<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CRA MANAGED CARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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8099 04-2658593
MASSACHUSETTS (PRIMARY STANDARD (I.R.S. EMPLOYER
INDUSTRIALCLASSIFICATION IDENTIFICATION NO.)
(STATE OR OTHER CODE NUMBER)
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
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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
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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 to be offered
pursuant to a dividend or interest reinvestment plan, 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 connection 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, 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]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share.. 2,875,000 shares $42.875 $123,265,625 $42,506
</TABLE>
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(1) Includes an aggregate of 375,000 shares which the Underwriters have the
option to purchase from the Company and the Selling Stockholders 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 May 2, 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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
MAY 7, 1996
2,500,000 Shares
[LOGO OF CRA MANAGED CARE, INC. APPEARS HERE]
Common Stock
--------
Of the 2,500,000 shares of Common Stock offered hereby, 1,100,000 are being
sold by CRA Managed Care, Inc. ("CRA" or the "Company") and 1,400,000 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 May 3, 1996, the last reported sale price of the Company's Common Stock was
$42.38 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.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
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Total(2).......................... $ $ $ $
</TABLE>
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(1) Before deducting expenses of the offering estimated at $600,000 payable by
the Company.
(2) Certain Selling Stockholders have granted the Underwriters a 30-day option
to purchase up to 375,000 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 Selling Stockholders
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>
[Image of map of the continental United States of America and the State of
Hawaii with dots, circles and a star imprinted in the various states
representing the Company's field case management, specialized cost containment
and corporate offices.]
CRA SERVICE LOCATIONS
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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 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. Specialized cost containment services include various techniques designed
to reduce the cost of workers' compensation claims and automobile accident
injury claims. The Company operates one of the largest field case management
organizations in the United States, consisting of 110 field case management
offices with approximately 1,000 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 28.5% of revenues for the first quarter of 1996, up from
approximately 25.2% for the corresponding period of the prior year. The Company
markets its services 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 1,200 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. 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. The
Company believes that this growth resulted primarily from (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.
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
3
<PAGE>
of only a small number of companies that offer a comprehensive line of workers'
compensation managed care services on a nationwide basis.
CRA believes that significant opportunities exist in applying managed care
techniques to the workers' compensation marketplace. The Company's objective is
to expand its presence as a national provider of comprehensive managed care
services to workers' compensation payors. CRA's strategy is to (i) continue its
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 promptly 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.
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 two acquisitions and has entered into a definitive agreement
with respect to a third strategic acquisition. On October 24, 1995, CRA
acquired all outstanding capital stock of Alta Pacific Corporation ("Alta
Pacific"), a leading provider of case management services in the state of
Washington. The acquisition of Alta Pacific provides a platform for the
introduction of CRA's specialized cost containment services in the Pacific
Northwest, a region where the Company has historically not maintained a
presence. 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 6, 1996 CRA
signed a definitive agreement to acquire 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. 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...... 1,100,000 shares
Common Stock offered by the Selling 1,400,000 shares
Stockholders............................
Common Stock to be outstanding after the 8,474,724 shares(1)
offering................................
Use of proceeds.......................... Repayment of short-term debt and
general corporate purposes, including
acquisitions.
Nasdaq National Market symbol............ CRAA
</TABLE>
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(1) Based on the number of shares outstanding as of April 30, 1996. Excludes
options to purchase 664,700 shares at April 30, 1996, with a weighted
average exercise price of $20.23 per share, of which options to purchase
244,000 shares have been granted subject to stockholder approval. See "Risk
Factors---Shares Eligible for Future Sale" and Note 10 to the Consolidated
Financial Statements of the Company.
4
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(1) 1995 1996 1996(1)
------- ------- -------- -------- -------- ----------- ------- ------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $58,969 $80,851 $100,546 $121,295 $146,055 $155,556 $34,930 $40,225 $42,283
Gross profit........... 6,458 11,997 14,464 17,499 23,440 26,087 5,385 6,803 7,225
Operating income(2).... 1,965 4,990 4,533 8,746 12,419 13,443 2,708 3,694 3,604
Interest expense....... 78 66 16 4,087 2,484 4,282 1,354 194 568
Provision for income
taxes(3).............. 118 307 355 5,302 3,974 3,930 542 1,453 1,336
Net income (loss)
before extraordinary
items(2)(3)........... $ 1,798 $ 4,677 $ 4,178 $ (713) $ 5,961 $ 5,231 $ 812 $ 2,047 $ 1,717
Weighted average shares
outstanding........... 4,815 6,540 6,540 4,815 7,550 7,550
Pro forma and actual
earnings per share(4). $ 0.57 $ 0.91 $ 0.80 $ 0.17 $ 0.27 $ 0.23
STATISTICAL DATA:
Total number of service
locations............. 93 122 150 160 161 150 160 161
FIELD CASE MANAGEMENT
SERVICES:
Revenues............... $67,366 $ 80,948 $ 92,232 $106,462 $106,462 $26,111 $28,765 $28,765
Percentage of total
revenue............... 83.3% 80.5% 76.0% 72.9% 68.4% 74.8% 71.5% 68.0%
Number of service
locations............. 78 87 102 110 110 102 110 110
SPECIALIZED COST
CONTAINMENT SERVICES:
Revenues............... $13,485 $ 19,598 $ 29,063 $ 39,593 $ 49,094 $ 8,819 $11,460 $13,518
Percentage of total
revenue............... 16.7% 19.5% 24.0% 27.1% 31.6% 25.2% 28.5% 32.0%
Number of service
locations(5).......... 15 35 48 50 51 48 50 51
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED(6)
------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................ $ 9,386 $(11,085) $32,602
Total assets............................... 38,911 61,540 75,127
Total debt................................. 9,100 30,208 108
Stockholders' equity....................... 13,720 13,720 57,407
</TABLE>
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(1) Pro forma to give effect to the acquisition of Focus as if such transaction
had occurred on January 1, 1995 for the statement of operations data. The
balance sheet data is pro forma as if the transaction had occurred on March
31, 1996. See "Financial Statements--Consolidated Pro Forma Financial
Statements of CRA Managed Care, Inc. and Focus Healthcare Management, Inc."
(2) In 1994 the Company completed a recapitalization (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. 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."
(3) 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 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 estimated 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. Proposals for health care
legislative reforms are regularly considered at the federal and state levels.
To the extent that such proposals affect workers' compensation, such proposals
may adversely affect the Company's business and results of operations. In
addition, changes in workers' compensation laws or regulations may impact
demand for the Company's services, require the Company to develop new or
modified services to meet the demands of the marketplace or modify the fees
that the Company may charge for its services. 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. 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. To date, only Colorado
and New York have legislation that permits such direction of care and QMC3 has
been approved to offer 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. If approved, such an arrangement would be
the first to offer automobile insurance managed care services in New York.
While the Company believes that approval from the State of New York Insurance
Department will be forthcoming, there can be no assurance that New York will
issue such approval. Without such approval, QMC3 and this PPO would not be
permitted to offer fully integrated managed care services to the New York
automobile insurance market. 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. 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
6
<PAGE>
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, 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
maintenance organizations ("HMOs"), PPOs, third party administrators ("TPAs")
and other managed health care
7
<PAGE>
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 than 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.
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
approximately $59,332,000 in gross proceeds (plus up to an additional
$15,892,500 in gross proceeds if the over-allotment option is exercised in
full), based on the last reported sale price of the Common Stock on May 3,
1996, as reported on the Nasdaq National Market. 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 30.7% of the outstanding Common Stock (26.3% 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."
Potential Adverse Impact of Shares Eligible for Future Sale. Sales of
substantial amounts of Common Stock in the public market following this
offering, or the perception that such sales could occur, could adversely
affect prevailing market prices of the Common Stock. In connection with the
Recapitalization, the Company entered into a registration rights agreement
(the "Registration Rights Agreement") with J.H. Whitney & Co. ("Whitney") and
certain of its affiliates, First Union Corporation
8
<PAGE>
("First Union"), Lois E. Silverman and Donald J. Larson, pursuant to which
such persons and entities are entitled to certain rights with respect to
registration under the Securities Act of 1933, as amended, of approximately
4,502,611 shares of Common Stock. Pursuant to the Registration Rights
Agreement, holders of at least 25.0% of the shares of Common Stock subject to
the Registration Rights Agreement (the "Rightsholders") (excluding Ms.
