT in the ordinary course of
business and consistent with past practice;
-17-
<PAGE>
(vii) suffered any material physical damage, destruction or
loss (whether or not covered by insurance);
(viii) entered into any transaction other than in the ordinary
course of business;
(ix) encountered any material labor disputes or labor union
organizing activities with respect to its employees;
(x) issued or sold any shares of capital stock or other
securities or granted any options, warrants or other purchase rights with
respect thereto;
(xi) made any acquisition of any material assets or made any
single capital expenditure or commitment in excess of $50,000 for additions
to property or equipment;
(xii) made any change in any Employee Benefit Plan which
would be reasonably likely to increase the cost of maintaining such
Employee Benefit Plan by the Company in excess of $50,000 in the aggregate
for all such Employee Benefit Plans, or $10,000 in the case of an
individual Employee Benefit Plan;
(xiii) increased the compensation payable, or to become
payable, to any of its employees or directors, or made any bonus payment or
similar arrangement with any employees or directors or increased the scope
or nature of any fringe benefits provided for its employees or directors;
or
(xiv) agreed, whether in writing or otherwise, to do any of
the foregoing other than pursuant hereto.
3.20. DISCLOSURE. The representations and warranties contained in
this Article III and in the Disclosure Schedule taken as a whole do not, to the
Knowledge of the Company, contain any untrue statement of a material fact or
omit to state any fact necessary in order to make the statements contained in
this Article III not misleading in any material respect.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS AND THE OPTIONHOLDERS
Each of the Stockholders and the Optionholders hereby severally (and
not jointly) represents and warrants, as to himself, herself or itself only, as
follows:
4.01. ORGANIZATION OF CERTAIN STOCKHOLDERS. With respect to SV-II
and SI-II, such Stockholder is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization.
-18-
<PAGE>
4.02. AUTHORIZATION OF TRANSACTION. Such Stockholder or
Optionholder has full power and authority to execute and deliver this Agreement
and to perform such Stockholder's or Optionholder's obligations hereunder. This
Agreement constitutes the valid and legally binding obligation of such
Stockholder or Optionholder, enforceable against such Stockholder or
Optionholder in accordance with its terms and conditions. Such Stockholder has
not perfected his or its appraisal rights under the Delaware General Corporation
Law with respect to the Merger.
4.03. NON-CONTRAVENTION. Neither the execution and the delivery of
this Agreement by such Stockholder or Optionholder, nor the performance by such
Stockholder or Optionholder of his or its obligations hereunder, will (a)
violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge or other restriction of any government,
governmental agency or court to which the Stockholder or Optionholder is
subject, EXCEPT where the violation would not be reasonably likely to have a
Material Adverse Effect, (b) with respect to SV-II and SI-II, violate any
provision of their organizational documents, or (c) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, create in
any Person the right to accelerate, terminate, modify, cancel or require any
notice under any agreement, contract, lease, license, instrument or other
arrangement to which such Stockholder or Optionholder is a party or by which
such Stockholder or Optionholder is bound or to which any of such Stockholder's
or Optionholder's assets are subject (or result in the imposition of any Lien on
any of his or its assets), EXCEPT where the violation, conflict, breach,
default, acceleration, termination, modification, cancellation, failure to give
notice, or Lien would not be reasonably likely to have a Material Adverse
Effect.
4.04. OWNERSHIP OF STOCK AND OPTIONS.
(a) The Shares owned by such Stockholder are free and clear of all
Liens, other than Liens in favor of the Company and other Liens that will be
terminated prior to the Effective Time, and the restrictions imposed by federal
and state securities laws.
(b) The Option owned by such Optionholder is free and clear of all
Liens, other than the restrictions imposed by the applicable Option Agreement or
by federal and state securities laws.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BUYER AND CRA
The Buyer and CRA each hereby jointly and severally represent and
warrant to the Company and the Stockholders as follows:
5.01. ORGANIZATION. Each of the Buyer and CRA is a corporation
duly organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation.
5.02. AUTHORIZATION OF TRANSACTION. Each of the Buyer and CRA has
full power and authority to execute and deliver this Agreement and to perform
its obligations hereunder. Without limiting the generality of the foregoing,
the boards of directors of each of the Buyer and CRA (both
-19-
<PAGE>
for itself and as the sole stockholder of the Buyer) have duly authorized the
execution, delivery and performance of this Agreement by the Buyer and CRA, as
applicable. This Agreement constitutes the valid and legally binding obligation
of each of the Buyer and CRA, enforceable against each of the Buyer and CRA in
accordance with its terms and conditions.
5.03. NON-CONTRAVENTION. Neither the execution and the delivery
of this Agreement, nor the consummation of the transactions contemplated hereby,
will (a) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, or other restriction of any government,
governmental agency or court to which either the Buyer or CRA is subject, (b)
violate any provision of the certificate of incorporation or bylaws of either
the Buyer or CRA, or (c) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify or cancel, or require any notice under any
material agreement, contract, lease, license, instrument, or other arrangement
to which either the Buyer or CRA is a party or by which either are bound or to
which any of their assets are subject. Neither the Buyer nor CRA is required to
give any notice to, make any filing with or obtain any authorization, consent or
approval of any government or governmental agency in order for either the Buyer
or CRA to consummate the transactions contemplated by this Agreement, EXCEPT for
filings under the HSR Act, which filings have already been made and with respect
to which all applicable waiting periods have expired or been terminated, and the
filing of the Certificate of Merger with the Secretary of State of the State of
Delaware.