Silverman and Mr. Larson) have the right to require the Company to register
their Common Stock on up to three occasions. Ms. Silverman has the right to
require the Company to register her shares of Common Stock after the other
Rightsholders (excluding Mr. Larson) have sold Common Stock of the Company
with an aggregate sales price of at least $30,000,000 in one or more
registered offerings. If the Company proposes to register any of its
securities under the Securities Act of 1933, as amended, whether for its own
account or otherwise, the parties to the Registration Rights Agreement
(including Ms. Silverman and Mr. Larson) are entitled to receive notice of
such registration and to include their shares in such registration, subject to
certain conditions and limitations. In addition, the Company has granted to
former stockholders of each of Alta Pacific and QMC3 the right to request
registration of up to 136,150 shares and 249,816 shares, respectively, on one
occasion and to include any of such shares in the Company's registration
statements filed on behalf of the Company or other stockholders of the
Company. To the extent exercised, such rights to register shares of Common
Stock will result in additional shares becoming available to the public
market, which could adversely affect prevailing market prices of the Common
Stock. The Company has agreed to pay fees, costs and expenses of any
registration effected on behalf of the parties to the Registration Rights
Agreement and the former stockholders of Alta Pacific and QMC3 (other than
underwriting discounts and commissions). The shares being sold by certain of
the Selling Stockholders are being registered pursuant to the Registration
Rights Agreement and the registration rights agreement with the former Alta
Pacific stockholders. In addition, the Company, its executive officers and
directors, all current stockholders that are parties to the Registration
Rights Agreement, and the former stockholders of Alta Pacific have agreed to
certain restrictions on their disposition of shares of Common Stock for a
period of 90 days after the date of this Prospectus. See "Underwriting."
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 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 two acquisitions and has entered into a definitive
agreement with respect to a third strategic acquisition.
On October 24, 1995, CRA acquired all outstanding capital stock of Alta
Pacific in exchange for 136,150 shares of the Company's Common Stock, which
was then valued at $2,900,000. This acquisition was accounted for as a pooling
of interests and was not material from an accounting perspective. Therefore,
the Company restated its opening retained earnings to reflect the net assets
of Alta Pacific. As such, the results for the year ended December 31, 1995
only include the operating results of Alta Pacific subsequent to the
acquisition date. Alta has eight field case management offices in the state of
Washington and last year had revenues of approximately $2,900,000. The
acquisition of Alta Pacific gives CRA an immediate presence in the Pacific
Northwest for the introduction of CRA's specialized cost containment services.
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 85,000 individual providers and 1,700 hospitals servicing
26 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 6, 1996, CRA signed a definitive agreement to acquire all outstanding
capital stock of QMC3 in exchange for 249,816 shares of the Company's Common
Stock, which was then valued at $8,500,000. 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 is
expected to be accounted for as a pooling of interests and is not material to
the Company from an accounting perspective. The closing of the acquisition of
QMC3 is expected to occur prior to the closing of this offering. The agreement
pursuant to which CRA intends to acquire QMC3 contains a number of customary
conditions to closing. While the Company anticipates that such conditions will
be satisfied, there can be no assurance that the acquisition of QMC3 will be
consummated.
10
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 1,100,000 shares of Common Stock
offered by the Company hereby are estimated to be $43,687,000,at an assumed
public offering price of $42.38 per share (the last reported sale price of the
Common Stock on May 3, 1996) and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company. Certain affiliates of Whitney have agreed to permit the Company to
sell, in place of such affiliates of Whitney, up to 100,000 shares of Common
Stock upon exercise of the underwriters' over-allotment option. If the over-
allotment option is exercised in full and the Company sells all 100,000
shares, the total proceeds to the Company are estimated to be $47,713,200.
The Company intends to apply the net proceeds it receives from this offering
as follows: (i) repay approximately $30 million of senior debt outstanding
under the $40 million revolving credit facility (the "Credit Facility")
between the Company and First Union Bank, of which $21 million was incurred to
fund the acquisition of Focus, $5 million was incurred to repay the junior
subordinated notes and the balance was incurred to provide working capital;
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 (through May 3, 1996)........................... $44.88 $34.00
</TABLE>
On May 3, 1996, the last reported sale price was $42.38 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
March 31, 1996, (ii) the pro forma capitalization of the Company at March 31,
1996 giving effect to the consummation of the Focus acquisition and (iii) the
adjusted pro forma capitalization of the Company at March 31, 1996 giving
effect to the sale of 1,100,000 shares of Common Stock offered by the Company
hereby, at an assumed public offering price of $42.38 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>
MARCH 31, 1996
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
--------- ------------ --------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Revolving credit facility and current
portion
of capital leases....................... $ 9,100 $ 30,169 $ 69
Long-term debt:
Capital leases.......................... 39 39
Stockholders' equity:
Preferred Stock, $.01 par value;
1,000,000 shares authorized; no shares
issued and outstanding................. -- -- --
Common Stock, $.01 par value; 10,000,000
shares authorized; 7,373,024 shares
issued and outstanding and 8,473,024
shares issued and outstanding, as
adjusted(3)(4)......................... 74 74 85
Additional paid-in capital.............. 36,852 36,852 80,528
Retained deficit........................ (23,206) (23,206) (23,206)
--------- --------- ---------
Total stockholders' equity........... 13,720 13,720 57,407
--------- --------- ---------
Total capitalization............... $ 22,820 $ 43,928 $ 57,515
========= ========= =========
</TABLE>
- --------
(1) Pro forma to give effect to the acquisition of Focus as if such
transaction had occurred on March 31, 1996. See "Unaudited Pro Forma
Combined Condensed Financial Statements."
(2) Adjusted to give effect to the sale by the Company of 1,100,000 shares of
Common Stock at an assumed offering price of $42.38 per share and the
application of the estimated net proceeds therefrom, as described under
"Use of Proceeds."
(3) Excludes options to purchase 664,700 shares outstanding at April 30, 1996,
with a weighted average exercise price of $20.23 per share, of which
options to purchase 244,000 shares have been granted subject to
stockholder approval. See "Description of Capital Stock" and Note 10 to
the Company's Financial Statements.
(4) The Company's Board of Directors has authorized an increase in the number
of shares of Common Stock which the Company is authorized to issue to
40,000,000. Such increase is subject to the approval of the Company's
stockholders at the Company's Special Meeting in lieu of its Annual
Meeting of Stockholders to be held on May 21, 1996. See "Description of
Capital Stock."
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 three months ended
March 31, 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>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- ----------------
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 $34,930 $40,225
Cost of services....... 52,421 68,854 86,082 103,796 122,615 29,545 33,422
------- ------- -------- -------- -------- ------- -------
Gross profit........... 6,548 11,997 14,464 17,499 23,440 5,385 6,803
General and
administrative
expenses(1)........... 4,583 7,007 9,931 8,753 11,021 2,677 3,109
Operating income(1).... 1,965 4,990 4,533 8,746 12,419 2,708 3,694
Other expenses:
Interest (income)..... (32) (5) (11) (62) -- -- --
Interest expense...... 78 66 16 4,087 2,484 1,354 194
Other (income)
expense.............. 3 (55) (5) 132 -- -- --
------- ------- -------- -------- -------- ------- -------
Total other
(income) expense.. 49 6 -- 4,157 2,484 1,354 194
Income before income
taxes(1).............. 1,916 4,984 4,533 4,589 9,935 1,354 3,500
Provision for income
taxes(2)
Current year
operations........... 118 307 355 1,530 3,974 542 1,453
Change in tax status.. -- -- -- 3,772 -- -- --
------- ------- -------- -------- -------- ------- -------
Total provision for
income taxes...... 118 307 355 5,302 3,974 542 1,453
------- ------- -------- -------- -------- ------- -------
Net income (loss)
before extraordinary
items (1)(2).......... 1,798 4,677 4,178 (713) 5,961 812 2,047
------- ------- -------- -------- -------- ------- -------
Loss on retirement of
debt, net of taxes.... -- -- -- -- (2,460) -- --
------- ------- -------- -------- -------- ------- -------
Net income (loss)...... $ 1,798 $ 4,677 $ 4,178 $ (713) $ 3,501 $ 812 $ 2,047
======= ======= ======== ======== ======== ======= =======
PRO FORMA AND ACTUAL
EARNINGS PER SHARE:
Net income before ex-
traordinary items(3).. $ 0.57 $ 0.91 $ 0.17 $ 0.27
Loss on retirement of
debt, net of tax...... -- (0.37) -- --
-------- -------- ------- -------
Net income............. $ 0.57 $ 0.54 $ 0.17 $ 0.27
======== ======== ======= =======
Weighted average shares
outstanding........... 4,815 6,540 4,815 7,550
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
BALANCE SHEET DATA: ------- ------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital........ $ 5,366 $ 9,114 $ 12,126 $ 5,609 $ 7,493 $ 5,347 $ 9,386
Total assets........... 11,704 15,894 20,836 31,345 36,556 30,484 38,911
Total debt............. 453 337 -- 44,716 9,300 44,059 9,100
Total stockholders'
equity (deficit)...... 7,616 11,896 15,856 (28,513) 11,660 (27,701) 13,720
</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 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. Specialized cost containment services include various techniques
designed to reduce the cost of workers' compensation claims and automobile
accident injury claims.
The Company operates one of the largest field case management organizations
in the United States, consisting of 110 field case management offices with
approximately 1,000 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. The Company markets its services 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 1,200 customers nationwide.
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 three
months ended March 31, 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>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------- ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Field case management services.......... 80.5% 76.0% 72.9% 74.8% 71.5%
Specialized cost containment services... 19.5% 24.0% 27.1% 25.2% 28.5%
</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 and eight in 1995, all eight of which were opened in connection
with the acquisition of Alta Pacific. 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 two to five new field case management offices per year to satisfy
client needs in selected regions. Revenues from specialized cost containment
services comprised approximately 28.5% of total revenues for the first quarter
of 1996. The Company opened 20 new specialized cost containment locations in
1993, 13 in 1994 and two in 1995.
14
<PAGE>
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.
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
-----------------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------- --------------
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 84.6 83.1
Gross profit............................. 14.4 14.4 16.0 15.4 16.9
General and administrative expenses........ 9.9 7.2 7.5 7.7 7.7
Operating income......................... 4.5 7.2 8.5 7.7 9.2
Other expenses............................. -- 3.4 1.7 3.9 0.5
Provision for income taxes................. 0.3 4.4 2.7 1.6 3.6
Net income (loss).......................... 4.2 (0.6) 2.4 2.3 5.1
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Revenues
Revenues increased 15.2% in the first quarter of 1996 to $40,225,000 from
$34,930,000 in the first quarter of 1995. Field case management revenues
increased 10.2% in the first quarter of 1996 to $28,765,000 from $26,111,000
in the first quarter of 1995, while specialized cost containment revenues
increased 30.0% in the first quarter of 1996 to $11,460,000 from $8,819,000 in
the first quarter of 1995, primarily as a result of greater penetration in the
Company's existing service areas. The growth in the Company's revenues is
attributable to the opening of eight field case management offices associated
with the acquisition of Alta Pacific in the fourth quarter of 1995 and growth
in revenues from existing service locations.
Cost of Services
Cost of services increased 13.1% in the first quarter of 1996 to $33,422,000
from $29,545,000 in the first quarter of 1995 due to an increase in revenues.
Cost of services as a percentage of revenue decreased to 83.1% in the first
quarter of 1996 compared to 84.6% in the first quarter of 1995. This
improvement is the result of productivity gains in field case management
services coupled with a continued shift in the Company's revenue mix towards
the specialized cost containment services, especially bill review, which have
higher gross profit margins than field case management revenues.
General and Administrative Expenses
General and administrative expenses increased 16.1% in the first quarter of
1996 to $3,109,000 from $2,677,000 in the first quarter of 1995, or 7.7% as a
percentage of revenue for the first quarter of 1996 and 1995. The increase in
general and administrative expenses in the first three months of 1996 was due
primarily to increased expenditures for marketing initiatives and additional
investments in the information technology group.
Interest Expense
Interest expense decreased $1,160,000 in the first quarter of 1996 to
$194,000 from $1,354,000 in the first quarter of 1995 due primarily to the
repayment of the $17,000,000 principal amount of term loans
15
<PAGE>
(the "Term Loan") and the $21,000,000 principal amount of senior subordinated
notes (the "Senior Subordinated Notes") with the proceeds from the closing of
the sale of Common Stock on May 10, 1995.
Provision for Income Taxes
The Company's provision for income taxes in the first quarter of 1996 of
$1,453,000 resulted in an effective tax rate of 41.5% compared to 40% for the
first quarter of 1995. The Company expects to continue to provide for its
taxes at the higher effective tax rate for the remainder of the year due to
increased profitability and a higher effective state tax rate.
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.
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.
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<PAGE>
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.
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
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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%.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters ended March 31, 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
--------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1994 1994 1994 1995 1995 1995 1995 1996
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $30,477 $30,962 $31,742 $34,930 $36,125 $36,826 $38,174 $40,225
Cost of services........ 26,125 26,650 26,914 29,545 30,212 30,843 32,015 33,422
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.......... 4,352 4,312 4,828 5,385 5,913 5,983 6,159 6,803
General and administra-
tive expenses.......... 2,039 2,287 2,498 2,677 2,744 2,759 2,841 3,109
------- ------- ------- ------- ------- ------- ------- -------
Operating income...... 2,313 2,025 2,330 2,708 3,169 3,224 3,318 3,694
Other expenses.......... 1,155 1,268 1,300 1,354 655 251 224 194
Provision for income
taxes.................. 498 326 444 542 1,005 1,189 1,238 1,453
------- ------- ------- ------- ------- ------- ------- -------
Net income before ex-
traordinary items ..... -- -- -- 812 1,509 1,784 1,856 2,047
Loss on retirement of
debt, net of taxes..... -- -- -- -- (2,460) -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 660 $ 431 $ 586 $ 812 $ (951) $ 1,784 $ 1,856 $ 2,047
======= ======= ======= ======= ======= ======= ======= =======
</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. Cash
flows generated from operations were $2,961,000, $5,594,000, $4,114,000 and
$650,000 for the years ended December 31, 1993, 1994, 1995 and for the first
three months of 1996, respectively. During the first three months of 1996,
working capital used $1,920,000 of cash due primarily to an increase in
accounts receivable of $2,654,000 offset by an increase in accounts payable,
accrued expenses and income taxes of $495,000. Accounts receivable increased
due to continued revenue growth
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while accounts payable increased due to the timing of payments, primarily the
payment of income taxes. The Company used $575,000 of cash to purchase
property and equipment during the first three months of 1996, the majority of
which was spent on new computer and software technology. The Company believes
cash flow generated from operations will be sufficient to fund the Company's
working capital, capital expenditures and debt service requirements for at
least the next 12 months. To the extent strategic opportunities arise, the
Company anticipates funding any future acquisitions through working capital
and, if necessary, future debt or equity financing.
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 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. 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. The
Company intends to use a portion of the proceeds from the sale of the shares
of Common Stock offered hereby to repay approximately $30,000,000 principal
amount outstanding under the Credit Facility. See "Use of Proceeds."
On January 16, 1996, the Company retired the $5,000,000 junior subordinated
notes issued in connection with the Recapitalization utilizing borrowings
under the 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.
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<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 110 field case management offices with approximately 1,000 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 28.5% of revenues for the first quarter of 1996, up from
approximately 25.2% 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 1,200 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
20
<PAGE>
administration. Despite various state reforms and employers' increasing
attention to workers' compensation costs, total workers' compensation costs
have increased substantially from 1982 to 1992.