5.04. LITIGATION. No claim, action, suit, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency or commission or any arbitration tribunal is
pending or, to the Buyer's and CRA's Knowledge, is threatened, which seeks to
delay, prevent, adversely affect or restrict the consummation of the
transactions contemplated hereby.
5.05. INVESTMENT. CRA is not acquiring the Shares with a view to
or for sale in connection with any distribution thereof within the meaning of
the Securities Act of 1933, as amended, or in violation of any applicable state
securities laws.
5.06. BROKERS' FEES. Neither CRA, the Buyer nor any Affiliate or
representative of CRA or the Buyer has any liability or obligation to pay any
fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement for which the Stockholders could
become liable or obligated.
ARTICLE VI
COVENANTS
6.01. TAX MATTERS.
(a) TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE. The Buyer
shall prepare or cause to be prepared and file or cause to be filed all Income
Tax Returns for the Company for all periods ending on or prior to the Closing
Date which are required to be filed after the Closing Date.
-20-
<PAGE>
Buyer shall permit the Stockholder Representative to review and comment on each
such Tax Return described in the preceding sentence prior to filing and shall
make such revisions to such Tax Returns as are reasonably requested by the
Stockholder Representative to the extent that any requested changes to the Tax
Returns are consistent with the past practice of the Company or have substantial
authority within the meaning of Section 6662 of the Code. The Stockholder
Representative shall have not more than thirty (30) days following its receipt
of a draft Income Tax Return for the taxable year ending on the Closing Date to
review and make comments thereon. The Stockholder Representative shall have the
right to approve, in its sole discretion, the filing of any amended return for
any Tax period ending on or prior to the Closing Date for which the Company does
not have a legal obligation to file. Notwithstanding Section 7.01 of this
Agreement, the Stockholders shall have no indemnification obligation for any Tax
Return filed in violation of the preceding sentence. The Stockholders shall
advance funds to the Buyer for Taxes of the Company, if any, with respect to
such periods, to the extent that such Taxes were not paid on or before the
Closing Date, within fifteen (15) days after notice by the Buyer or the Company
stating the amount of such Taxes and the date on which such Taxes are due;
PROVIDED HOWEVER that no Stockholder shall be required to pay more than his, her
or its Allocable Percentage of such Taxes.
(b) TAX PERIODS BEGINNING BEFORE AND ENDING AFTER THE CLOSING
DATE. The Buyer shall prepare or cause to be prepared and file or cause to be
filed any Income Tax Returns of the Company for Tax periods which begin before
the Closing Date and end after the Closing Date. The Buyer shall permit the
Stockholder Representative to review and comment on each such Tax Return
described in the preceding sentence prior to filing and shall make such
revisions to such Tax Returns as are requested by the Stockholder
Representative. The Stockholders shall pay to the Buyer within fifteen (15)
days after the date on which Taxes are paid with respect to such periods, to the
extent that such Taxes were not paid on or before the Closing Date, an amount
equal to the portion of such Taxes which relates to the portion of such Taxable
period ending on the Closing Date; PROVIDED HOWEVER that no Stockholder shall be
required to pay more than his, her or its Allocable Percentage of such payments.
For purposes of this Section 6.01(b), in the case of any Taxes that are imposed
on a periodic basis and are payable for a Taxable period that includes (but does
not end on) the Closing Date, the portion of such Tax which relates to the
portion of such Taxable period ending on the Closing Date shall (i) in the case
of any Taxes other than Taxes based upon or related to income or receipts, be
deemed to be the amount of such Tax for the entire Taxable period multiplied by
a fraction the numerator of which is the number of days in the Taxable period
ending on the Closing Date and the denominator of which is the number of days in
the entire Taxable period, and (ii) in the case of any Tax based upon or related
to income or receipts be deemed equal to the amount which would be payable if
the relevant Taxable period ended on the Closing Date. Any credits relating to a
Taxable period that begins before and ends after the Closing Date shall be taken
into account as though the relevant Taxable period ended on the Closing Date.
All determinations necessary to give effect to the foregoing allocations shall
be made in a manner consistent with prior practice of the Company.
(c) REFUNDS. Any refunds of Income Taxes (including any
interest thereon) received by or credited to the Company attributable to periods
ending on or prior to the Closing Date, or attributable to periods which include
the Closing Date with respect to which the Stockholders are obligated to
indemnify the Buyer pursuant to Section 6.01(b), shall be for the
-21-
<PAGE>
benefit of the Stockholders, and the Buyer shall use its reasonable best efforts
to obtain such refunds and shall cause the Company to pay over to the
Stockholder Representative any refunds immediately upon receipt thereof, which
refunds shall be distributed by the Stockholder Representative to the
Stockholders in accordance with their Allocable Percentage. In addition, if the
Income Taxes with respect to the pre-Closing portion of any period that begins
before and ends after the Closing Date are less than the payments made (or
deemed made) by the Company on or before the Closing Date, the Buyer shall cause
the Company to pay to the Stockholder Representative the excess of such payments
over such Income Taxes immediately upon the Company's receiving the benefit of
such excess payments through a reduction in any Tax payment required to by made
by the Company after the Closing, which excess shall be distributed by the
Stockholder Representative to the Stockholders in accordance with their
Allocable Percentage.