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 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.
21
<PAGE>
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 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
CRA believes that significant opportunities exist in applying managed care
techniques to the workers' compensation marketplace, which historically has
been under-managed. The Company's objective is to expand its presence as a
national provider of comprehensive managed care services to workers'
compensation payors and payors of automobile accident medical claims. The
Company's strategy for achieving this objective is as follows:
Focus on Workers' Compensation Managed Care. The Company intends to continue
its 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 110-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 50 service locations nationwide that provide one or
more specialized cost containment services. Of the Company's approximately
1,200 case management customers, only a small percentage are also utilizing
the
22
<PAGE>
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.
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 pending 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 workers' compensation managed care
industry market remains in an early stage of development as payors begin to
embrace the concept of managing their workers' compensation exposure. The
Company will continue to seek strategic acquisitions 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 1,000 field case managers
serving 49 states and the District of Columbia from CRA's 110 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% and 72.9% of
the Company's revenues for 1993, 1994, and 1995, respectively.
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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.
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 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%
and 27.1% of the Company's revenues for 1993, 1994 and 1995, 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.
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<PAGE>
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 important historical database for
provider practice patterns and managed care provider compliance requirements.
CRA provides retrospective bill review service from 29 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 85,000
individual providers and 1,700 hospitals covering 26 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 12 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.
Social Security Disability Advocacy. Social security disability advocacy
services are offered to individuals who are receiving group or individual
long-term disability benefits. Long-term disability insurance carriers refer
individuals to CRA and the Company determines which of these individuals may
be eligible to receive social security disability benefits. CRA then provides
representation services for those appropriate individuals before the Social
Security Administration. When the individuals become entitled to social
security disability benefits, the group long-term disability insurance
carrier's liability is reduced dollar-for-dollar by the amount of the social
security award. This represents significant reserve savings for the insurance
company through benefit integration while also benefiting the disabled worker.
25
<PAGE>
Automobile Insurance Managed Care. The Company, through the proposed
acquisition of QMC3, is expanding its product line to offer an integrated
service to the automobile insurance market which 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. If approved, such an arrangement would be
the first to offer automobile insurance managed care services in 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 1,200 customers located in approximately 2,500 offices across
the country, including most of the major underwriters of workers' compensation
insurance, large TPAs and self-insured employers. No one customer represents
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 which focus on 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.
26
<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 or 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.
27
<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
28
<PAGE>
insurers products that permit them to direct claimants into a network of
medical providers. To date, only Colorado and New York have legislation that
permits such direction of care and QMC3 has been approved to offer 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. If approved, such an arrangement would be the first to offer automobile
insurance managed care services in New York. While the Company believes that
approval from the State of New York Insurance Department will be forthcoming,
there can be no assurance that New York will issue such approval. Without such
approval, QMC3 and this PPO would not be permitted to offer fully integrated
managed care services to the New York automobile insurance market. 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 March 31, 1996, the Company had approximately 2,120 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 at this site
pursuant to a lease agreement expiring in 2003. The Company also leases all of
its offices located in 43 states and two 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.
29
<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)............ 45 President, Chief Executive Officer and
Director
Joseph F. Pesce................ 47 Vice President--Finance and Administration,
Chief Financial Officer and Treasurer
John A. McCarthy, Jr........... 37 Vice President--Cost Containment Services
and Corporate Development
Anne E. Kirby.................. 42 Vice President--Marketing and Product
Development
Directors
Lois E. Silverman.............. 55 Chairman of the Board
George H. Conrades(2).......... 57 Director
Jeffrey R. Jay, M.D.(1)........ 37 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 Vice President--Finance and Administration, Chief
Financial Officer and Treasurer of the Company since October 1994. 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 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.
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
30
<PAGE>
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 Pioneer Companies, Inc.
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 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 Medicon, 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 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.
Since 1966, Dr. Rabkin has been 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.
The Company's Board of Directors is divided into three classes. The members
of each class of Directors serve for staggered three-year terms. The Board is
comprised of two Class I Directors (Mr. Conrades and Dr. Jay), two Class II
Directors (Mr. Larson and Mr. Rabkin) and two Class III Directors (Mr.
Laverack and Ms. Silverman), whose initial terms will expire upon the election
and qualification of Directors at the annual meeting of stockholders held
following the years ending December 31, 1995, 1996 and 1997, respectively. At
each annual meeting of stockholders, one class of Directors will be elected
for a term of three years. At the Special Meeting in lieu of the Company's
1996 Annual Meeting of Stockholders to be held on May 21, 1996, the
stockholders will consider a proposal to reelect the Class I Directors, Mr.
Conrades and Dr. Jay, for a term expiring December 31, 1999.
31
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 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).... 622,470 8.4% 300,000 322,470 3.8%
Donald J. Larson(3)..... 1,174,530 15.8% 150,000 1,024,530 12.0%
Joseph F. Pesce(4)...... 22,240 * 20,740 1,500 *
John A. McCarthy,
Jr.(5)................. 15,286 * 15,100 186 *
Anne E. Kirby(6)........ 20,986 * 19,800 1,186 *
George H. Conrades(7)... 15,666 * -- 15,666 *
Jeffrey R. Jay, M.D.(8). 2,075,581 27.8% 826,285 1,249,296 14.6%
William Laverack,
Jr.(8)................. 2,075,581 27.8% 826,285 1,249,296 14.6%
Mitchell T. Rabkin,
M.D.(9)................ 8,033 * -- 8,033 *
J.H. Whitney & Co.(10).. 2,075,581 27.8% 826,285 1,249,296 14.6%
Morgan Stanley Group,
Inc.(11)............... 467,400 6.3% -- 467,400 5.5%
Morgan Stanley Asset
Management, Inc.(12)... 467,400 6.3% -- 467,400 5.5%
Michael J. Spilde(13)... 68,075 * 34,037 34,038 *
Laurence G. Ernst(14)... 68,075 * 34,038 34,037 *
All executive officers
and directors as a
group (9 persons)(15).. 3,954,792 53.1% 1,400,000 2,622,867 30.7%
</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 April 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. Includes 250,000 shares held of record by the
Lois and Norman Silverman 1996 Charitable Remainder Unitrust, all of which
shares are being sold in this offering by such trust.
(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 20,740 shares of Common Stock issuable pursuant to currently
exercisable stock options.
(5) Includes 15,100 shares of Common Stock issuable pursuant to currently
exercisable stock options.
(6) Includes 19,800 shares of Common Stock issuable pursuant to currently
exercisable stock options.
(7) Includes 15,666 shares of Common Stock issuable pursuant to currently
exercisable stock options.
32
<PAGE>
(8) The address of these directors is c/o J.H. Whitney & Co., 177 Broad
Street, Stamford, Connecticut 06901. Consists of 2,075,581 shares held of
record by 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.
(9) Includes 7,833 shares of Common Stock issuable pursuant to currently
exercisable stock options.
(10) 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--305,726
shares of Common Stock; (ii) the Whitney Equity Fund--1,222,893 shares of
Common Stock; and (iii) the Whitney Debt Fund--546,962 shares of Common
Stock.
(11) 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.
(12) 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.
(13) The address of this stockholder is 9642 48th Avenue, S.W., Seattle,
Washington 98136.
(14) The address of this stockholder is c/o Gordon Thomas Hunnewell, 1201
Pacific Avenue, Suite 2200, Tacoma, Washington 98402.
(15) Includes 79,139 shares of Common Stock issuable pursuant to currently
exercisable stock options. Includes 2,075,581 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.
33
<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 10,000,000 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 shares of
Common Stock, and no shares of Preferred Stock, issued and outstanding. The
Company's Board of Directors has authorized an increase of the number of
shares of Common Stock which the Company is authorized to issue from
10,000,000 shares to 40,000,000 shares. Such increase is subject to the
approval of the Company's stockholders at the Company's Special Meeting in
lieu of its 1996 Annual Meeting of Stockholders to be held on May 21, 1996.
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
34
<PAGE>
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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Union
National Bank of North Carolina.
35
<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., J.P. Morgan
Securities Inc. and Montgomery Securities 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
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated......................................
Dean Witter Reynolds Inc.............................................
Montgomery Securities................................................
J.P. Morgan Securities Inc...........................................
---------
Total................................................................ 2,500,000
=========
</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 Selling Stockholders have granted to the Underwriters an option,
exercisable not later than 30 days after the date of this Prospectus, to
purchase up to 375,000 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
2,500,000, 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 2,500,000 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 2,690,942 shares of Common Stock,
including the executive officers and directors of the Company, 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
36
<PAGE>
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.
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.
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 matter 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 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 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.
37
<PAGE>
INCORPORATION BY REFERENCE
The Company hereby incorporates by reference the documents listed in (a)
through (e) 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 Current Report on Form 8-K/A filed on May 7, 1996
(CommissionNo. 0-25856).
(d) 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.
(e) 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 in 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.
38
<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-19
FINANCIAL STATEMENTS OF FOCUS HEALTHCARE MANAGEMENT, INC.
Balance Sheets.......................................................... F-20
Statements of Operations................................................ F-21
Statements of Shareholder's Equity (Deficit)............................ F-22
Statements of Cash Flows................................................ F-23
Notes to Financial Statements........................................... F-24
CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS OF CRA MANAGED CARE, INC. AND
FOCUS HEALTHCARE MANAGEMENT, INC. (UNAUDITED):
Consolidated Pro Forma Balance Sheet.................................... F-27
Consolidated Pro Forma Statement of Operations.......................... F-28
Notes to Pro Forma Financial Statements................................. F-29
</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,
-------------------------- MARCH 31,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 2,197,000 $ 3,005,000 $ 2,893,000
Accounts receivable, less allowance
for doubtful accounts of $380,000,
$430,000 and $500,000
respectively...................... 20,654,000 26,380,000 28,964,000
Prepaid expenses................... 394,000 629,000 664,000
Prepaid taxes...................... 1,084,000 319,000 --
------------ ------------ ------------
Total current assets............. 24,329,000 30,333,000 32,521,000
Property and equipment, at cost...... 8,890,000 11,732,000 12,307,000
Less: Accumulated depreciation and
amortization........................ 4,071,000 5,864,000 6,317,000
------------ ------------ ------------
Net property and equipment....... 4,819,000 5,868,000 5,990,000
Other assets:
Deferred finance costs, net of
accumulated amortization.......... 1,890,000 -- --
Other assets....................... 307,000 355,000 400,000
------------ ------------ ------------
Total other assets............... 2,197,000 355,000 400,000
------------ ------------ ------------
$ 31,345,000 $ 36,556,000 $ 38,911,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Revolving credit facilities........ $ 4,716,000 $ 4,300,000 $ 9,100,000
Current portion of long-term debt.. 2,500,000 5,000,000 --
Accrued interest expense........... 627,000 18,000 118,000
Accounts payable and accrued
expenses.......................... 5,074,000 5,927,000 6,646,000
Accrued payroll and related
expenses.......................... 5,803,000 7,595,000 6,262,000
Accrued income taxes............... -- -- 1,009,000
------------ ------------ ------------
Total current liabilities........ 18,720,000 22,840,000 23,135,000
Long-term debt....................... 37,500,000 -- --
Long-term deferred tax liabilities... 3,638,000 2,056,000 2,056,000
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 10,000,000
authorized; none, 7,372,424 and
7,373,024 shares issued and
outstanding, respectively......... -- 74,000 74,000
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 36,852,000
Retained earnings (deficit)........ 3,103,000 (25,253,000) (23,206,000)
Less: Treasury stock, 1,698,463,
none and none shares,
respectively...................... (40,866,000) -- --
------------ ------------ ------------
Total stockholders' equity
(deficit)....................... (28,513,000) 11,660,000 13,720,000
------------ ------------ ------------
$ 31,345,000 $ 36,556,000 $ 38,911,000
============ ============ ============
</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>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -----------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $100,546,000 $121,295,000 $146,055,000 $34,930,000 $40,225,000
Cost of services........ 86,082,000 103,796,000 122,615,000 29,545,000 33,422,000
------------ ------------ ------------ ----------- -----------
Gross profit........ 14,464,000 17,499,000 23,440,000 5,385,000 6,803,000
General and
administrative
expenses............... 9,931,000 8,753,000 11,021,000 2,677,000 3,109,000
------------ ------------ ------------ ----------- -----------
Operating income.... 4,533,000 8,746,000 12,419,000 2,708,000 3,694,000
Other (income) expense:
Interest (income)..... (11,000) (62,000) -- -- --
Interest expense...... 16,000 4,087,000 2,484,000 1,354,000 194,000
Other (income)
expense.............. (5,000) 132,000 -- -- --
------------ ------------ ------------ ----------- -----------
Total other (income)
expense............ -- 4,157,000 2,484,000 1,354,000 194,000
Income before income
taxes.............. 4,533,000 4,589,000 9,935,000 1,354,000 3,500,000
Provision for income
taxes
Current year
operations........... 355,000 1,530,000 3,974,000 542,000 1,453,000
Change in tax status.. -- 3,772,000 -- -- --
------------ ------------ ------------ ----------- -----------
Total provision for
income taxes....... 355,000 5,302,000 3,974,000 542,000 1,453,000
------------ ------------ ------------ ----------- -----------
Net income (loss) before
extraordinary items 4,178,000 (713,000) 5,961,000 812,000 2,047,000
Loss on retirement of
debt, net of taxes of
$1,610,000............. -- -- (2,460,000) -- --
------------ ------------ ------------ ----------- -----------
Net income (loss)....... $ 4,178,000 $ (713,000) $ 3,501,000 $ 812,000 $ 2,047,000
============ ============ ============ =========== ===========
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 $ 0.17 $ 0.27
Loss on retirement of
debt, net of tax..... -- (0.37) -- --
------------ ------------ ----------- -----------
Net income............ $ 0.57 $ 0.54 $ 0.17 $ 0.27
============ ============ =========== ===========
Weighted average
shares outstanding... 4,815,000 6,540,000 4,815,000 7,550,000
============ ============ =========== ===========
</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>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- ------------------------
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 $ 812,000 $ 2,047,000
Items not requiring
cash:
Depreciation of
property and
equipment............. 847,000 1,274,000 1,601,000 412,000 453,000
Provision for doubtful
accounts.............. 15,000 353,000 186,000 -- 70,000
Amortization of
deferred finance
costs and debt
discount.............. -- 521,000 228,000 170,000 --
Loss on retirement of
debt.................. -- -- 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) (701,000) (2,654,000)
Prepaid expenses and
deposits.............. 311,000 (1,407,000) 344,000 178,000 239,000
Accounts payable,
accrued expenses and
income taxes.......... 1,213,000 7,404,000 (296,000) (1,016,000) 495,000
----------- ------------ ------------ ----------- -----------
Cash flows from
operations.......... 2,961,000 5,594,000 4,114,000 (145,000) 650,000
Cash flows from
investing activities:
Purchase of property
and equipment......... (1,763,000) (2,788,000) (2,492,000) (744,000) (575,000)
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) (744,000) (575,000)
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) (489,000) 4,800,000
Proceeds from the
issuance of Term Loan. -- 17,000,000 -- -- --
Payments on Term Loan.. -- (750,000) (16,250,000) (250,000) --
Proceeds from issuance
of Senior Subordinated
Notes................. -- 21,000,000 -- -- --
Payments on the Senior
Subordinated Notes.... -- -- (21,000,000) -- --
Proceeds from issuance
of Junior Subordinated
Notes................. -- 5,000,000 -- -- --
Payment on Junior
Subordinated Notes.... -- -- -- -- (5,000,000)
Proceeds from the
issuance of Preferred
Stock................. -- 10,000,000 -- -- --
Proceeds from the sale
of Common Stock....... -- -- 40,250,000 -- --
Proceeds for the sale
of Common Stock under
the employee stock
purchase plan and
stock option plan..... -- -- 357,000 -- 13,000
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) -- --
Repurchase of Common
Stock................. -- (55,412,000) -- -- --
----------- ------------ ------------ ----------- -----------
Cash flows used for
financing
activities.......... (555,000) (1,351,000) (802,000) (739,000) (187,000)