(d) COOPERATION ON CERTAIN TAX MATTERS. The Buyer, the Company
and the Stockholders shall cooperate fully, as and to the extent reasonably
requested by the other Party, in connection with the filing of Tax Returns
pursuant to this Section 6.01 and any audit, litigation or other proceeding with
respect to Taxes. Such cooperation shall include the retention and (upon the
other Party's request) the provision of records and information which are
reasonably relevant to any such audit, litigation or other proceeding and making
employees available on a mutually convenient basis to provide additional
information and explanation of any material provided hereunder. CRA and the
Buyer agree (i) to retain all books and records with respect to Tax matters
pertinent to the Company relating to any Taxable period beginning before the
Closing Date until the expiration of the statute of limitations (and any
extensions thereof) of the respective Taxable periods, and to abide by all
record retention agreements entered into with any taxing authority, and (ii) to
give the other Parties reasonable written notice prior to transferring,
destroying or discarding any such books and records and, if the other Parties so
request, CRA and the Buyer shall allow the other Parties to take possession of
such books and records.
(e) COOPERATION REGARDING GOVERNMENTAL CERTIFICATES. The Buyer
and the Stockholders agree, upon written request from the other, to use their
reasonable best efforts to obtain any certificate or other document from any
governmental authority or any other Person as may be necessary to mitigate,
reduce or eliminate any Tax that could be imposed (including, but not limited
to, with respect to the transactions contemplated hereby).
(f) COOPERATION REGARDING REPORTING OBLIGATIONS. The Buyer and
the Stockholders further agree, upon written request from the other, to provide
the other Party with all information that either Party may be required to report
pursuant to Section 6043 of the Code.
6.02. FURTHER ASSURANCES. From time to time after the Closing
Date, without further consideration, the Parties will execute and deliver such
documents and take such actions as any Party may reasonably request in order to
more effectively consummate the transactions contemplated hereby.
6.03. BOOKS AND RECORDS; PERSONNEL. Until the later of (a)
January 15, 2000 and (b) the date on which any and all claims by the Buyer for
indemnification have been finally resolved, CRA shall cause the Company to
provide to any Stockholder or Optionholder for any purpose
-22-
<PAGE>
relating to such Stockholder's or Optionholder's ownership of any securities of
the Company or such Stockholder's rights or obligations under Article VII
hereof, access to the books and records of the Company upon reasonable advance
written notice during regular business hours for the sole purpose of obtaining
information for use as aforesaid and will permit such Stockholder or
Optionholder to make such extracts and copies thereof as may be necessary;
PROVIDED, HOWEVER CRA shall cause the Company to provide any Stockholder such
access and rights for any purpose relating to a claim for indemnification in
connection with Section 3.08 hereof until the later of (x) September 30, 2001
and (y) the date on which any and all claims by the Buyer with respect thereto
have been finally resolved.
6.04. WAIVER OF APPRAISAL RIGHTS. Each of the Stockholders hereby
waives his or its rights under the Delaware General Corporation Law to an
appraisal of the fair value of his or its Common Shares.
6.05. EMPLOYEE BONUSES. Consistent with the past practice of the
Company, the Surviving Corporation shall (a) pay employee bonuses included in
the calculation of the Actual Working Capital Amount (the accrual of which as of
the Closing Date equaled approximately $334,434) and (b) make additional accrual
for such bonuses (other than in the case of Roberto) from the Closing Date
through December 31, 1996; provided, however, the Surviving Corporation shall
not include in the determination of any employee bonuses any costs, expenses or
other charges which may occur in connection with the transactions contemplated
by this Agreement, including without limitation, the payment of any and all
bonuses to employees of the Company on or about the Effective Time.
6.06. ESTIMATED CLOSING DATE WORKING CAPITAL STATEMENT. The
Estimated Closing Date Working Capital Statement, to be delivered by the Company
to the Buyer pursuant to Section 2.05 hereof, shall include not less than
$50,000 in cash.
ARTICLE VII
INDEMNIFICATION
7.01. INDEMNIFICATION BY THE STOCKHOLDERS AND OPTIONHOLDERS.
Subject to the limitations set forth in this ARTICLE VII, the Stockholders agree
to indemnify, defend and hold the Buyer and its respective officers, directors,
agents and Affiliates (collectively, the "BUYER INDEMNITEES"), harmless from and
in respect of any and all losses, damages, costs, fines, penalties and
reasonable fees and expenses (including, without limitation, reasonable
attorney's fees but excluding any consequential damages or lost profits)
(collectively,"DAMAGES") that any of them actually incurs arising out of or due
to (a) the inaccuracy of any representation or the breach of any warranty made
by the Company or the Stockholders in this Agreement, or (b) the breach of any
covenant, undertaking or agreement of the Company or the Stockholders contained
in this Agreement. Subject to the limitations set forth in this ARTICLE VII,
the Optionholders agree to indemnify, defend and hold the Buyer Indemnitees
harmless from and in respect of any and all Damages that any of them actually
incurs arising out of or due to (x) the inaccuracy of any representation or the
breach of any warranty made by the Optionholders in this Agreement, or (y)
-23-
<PAGE>
the breach of any covenant, undertaking or agreement of the Optionholders
contained in this Agreement.