----------- ------------ ------------ ----------- -----------
Net increase in cash and
cash equivalents....... 645,000 1,445,000 808,000 (1,628,000) (112,000)
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 $ 569,000 $ 2,893,000
=========== ============ ============ =========== ===========
Supplemental disclosure
of cash flow
information:
Interest paid.......... $ 16,000 $ 2,902,000 $ 2,865,000 $ 1,716,000 $ 94,000
Income taxes paid...... $ 48,000 $ 3,690,000 $ 3,392,000 $ 206,000 $ 125,000
</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 RETAINED
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE CAPITAL EARNINGS
----------- ----------- ---------- ------- --------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December
31, 1992......... -- $ -- 4,700,000 $ 1,000 -- $ -- $ -- $ 11,895,000
Dividends on
Common Stock.... -- -- -- -- -- -- -- (218,000)
Net income...... -- -- -- -- -- -- -- 4,178,000
----------- ----------- ---------- ------- --------- ------- ----------- ------------
Balance December
31, 1993......... -- -- 4,700,000 1,000 -- -- -- 15,855,000
=========== =========== ========== ======= ========= ======= =========== ============
Treasury stock
purchase........ -- -- -- -- -- -- -- --
Treasury stock
reissuance...... -- -- -- -- -- -- -- (12,039,000)
Issuance of
Preferred Stock. 1,698,463 9,249,000 -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- (713,000)
----------- ----------- ---------- ------- --------- ------- ----------- ------------
Balance December
31, 1994......... 1,698,463 9,249,000 4,700,000 1,000 -- -- -- 3,103,000
=========== =========== ========== ======= ========= ======= =========== ============
Conversion of
Convertible
Preferred Stock
into Class A
Common Stock.... (1,698,463) (9,249,000) -- -- -- -- -- (31,617,000)
Conversion of
Class A Common
Stock into $0.01
par value Common
Stock........... -- -- (4,700,000) (1,000) 4,700,000 47,000 -- (46,000)
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 -- (194,000)
Common Stock
issued under
employee stock
purchase plan
and stock option
plan............ -- -- -- -- 20,649 -- 357,000 --
Net income...... -- -- -- -- -- -- -- 3,501,000
----------- ----------- ---------- ------- --------- ------- ----------- ------------
Balance December
31, 1995......... -- -- -- -- 7,372,424 74,000 36,839,000 (25,253,000)
=========== =========== ========== ======= ========= ======= =========== ============
Common Stock
issued under
employee stock
purchase plan
and stock option
plan............ -- -- -- -- 600 -- 13,000 --
Net income...... -- -- -- -- -- -- -- 2,047,000
----------- ----------- ---------- ------- --------- ------- ----------- ------------
Balance March 31,
1996............. -- $ -- -- $ -- 7,373,024 $74,000 $36,852,000 $(23,206,000)
=========== =========== ========== ======= ========= ======= =========== ============
<CAPTION>
SERIES A
TREASURY STOCK TOTAL
------------------------- STOCKHOLDERS'
NUMBER EQUITY
OF SHARES VALUE (DEFICIT)
----------- ------------- --------------
<S> <C> <C> <C>
Balance December
31, 1992......... -- $ -- $ 11,896,000
Dividends on
Common Stock.... -- -- (218,000)
Net income...... -- -- 4,178,000
----------- ------------- --------------
Balance December
31, 1993......... -- -- 15,856,000
=========== ============= ==============
Treasury stock
purchase........ (2,303,000) (55,412,000) (55,412,000)
Treasury stock
reissuance...... 604,537 14,546,000 2,507,000
Issuance of
Preferred Stock. -- -- 9,249,000
Net loss........ -- -- (713,000)
----------- ------------- --------------
Balance December
31, 1994......... (1,698,463) (40,866,000) (28,513,000)
=========== ============= ==============
Conversion of
Convertible
Preferred Stock
into Class A
Common Stock.... 1,698,463 40,866,000 --
Conversion of
Class A Common
Stock into $0.01
par value Common
Stock........... -- -- --
Sale of Common
Stock at initial
public offering. -- -- 36,507,000
Common Stock
issued
for the
acquisition of
Alta Pacific
Corporation..... -- -- (192,000)
Common Stock
issued under
employee stock
purchase plan
and stock option
plan............ -- -- 357,000
Net income...... -- -- 3,501,000
----------- ------------- --------------
Balance December
31, 1995......... -- -- 11,660,000
=========== ============= ==============
Common Stock
issued under
employee stock
purchase plan
and stock option
plan............ -- -- 13,000
Net income...... -- -- 2,047,000
----------- ------------- --------------
Balance March 31,
1996............. -- $ -- $ 13,720,000
=========== ============= ==============
</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",
$1,000,000), 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 1/2% 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.
F-7
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 annual sales of approximately $10,000,000
and employs 115 people. On March 29, 1996, 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.
(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 three months
ended March 31, 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 (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 ($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.
(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.
F-8
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(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 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
F-9
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 and March 31, 1996, the Company had borrowings
under the Credit Facility of $4,300,000 and $9,100,000, respectively at an
average rate of interest of 7.361% and 6.88%, respectively.
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 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.
F-10
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
(5) LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
------------ MARCH 31,
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 dis-
count of $2,250,000.................................... 18,750 -- --
Junior Subordinated Notes, less current portion of
$5,000,000............................................. 5,000 -- --
------- ---- ----
$37,500 $-- $--
======= ==== ====
</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.
F-11
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(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 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, taxed as
an
S corporation.............................. (352,000) (7.7) -- --
State taxes, net of federal income tax bene-
fit........................................ 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>
F-12
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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, 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.
(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.
F-13
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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 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
F-14
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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 specified 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 took 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.
F-15
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(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 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-16
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SUMMARY OF STOCK OPTION PLAN ACTIVITY
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------
RESERVED PRICE PER
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 for the fiscal year
ended December 31, 1996. This standard establishes the financial accounting
and
F-17
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 $88,500 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-18
<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-19
<PAGE>
FOCUS HEALTHCARE MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- ---------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
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 as-
sets.................................. 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
=========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current portion of capital lease obli-
gations............................... $ 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-20
<PAGE>
FOCUS HEALTHCARE MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(PREDECESSOR) (FOCUS)
------------- ------------------------------------
FOR THE THREE
FOR THE YEARS ENDED DECEMBER 31, MONTHS ENDED
------------------------------------- MARCH 31,
1993 1994 1995 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 administra-
tive.................. 2,271,000 3,124,000 2,269,000 605,000
----------- ----------- ---------- ---------
Total costs and ex-
penses............. 21,067,000 17,935,000 9,616,000 2,531,000
----------- ----------- ---------- ---------
(Loss) Income from oper-
ations................. (1,698,000) (2,972,000) 292,000 (204,000)
Interest Expense (In-
come) 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-21
<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 Prede-
cessor 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 pur-
chase 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-22
<PAGE>
FOCUS HEALTHCARE MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(PREDECESSOR) (FOCUS)
------------- ---------------------------------------
FOR THE THREE
FOR THE YEARS ENDED DECEMBER 31, MONTHS ENDED
-------------------------------------- MARCH 31,
1993 1994 1995 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--
Depreciation 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-23
<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 $563,000, 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.
(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-24
<PAGE>
FOCUS HEALTHCARE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(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>
(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.