7.02. INDEMNIFICATION BY THE BUYER AND CRA. Subject to the
limitations set forth in this ARTICLE VII, the Buyer and CRA agree to indemnify,
defend and hold the Stockholders and Optionholders, and, to the extent
applicable, their respective officers, directors, agents and Affiliates
(collectively, the "COMPANY INDEMNITEES"), harmless from and in respect of any
and all Damages that they actually incur arising out of or due to (a) the
inaccuracy of any representation or the breach of any warranty made by the Buyer
or CRA in this Agreement, or (b) the breach of any covenant, undertaking or
agreement of the Buyer or CRA contained in this Agreement.
7.03. SURVIVAL. All of the representations, warranties and
covenants of the Parties contained in this Agreement shall survive the Closing;
PROVIDED HOWEVER, that notwithstanding anything to the contrary contained herein
the representations, warranties and covenants of the Company, the Stockholders
or the Optionholders contained in this Agreement (other than their
indemnification obligations under this Article VII) shall expire in their
entirety on the first anniversary of the Closing Date EXCEPT that (a) the
representations and warranties contained in Sections 3.04, 3.17, and 5.06 shall
survive indefinitely and not expire and (b) the representations and warranties
contained in Section 3.08 and the covenants contained in Sections 6.01 and 6.03
shall survive until, and expire in their entirety on, April 15, 2000 (PROVIDED,
HOWEVER, the representation and warranty set forth in Section 3.08(a) shall
survive until September 30, 2001 with respect to the Company's taxable year
ended December 31, 1994); and PROVIDED, HOWEVER, that such representations,
warranties and covenants (including the indemnification obligations under this
ARTICLE VII) shall survive beyond such date with respect to any inaccuracy
therein or breach thereof, notice of which shall have been duly given prior to
such date in accordance with Section 7.05 hereof.
7.04. LIMITATIONS ON INDEMNITY CLAIMS.
(a) Anything to the contrary contained herein notwithstanding,
the Buyer Indemnitees shall not be entitled to recover from the Stockholders or
the Optionholders pursuant to Section 7.01 hereof unless and until the total of
all Damages entitled to indemnification pursuant to Section 7.01 exceeds
$300,000 (the "BASKET"), and once all such Damages have exceeded the Basket, the
Buyer Indemnitees shall be entitled to recover from the Stockholders or the
Optionholders the amount by which all such Damages exceed the Basket; PROVIDED,
HOWEVER, that the foregoing shall not apply to claims made as a result of
inaccuracies in or breaches of representations or warranties contained in
Section 3.04, the last sentence of Section 3.06, and Sections 3.08, 3.17 and
4.04 hereof or a breach of the covenants contained in Sections 2.08, 6.01 and
6.06. In addition, notwithstanding any other provisions of this Agreement,
i) the Buyer Indemnitees shall not be entitled to recover from the Stockholders
or the Optionholders pursuant to Section 7.01 hereof with respect to claims made
as a result of an inaccuracy in or breach of representations and warranties
contained in Section 3.18 hereof unless, and then only to the extent, each such
claim is for Damages that are in excess of $10,000; (ii) the total combined
liability of the Stockholders and the Optionholders in respect of all Damages
entitled to indemnification pursuant to the terms of this Article VII shall be
limited to $4,000,000 in the aggregate, including Damages in respect of breaches
-24-
<PAGE>
of Section 3.08 and 6.01 hereof, but excluding Damages in respect of breaches of
Section 6.06 hereof (the "CAP") EXCEPT that (A) the total combined liability of
the Stockholders and Optionholders in respect of all Damages entitled to
indemnification pursuant to the terms of this Article VII in respect of breaches
of any representations, warranties and covenants contained in this Agreement
(other than those contained in Sections 3.08, 6.01 and 6.06 hereof) shall be
limited to $2,500,000 in the aggregate, and (B) with respect to claims made
under this Article VII after the first anniversary of the Closing Date, the Cap
shall be reduced to an amount equal to $4,000,000 minus the greater of (Y)
$500,000 and (Z) the amount of outstanding claims for Damages (to the extent
such claims for Damages are actually paid) (plus Damages previously paid)
pursuant to the terms of this Article VII in respect of breaches of any
representations, warranties and covenants contained in this Agreement other than
those contained in Sections 3.08, 6.01 and 6.06 hereof; and (iii) the
indemnification obligation of each Stockholder hereunder shall be several (and
not joint) and, with respect to each claim for indemnification for which the
Buyer Indemnitees are entitled to indemnification hereunder, shall be limited to
such Stockholder's Allocable Percentage of the liability related to such claim.
Notwithstanding any provision contained in this Agreement to the contrary, each
Stockholder and Optionholder shall have sole liability in respect of breaches of
his, her or its respective representations, warranties or covenants, which
liability shall in all respects be several and not joint, and no other
Stockholder or Optionholder shall have any liability of any nature whatsoever
(whether under this Agreement, by law or otherwise) for the breaches of any
representation, warranty or covenant of another Stockholder or Optionholder.
(b) The amount of any Damages for which indemnification is
provided under this ARTICLE VII shall be reduced by (i) any amounts recovered by
the indemnified Party under insurance policies with respect to such Damages, and
(ii) any net Tax benefit realized by the indemnified Person arising from the
incurrence or payment of any such Damages. In addition, the amount of Damages
shall be increased by any Tax liabilities resulting from indemnification
payments hereunder. In computing the amount of any Tax benefit, the indemnified
Person shall be deemed to recognize all other items of income, gain, loss,
deduction or credit before recognizing any loss, deduction or credit arising
from the incurrence or payment of any indemnified Damages. Any indemnification
payment hereunder shall initially be made without regard to this Section 7.04(b)
and shall be reduced to reflect any such net Tax benefit only after the
indemnified Person has actually realized such benefit. For purposes of this
Agreement, an indemnified Person shall be deemed to have "actually realized" a
net Tax benefit to the extent that, and at such time as, the amount of Taxes
payable by such indemnified Person is reduced below the amount of Taxes that
such indemnified Person would be required to pay but for the incurrence or
payment of such Damages. The amount of any reduction hereunder shall be
adjusted to reflect any final determination (which shall include the execution
of Form 870-AD or successor form issued pursuant to the Code) with respect to
the indemnified Person's liability for Taxes and payments between the
Stockholders, on the one hand, and CRA and the Buyer, on the other hand, to
reflect such adjustment shall be made if necessary.
(c) If (and then only to the extent) permitted by applicable
law, the Parties shall treat any payment of Damages under this Article VII as an
adjustment to the Cash Purchase Price.
-25-
<PAGE>
(d) The indemnification provisions in this Article VII shall be
the sole and exclusive remedy of the Parties for the breach of any
representation, warranty or covenant contained in this Agreement.
(e) Notwithstanding anything to the contrary contained herein,
any claim for indemnification based upon any federal, state, local or foreign
assessment, deficiency or liability with respect to the Company's taxable year
ended October 28, 1996 shall be limited to the Taxes payable with respect to the
taxable year ended October 28, 1996 and shall not include any claim for
indemnification based upon the disallowance of the net operating loss generated
in the Company's taxable year ended October 28, 1996 which was used by a Buyer
Indemnitee in a taxable year ending after October 28, 1996.
(f) Notwithstanding anything to the contrary in this Section
7.04, in determining Damages in respect of any claim involving Taxes, the
Stockholders shall be permitted to carry back the net operating loss generated
by the Company in its taxable year ended October 28, 1996, if any, in an amount
not exceeding $300,000, to offset any increase in the Company's Income Tax
liability for the Company's preceding taxable years to the extent permissible by
law and such carryback will not cause the Stockholders to be liable for any
claim for indemnification based upon any federal, state, local or foreign
assessment, deficiency or liability for Income Taxes because of the reduction in
the amount of the net operating loss generated in the Company in its taxable
year ended October 28, 1996 resulting from the use by a Buyer Indemnitee in a
taxable year ending after October 28, 1996.
7.05. NOTICE AND OPPORTUNITY TO DEFEND.
(a) If there occurs an event which a Buyer Indemnitee or a
Company Indemnitee asserts is an indemnifiable event pursuant to Section 7.01 or
7.02 hereof, the Buyer, on behalf of such Buyer Indemnitee, or the Stockholder
Representative, on behalf of such Company Indemnitee, shall notify the other
Party or Parties obligated to provide indemnification (the "INDEMNIFYING PARTY")
promptly upon its determination to seek indemnification.
(b) If there occurs an event which a Buyer Indemnitee or a
Company Indemnitee asserts is an indemnifiable event pursuant to Section 7.01 or
7.02, as applicable, which involves any claim or the commencement of any claim,
action or proceeding by a third person, the Buyer, on behalf of such Buyer
Indemnitee, or the Stockholder Representative, on behalf of such Company
Indemnitee, will give the Indemnifying Parties prompt written notice of such
claim or the commencement of such action or proceeding. In case any such action
shall be brought against any Party seeking indemnification and it shall notify
the Indemnifying Party of the commencement thereof, the Indemnifying Party shall
be entitled to participate therein and may elect, within fifteen (15) days of
receiving such notice, to assume the defense thereof, with counsel reasonably
satisfactory to such Party seeking indemnification and, after notice from the
Indemnifying Party to such Party seeking indemnification of such election so to
assume the defense thereof, the Indemnifying Party shall not be liable to the
Party seeking indemnification hereunder for any legal expenses of a Person
entitled to indemnification hereunder or any other expenses subsequently
incurred by such Person in connection with the defense thereof. The Party
seeking indemnification
-26-
<PAGE>
agrees to cooperate fully with the Indemnifying Party and its counsel in the
defense against any such asserted liability. The Party seeking indemnification
shall have the right to participate at its own expense in the defense of such
asserted liability. No settlement shall be effected by the Indemnifying Party
without the written consent of the Party seeking indemnification (which consent
shall not be unreasonably withheld) unless, in connection with such settlement,
the Party seeking indemnification is fully and unconditionally released from
such asserted liability (without any liability for payment) and the settlement
involves only the payment of money. No settlement shall be effected by a Party
seeking indemnification without the written consent of the Indemnifying Party,
such consent not to be unreasonably withheld.