F-25
<PAGE>
FOCUS HEALTHCARE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
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 $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-26
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
(AMOUNTS IN THOUSANDS--UNAUDITED)
The following sets forth the Consolidated Pro Forma Balance Sheet of CRA
Managed Care, Inc. (the "Company") as of March 31, 1996 giving effect to the
acquisition of Focus. The Company's Consolidated Pro Forma Balance Sheet
presents the acquisition of Focus as if it had been consummated on March 31,
1996. The 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 Focus has been accounted for by the Company as a purchase
whereby the basis for accounting for Focus' assets and liabilities is based
upon their fair values at the date of the 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>
MARCH 31, 1996
----------------------------------------
PRO FORMA PRO FORMA
CRA FOCUS ADJUSTMENTS COMBINED
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 2,893 $ 16 -- $ 2,909
Accounts receivable, net............. 28,964 1,745 -- 30,709
Prepaid expenses..................... 664 34 -- 698
------- ------- -------- -------
Total current assets............... 32,521 1,795 -- 34,316
Property and equipment, net............ 5,990 929 -- 6,919
Deferred taxes and other assets........ 400 5 -- 405
Excess of cost over fair value of
assets acquired ...................... -- 28,339 (8,439)(1) 19,900
------- ------- -------- -------
$38,911 $31,068 $ (8,439) $61,540
======= ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities.......... $ 9,100 $ -- $ 21,000 (2) $30,100
Current portion of long-term debt.... -- 69 -- 69
Accounts payable and accrued
expenses............................ 13,026 640 555 (3) 14,221
Intercompany payable................. -- 1,479 (1,479)(4) --
Accrued income taxes................. 1,009 2 -- 1,011
------- ------- -------- -------
Total current liabilities.......... 23,135 2,190 20,076 45,401
Long-term debt......................... -- 39 -- 39
Long-term deferred tax liabilities..... 2,056 324 -- 2,380
Stockholders' equity................... 13,720 28,515 (28,515)(5) 13,720
------- ------- -------- -------
$38,911 $31,068 $ (8,439) $61,540
======= ======= ======== =======
</TABLE>
See accompanying Notes to Consolidated Pro Forma Financial Statements.
F-27
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT EARNINGS PER SHARE--UNAUDITED)
The following sets forth the Company's Consolidated Pro Forma Statement of
Operations for the fiscal year ended December 31, 1995 and the three months
ended March 31, 1996 giving effect to the acquisition of Focus. The Company's
Consolidated Pro Forma Statement of Operations presents the acquisition of
Focus as if it had been consummated at January 1, 1995. 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 Focus has been accounted for by the Company as a purchase
whereby the basis for accounting for Focus' assets and liabilities is based
upon their fair values at the date of the 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 ADJUSTMENTS COMBINED
-------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Revenues............................... $146,055 $9,908 $ (407)(6) $155,556
Cost of services....................... 122,615 7,347 (493)(7) 129,469
-------- ------ ------ --------
Gross profit....................... 23,440 2,561 86 26,087
General and administrative expenses.... 11,021 2,269 (646)(8) 12,644
-------- ------ ------ --------
Operating income................... 12,419 292 732 13,443
Interest expense, net.................. 2,484 2 1,796 (9) 4,282
Provision for income taxes............. 3,974 395 (439)(10) 3,930
-------- ------ ------ --------
Net income (loss)...................... $ 5,961 $ (105) $ (625) $ 5,231
======== ====== ====== ========
Earnings per share..................... $ 0.91 $ 0.80
======== ========
Weighted average shares outstanding.... 6,540 6,540
======== ========
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
-----------------------------------------
PRO FORMA PRO FORMA
CRA FOCUS ADJUSTMENTS COMBINED
-------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Revenues............................... $ 40,225 $2,327 $ (269)(6) $ 42,283
Cost of services....................... 33,422 1,926 (290)(7) 35,058
-------- ------ ------ --------
Gross profit....................... 6,803 401 21 7,225
General and administrative expenses.... 3,109 605 (110)(8) 3,604
-------- ------ ------ --------
Operating income................... 3,694 (204) 131 3,621
Interest expense, net.................. 194 -- 374 (9) 568
Provision for income taxes............. 1,453 -- (117)(10) 1,336
-------- ------ ------ --------
Net income (loss)...................... $ 2,047 $ (204) $ (126) $ 1,717
======== ====== ====== ========
Earnings per share..................... $ 0.27 $ 0.23
======== ========
Weighted average shares outstanding.... 7,550 7,550
======== ========
</TABLE>
See accompanying Notes to Consolidated Pro Forma Financial Statements.
F-28
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS--UNAUDITED)
(1) Eliminate existing goodwill of Focus ($28,339) and record 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: $21,555
Purchase price allocated to:
Current assets..................................................... 1,795
Property and equipment............................................. 929
Other long term assets............................................. 5
Current liabilities................................................ (711)
Long-term deferred tax liabilities................................. (324)
Long-term capital leases........................................... (39)
-------
Net assets acquired.............................................. 1,655
-------
Excess of cost over fair value of net assets acquired.............. $19,900
=======
</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.
(2) Record borrowings of $21,000 under the Company's existing $40,000 Credit
Facility to finance the acquisition.
(3) Record fees and expenses associated with the purchase of Focus.
(4) To eliminate the intercompany payable between United HealthCare
Corporation and Focus which was forgiven as part of the transaction.
(5) To eliminate the historical stockholder's equity of Focus.
(6) To eliminate sales between CRA and Focus of $407 and $269 for the year
ended December 31, 1995 and the three months ended March 31, 1996,
respectively.
(7) The pro forma adjustment includes:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- ------------------
<S> <C> <C>
Elimination of sales between CRA and
Focus................................. $(407) $(269)
Elimination of historical goodwill am-
ortization............................ (749) (187)
Record new goodwill amortization under
a thirty year life.................... 663 166
----- -----
$(493) $(290)
===== =====
</TABLE>
(8) To eliminate general overhead expenses allocated to Focus by United
HealthCare Corporation of $646 and $110 for the year ended December 31,
1995 and three months ended March 31, 1996, respectively.
(9) To record interest expense of $1,796 and $374 associated with the
borrowing of $21,000 under the Company's Credit Facility for the year
ended December 31, 1995 and three months ended March 31, 1996,
respectively. 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 three months ended
March 31, 1996, respectively).
F-29
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS--UNAUDITED)
(10) To record the tax benefit of $439 and $117 associated with the pro forma
adjustments and to adjust Focus's results of operation to the Company's
effective tax rate of 40% and 41.5% for the year ended December 31, 1995
and three months ended March 31, 1996, respectively.
F-30
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OF-
FER 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 DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER 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.................................................................. 20
Management................................................................ 30
Principal and Selling Stockholders........................................ 32
Description of Capital Stock.............................................. 34
Underwriting.............................................................. 36
Legal Matters............................................................. 37
Experts................................................................... 37
Additional Information.................................................... 37
Incorporation by Reference................................................ 38
Index to Financial Statements............................................. F-1
</TABLE>
------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,500,000 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.............................. $ 42,506
NASD filing fee.................................................... 12,827
Nasdaq National Market fee......................................... 17,500
Legal fees and expenses............................................ 175,000
Accounting fees and expenses....................................... 125,000
Blue Sky fees and expenses (including legal fees).................. 15,000
Printing and engraving expenses.................................... 90,000
Transfer agent fees and expenses................................... 10,000
Miscellaneous...................................................... 112,167
--------
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 for 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
II-1
<PAGE>
his status as such, whether or not the corporation would have the power to
indemnify him against such liability.
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
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.
3.1 Restated Articles of Organization of the Company.
3.2 Form of Articles of Amendment to the Articles of Organization of the
Company.
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.
4.4 Form of Registration Rights Agreement by and among the Company and the
shareholders of QMC3, Inc.
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 with respect to the Company.
23.2 Consent of Arthur Andersen LLP with respect to Focus HealthCare
Management, Inc.
23.3 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation
(included in Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
27.1 Financial Data Schedule
</TABLE>
II-2
<PAGE>
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 of 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 6th day of May, 1996.
CRA Managed Care, Inc.
/s/ Donald J. Larson
By: _________________________________
DONALD J. LARSON PRESIDENT, CHIEF
EXECUTIVE OFFICER AND DIRECTOR
POWER OF ATTORNEY
Know all men by these presents that each person whose signature appears
below constitutes and appoints Donald J. Larson and Joseph F. Pesce, 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 sign any and all additional registration
statements relating to the same offering of securities as this registration
statement that are filed pursuant to rule 462(b) of the securities act of
1933, as amended, 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 May 6, 1996
- ------------------------------------- Executive Officer
DONALD J. LARSON and Director
(principal
executive officer)
/s/ Joseph F. Pesce Vice President-- May 6, 1996
- ------------------------------------- Finance and
JOSEPH F. PESCE Administration,
Chief Financial
Officer and
Treasurer
(principal
financial and
accounting officer)
II-4
<PAGE>
SIGNATURE TITLE DATE
/s/ Lois E. Silverman Chairman of the May 6, 1996
- ------------------------------------- Board of Directors
LOIS E. SILVERMAN
/s/ Jeffrey R. Jay Director May 2, 1996
- -------------------------------------
JEFFREY R. JAY
/s/ William Laverack, Jr. Director May 6, 1996
- -------------------------------------
WILLIAM LAVERACK, JR.
/s/ George H. Conrades Director May 6, 1996
- -------------------------------------
GEORGE H. CONRADES
/s/ Mitchell T. Rabkin Director May 2, 1996
- -------------------------------------
MITCHELL T. RABKIN
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE PAGE
------- ----- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1 Restated Articles of Organization of the Company.
3.2 Form of Articles of Amendment to the Articles of Organization
of the Company.
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.
4.4 Form of Registration Rights Agreement by and among the Company
and the shareholders of QMC3, Inc.
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 with respect to the Company.
23.2 Consent of Arthur Andersen LLP with respect to Focus HealthCare
Management, Inc.
23.3 Consent of Hutchins, Wheeler & Dittmar, A Professional
Corporation (included in Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
27.1 Financial Data Schedule
</TABLE>
<PAGE>
Draft 5/5/96
------------
2,500,000 Shares
CRA Managed Care, Inc.
Common Stock
($.01 Par Value)
UNDERWRITING AGREEMENT
----------------------
May ___, 1996
Alex. Brown & Sons Incorporated
Dean Witter Reynolds Inc.
J.P. Morgan & Co.
Montgomery Securities
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
---------------
2,500,000 shares of the Company's Common Stock, $.01 par value (the "Firm
----
Shares") , of which 1,100,000 shares will be sold by the Company and 1,400,000
- ------
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." Certain Selling Shareholders also propose
-------
to sell at the Underwriters' option an aggregate of up to 375,000 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>
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 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 Commission. 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 fi led
----------
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, and 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>
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 and the Subsidiaries, taken as a whole. 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 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>
(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 have
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 of, or incorporated
by reference in, 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 business or financial
condition of the Company and its Subsidiaries, taken as a whole, 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 all 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 in or affecting the condition,
financial or otherwise of the Company or the earnings, business affairs,
management or business prospects of the Company and its Subsidiaries, taken
as a whole, whether or not occurring in the ordinary course of business,
and there has not been any material transaction entered into by the Company
or the Subsidiaries, other than transactions
<PAGE>
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 Registration Statement, as it may be amended or
supplemented.
(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 business or financial
condition of the Company and its Subsidiaries, taken as a whole. 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 s and its Subsidiaries, taken as a whole. 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 and
the Subsidiaries, taken as a whole.
(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 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,
taken as a whole. 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
<PAGE>
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 and the Subsidiaries, taken as a whole. 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 and the Subsidiaries, taken as a whole.
(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 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.
<PAGE>
(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 and the
Option Closing Date, as the case may be (as such dates are hereinafter
defined) will have good and marketable title to the Firm Shares and the
Option 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 Option
Shares (provided that with respect to any Selling Shareholder who is
exercising a stock option, such representation need only be true as of the
Closing Date and Option Closing Date, as the case may be); and upon the
delivery of, against payment for, such Firm Shares and Option 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 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
<PAGE>
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
and the Option 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 "Principal and Selling
Stockholders" 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 the Company as custodian (the "Custodian") pursuant to the
---------
Power of Attorney and Custody Agreement executed by each Selling
Shareholder for delivery of all Firm Shares and any Option Shares to be
sold hereunder by the Selling Shareholders. Each of the Selling
Shareholders specifically agrees that the Firm Shares and any Option 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 or the Option Shares hereunder, certificates for the Firm
Shares or the Options Shares, as the case may be, 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 in
New York Clearing House funds by certified or bank cashier's checks drawn
to the order of the Company for the shares to be sold by it and to the
order of the Company, "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
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
<PAGE>
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,
certain Selling Shareholders listed on Schedule III hereto hereby grant a n
------------
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
maximum number of Option Shares to be sold by the Selling Shareholders is
set forth opposite their respective names on Schedule III hereto. 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, the Attorney-
in-Fact, and the Custodian 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. If the option
granted hereby is exercised in part, the respective number of Option Shares
to be sold by the Selling Shareholders listed in Schedule III hereto shall
------------
be determined on a pro rata basis in accordance with the percentages set
forth opposite their names on Schedule II hereto, adjusted by you in such
-----------
manner as to avoid fractional shares. 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 and the Attorney-in-Fact. 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 and to the order of "CRA
Managed Care, Inc., as Custodian" for the Option Shares to be sold by the
Selling Shareholders against delivery of certificates therefor at the
offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, Maryland.
(e) If on the Closing Date or Option Closing Date, as the case may
be, any Selling Shareholder fails to sell the Firm Shares or Option Shares
which such Selling Shareholder has agreed to sell on such date as set forth
in Schedule II or Schedule III hereto, as the case may be, the Company
----------- ------------
may, at its option, agree that it will sell or arrange for the sale of that
number of shares of Common Stock to the Underwriters which represents Firm
Shares or the Option Shares
<PAGE>
which such Selling Shareholder has failed to so sell, as set forth in
Schedule II or Schedule III hereto, as the case may be or such lesser
----------- ------------
number as may be requested by the Representatives.
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 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
<PAGE>
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
will either (i) 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 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.
<PAGE>
(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 officer and 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 to the Underwriters
pursuant to this Agreement.
(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.
(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.
<PAGE>
(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
to the Underwriters pursuant to this Agreement.
(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.
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 that
are entitled thereto pursuant to a separate written agreement with the
Company; 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
<PAGE>
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. To
the extent, if at all, that any of the Selling Shareholders (other than
those referred to above) 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
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:
(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.
<PAGE>
(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, taken as a whole; 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, 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 and paid for as contemplated by
this Agreement; and, to such counsel's knowledge, 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
<PAGE>
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 Common Shares 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 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 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 included 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-Government
Regulation," "Risk Factors-Potential Adverse Impact of Shares
Eligible for Future Sale," "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.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to or incorporated by reference in
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 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 which were filed as an exhibit to any of
the Company's registration statements, reports or forms filed pursuant
to the Securities Act or the Exchange Act.
<PAGE>
(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 who
acquire the Firm Shares and the Option Shares without notice of any
adverse claim) 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 of any adverse claims.
(xvii) Such counsel has not been advised, and based on (i) a
review of the Company's files, (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 II 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 and its Subsidiaries, taken as a
whole. 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 and its
Subsidiaries, taken as a whole.
<PAGE>
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), (xv) and
(xvi) 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 other financial information included 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, and that during the
course of preparation of the Registration Statement, there can be no
assurance that all possible material facts were disclosed.
(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 time it became effective under the Act (but after giving effect to
any modifications incorporated therein pursuant to Rule 430A under the Act)
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
<PAGE>
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, in their official capacities, 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
Registrations 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;
(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 in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries, taken as a whole, or
the earnings, business affairs, management or business prospects of
<PAGE>
the Company and the Subsidiaries, taken as a whole, 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 in all
material respects 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 material respects;
and
(viii) The Company has performed and/or complied in all material
respects 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 or
the Option Closing Date, as the case may be, a certificate of each Selling
Shareholder (or Attorney-in-Fact) to the effect that, as of the Closing
Date or the Option