ARTICLE VIII
STOCKHOLDER REPRESENTATIVE
Each of the Stockholders and Optionholders hereby appoints SV-II as
his, her or its true and lawful representative (the "STOCKHOLDER
REPRESENTATIVE") to take such actions on behalf of the Stockholders and
Optionholders as are authorized by this Agreement and as otherwise may be
necessary following the Closing to more effectively consummate the transactions
contemplated by this Agreement. The Stockholder Representative is authorized,
in the name and on behalf of each Stockholder and Optionholder in his, her or
its capacity as such, to (i) execute and deliver, and accept delivery of such
amendments as may be deemed by the Stockholder Representative in its sole
discretion to be appropriate to amend this Agreement or any other agreement
contemplated hereby, (ii) execute and deliver, and accept delivery of such
notices, agreements, instruments and other documents as may be deemed by the
Stockholder Representative, in its sole discretion, to be appropriate under this
Agreement, (iii) dispute or refrain from disputing any claim made by the
Stockholders and Optionholders under this Agreement and the agreements
contemplated hereby, (iv) negotiate or compromise any dispute which may arise
under and exercise or refrain from exercising remedies available under, and make
any determination under, this Agreement and the agreements contemplated hereby,
and sign any releases or other documents with respect to such dispute or remedy,
(v) waive any condition contained in this Agreement and the agreements
contemplated hereby, (vi) give any and all consents under this Agreement and the
agreements contemplated hereby and (vii) give such instructions and do such
other things and refrain from doing such other things as such Stockholder
Representative shall deem appropriate to carry out the provisions of this
Agreement and the agreements contemplated hereby. Each of the Stockholders and
Optionholders shall be bound by all notices received and agreements and
determinations made and documents executed and delivered by the Stockholder
Representative under this Agreement and the agreements contemplated hereby. The
Parties hereto acknowledge and agree that the Stockholder Representative shall
have no liability for acting in its capacity as such, except for such
liabilities arising out of its gross negligence or willful misconduct. Each of
the Stockholders and Optionholders hereby agrees to indemnify and hold the
Stockholder Representative harmless from any claims, liabilities, costs and
expenses (including reasonable attorneys' fees) arising out of or relating to
its actions as Stockholder Representative hereunder, other than any such claims,
liabilities, costs and expenses finally determined by a court of competent
jurisdiction to have arisen out of such Stockholder Representative's gross
negligence or willful misconduct; PROVIDED, HOWEVER, that no Stockholder or
-27-
<PAGE>
Optionholder shall be liable for more than his, her or its Selling Percentage of
such claims, liabilities, costs and expenses.
ARTICLE IX
MISCELLANEOUS
9.01. NO THIRD-PARTY BENEFICIARIES. This Agreement shall not
confer any rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns.
9.02. ENTIRE AGREEMENT. This Agreement (including the Exhibits,
the Disclosure Schedule and the other documents referred to herein) constitutes
the entire agreement among the Parties and supersedes any prior understandings,
agreements or representations by or among the Parties, written or oral, to the
extent they related in any way to the subject matter hereof.
9.03. SUCCESSION AND ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the Parties and their respective successors and
permitted assigns. No Party may assign either this Agreement or any of such
Party's rights, interest or obligations hereunder without the prior written
approval of each other Party; PROVIDED, HOWEVER, that CRA and the Buyer may
assign (i) their rights hereunder to secure obligations owed to CRA's secured
lenders and (ii) the right to receive the proceeds only (and no other related
rights) of any claim for indemnification made by CRA or the Buyer under Article
VII hereof, in each case without obtaining the prior written approval of any
other Party hereto.
9.04. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
9.05. HEADINGS. The section headings contained in this Agreement
are inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.06. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given by a reputable
and recognized overnight delivery service (E.G. Federal Express, etc.), against
receipt thereof, by facsimile against a confirmed receipt therefor or by mail
(registered or certified mail, postage prepaid, return receipt requested) to the
respective parties as follows:
-28-
<PAGE>
If to either the Buyer or CRA:
CRA Managed Care, Inc.
312 Union Wharf
Boston, MA 02109
(617) 367-8519 (facsimile)
(617) 367-2163 (telephone)
Attention: Mr. Donald J. Larson
President and CEO
in each case, with a copy to:
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02210
(617) 951-1295 (facsimile)
(617) 951-6677 (telephone)
Attention: James Westra, Esquire
If to the Company:
care of Summit Ventures II, L.P.
600 Atlantic Avenue, Suite 2800
Boston, Massachusetts 02210-2227
(617) 824-1100 (facsimile)
(617) 824-1000 (telephone)
Attention: Mr. Martin Mannion
in each case, with a copy to:
Kirkland & Ellis
655 Fifteenth Street, N.W., Suite 1200
Washington, D.C. 20005
(202) 879-5200 (facsimile)
(202) 879-5054 (telephone)
Attention: Richard L. Perkal, Esquire
If to the Stockholders or the Optionholders:
To the address specified with respect to such
Person on the signature pages hereto.
-29-
<PAGE>
in each case, with a copy to
Kirkland & Ellis
655 Fifteenth Street, N.W., Suite 1200
Washington, D.C. 20005
(202) 879-5200 (facsimile)
(202) 879-5054 (telephone)
Attention: Richard L. Perkal, Esquire
or to such other address as any Party hereto may, from time to time, designate
in a written notice given in like manner. Any notice given in accordance with
the requirements of this Section 9.06 shall be deemed to have been received when
delivered in person or via facsimile against receipt thereof, five Business Days
after deposit in the U.S. mail against receipt thereof, and one Business Day
after deposit with a reputable express overnight courier service against receipt
therefor.
9.07. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the Commonwealth of
Massachusetts without giving effect to any choice or conflict of law provision
or rule (whether of the Commonwealth of Massachusetts or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
Commonwealth of Massachusetts.
9.08. AMENDMENTS AND WAIVERS. No amendment of any provision of
this Agreement shall be valid unless the same shall be in writing and signed by
all of the Parties. No waiver by any Party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or not, shall
be deemed to extend to any prior or subsequent default, misrepresentation or
breach of warranty or covenant hereunder, or affect in any way any rights
arising by virtue of any prior or subsequent such occurrence.
9.09. SEVERABILITY. Any provision of this Agreement which is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction or rendering that or any other provision of this Agreement
invalid, illegal or unenforceable in any other jurisdiction.
9.10. CERTAIN TAXES. The Buyer shall be responsible for all
transfer, documentary, sales, use, stamp, registration and other such taxes and
fees (including any penalties and interest) ("TRANSFER TAXES") incurred in
connection with this Agreement and for the expenses of filing all necessary Tax
Returns and other documentation ("TRANSFER TAX RETURNS") with respect to all
such Transfer Taxes. Transfer Tax Returns shall be filed and Transfer Taxes
shall be paid when due by the Party normally required by law to file such
returns and pay such taxes. If required by applicable law, the Parties will and
will cause their Affiliates to, join in the execution of any such Transfer Tax
Returns. Within fifteen (15) days after the payment of any Transfer Taxes or
the filing of any Transfer Tax Returns by the Stockholders, the Buyer shall
reimburse the Stockholders for all such Transfer Taxes and for the Stockholders'
expenses in connection with the filing of any such Transfer Tax Returns.
-30-
<PAGE>
9.11. CONSTRUCTION. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. The word "including" shall mean including
without limitation.
9.12. EXPENSES. The Buyer and CRA shall pay all of their expenses
arising in connection with the transactions contemplated hereby. The
Stockholders and the Optionholders shall pay all of their respective expenses,
and their Allocable Percentage of all of the expenses of the Company, that arise
in connection with the transactions contemplated hereby; PROVIDED, HOWEVER, that
the foregoing shall not prohibit the Company from paying all or part of such
expenses.
9.13. GENDER, NUMBER. The masculine gender shall include the
feminine, the feminine the masculine, the neuter the masculine and the feminine,
the singular the plural and the plural the singular whenever the context or
sense of this Agreement may require, as if such words had been fully and
properly written in the required number and gender.
[END OF PAGE]
[SIGNATURE PAGE FOLLOWS]
-31-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement and
Plan of Merger to be executed as of the date first above written.
PAI ACQUISITION CORP.
By: /s/ Donald J. Larson
---------------------------------------
Name: Donald J. Larson
CRA MANAGED CARE, INC.
By: /s/ Donald J. Larson
----------------------------------------
Name: Donald J. Larson
Title: President
PROMPT ASSOCIATES, INC.
By: /s/ James T. Roberto
----------------------------------------
Name: James T. Roberto
Title: Chief Executive Officer
/s/ James T. Roberto
----------------------------------------
James T. Roberto
Address: 4 Joann Circle
Westport, CT 06880
/s/ Michael P. Thalasinos
----------------------------------------
Michael P. Thalasinos
Address: 604 Graham Drive
Coppell, TX 75019
/s/ Richard D. Proctor
----------------------------------------
Richard D. Proctor
Address: c/o Ron Schneider
Great American Mortgage
650 East 4500 South, #340
Salt Lake City, UT 84107
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER]
<PAGE>
SUMMIT VENTURES II, L.P.
By: Summit Partners II, L.P.
General Partner
By: Stamps, Woodsum & Co. II
General Partner
By: /s/ Martin Mannion
----------------------------------------
General Partner
SUMMIT INVESTORS II, L.P.
By: /s/ Martin Mannion
----------------------------------------
General Partner
/s/ Robert Patterson
----------------------------------------
Robert Patterson
Address: 2174 E. Willow Brook Way
Sandy, UT 84092
/s/ John Bonkoske
----------------------------------------
John Bonkoske
Address: 316 North Grant Street
Hinsdale, IL 60521
/s/ Renee Flaherty
----------------------------------------
Renee Flaherty
Address: 11606 Old Annapolis Road
Frederick, MD 21701
/s/ John Ward
----------------------------------------
John Ward
Address: 1481 N. Willow Valley Drive
Centerville, UT 84041
<PAGE>
/s/ Richard Gabel
----------------------------------------
Richard Gabel
Address: P.O. Box 3083
Ogden, UT 84409
/s/ Lloyd Roberts
----------------------------------------
Lloyd Roberts
Address: 1504 Mayfair Drive
Mesquite, TX 75149
/s/ Brad Hansen
----------------------------------------
Brad Hansen
Address: 4977 S. Huntington Road
Salt Lake City, UT 84118
/s/ Ann Pope
----------------------------------------
Ann Pope
Address: 6757 S. Buckthorn Circle
West Jordan, CT 84084
/s/ Adele Hansen
----------------------------------------
Adele Hansen
Address: 155 North 600 East
Bountiful, UT 84010
/s/ Sharon Breon
----------------------------------------
Sharon Breon
Address: 674 North 1250 West
Clearfield, UT 84015
/s/ Pat Wolfe
----------------------------------------
Pat Wolfe
Address: 16576 Ivy Lane
Rogers, AR 72756
/s/ Vicki Cerva-Mousley
----------------------------------------
Vicki Cerva-Mousley
Address: 1617 West Cloverdale
Appleton, WI 54914
<PAGE>
/s/ Charles Ricevuto
----------------------------------------
Charles Ricevuto
Address: 103 Woodward Court
Neptune, NJ 07753
/s/ Paul Glover
----------------------------------------
Paul Glover
Address: 15 Green Ridge Lane
West Hartford, CT 06107
/s/ Stephen Coady
----------------------------------------
Stephen Coady
Address: 15 Morningside Drive
West Granby, CT 06090-0312
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER]
<PAGE>
November 7, 1996
CRA Managed Care, Inc.
312 Union Wharf
Boston, MA 02109
Ladies and Gentlemen:
We have acted as counsel to CRA Managed Care, Inc., a Massachusetts
corporation (the "Company"), in connection with proceedings being taken to
register under the Securities Act of 1933, as amended, of up to 2,300,000
shares of the Company's Common Stock, $.01 par value per share (the "Common
Stock") pursuant to a Registration Statement on Form S-3 (the "Registration
Statement"). Of the Common Stock being registered, up to 800,000 shares are
being offered by the Company and 1,500,000 shares are being offered by
certain selling stockholders (the "Selling Stockholders").
As such counsel, we have examined (i) certain corporate records of the
Company, including its Articles of Organization, its By-laws, stock records
and records of the meetings of its Incorporator, Board of Directors and
Stockholders; (ii) a Certificate of the Secretary of the Commonwealth of
Massachusetts as to the legal existence of the Company; and (iii) such other
documents as we have deemed necessary as a basis for the opinions hereinafter
expressed.
Based upon the foregoing, and having regard for such legal
considerations as we deem relevant, we are of the opinion that:
1. The Company is a corporation duly organized and validly existing
under the laws of the Commonwealth of Massachusetts.
2. The Company is authorized to issue 40,000,000 shares of Common
Stock, par value $.01 per share.
3. When issued and sold under the circumstances contemplated in the
Registration Statement, the 800,000 shares of Common Stock offered by
the Company will be duly authorized, validly issued, fully paid and
nonassessable.
<PAGE>
CRA Managed Care, Inc.
November 7, 1996
Page 2
4. When sold under circumstances contemplated in the Registration
Statement, the 1,500,000 shares of Common Stock offered by the
Selling Stockholders will be duly authorized, validly issued, fully
paid and nonassessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the references to us under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
HUTCHINS, WHEELER & DITTMAR
A Professional Corporation
JW/WBD
115024-1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made part of this
Registration Statement on Form S-3.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 7, 1996
<PAGE>
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 19, 1996, with respect to Prompt
Associates, Inc. included in the Registration Statement (Form S-3) and
related prospectus of CRA Managed Care, Inc. for the registration of shares
of its common stock filed with the Securities and Exchange Commission.
Ernst & Young LLP
Salt Lake City, Utah
November 6, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000942136
<NAME> CRA MANAGED CARE, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 33,585,000
<SECURITIES> 0
<RECEIVABLES> 33,514,000
<ALLOWANCES> 1,119,000
<INVENTORY> 0
<CURRENT-ASSETS> 67,665,000
<PP&E> 17,714,000
<DEPRECIATION> 10,639,000
<TOTAL-ASSETS> 94,694,000
<CURRENT-LIABILITIES> 19,056,000
<BONDS> 6,000
0
0
<COMMON> 89,000
<OTHER-SE> 73,121,000
<TOTAL-LIABILITY-AND-EQUITY> 94,694,000
<SALES> 0
<TOTAL-REVENUES> 131,032,000
<CGS> 0
<TOTAL-COSTS> 107,981,000
<OTHER-EXPENSES> 10,491,000
<LOSS-PROVISION> 183,000
<INTEREST-EXPENSE> 212,000
<INCOME-PRETAX> 12,348,000
<INCOME-TAX> 5,124,000
<INCOME-CONTINUING> 7,224,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,224,000
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0
</TABLE>
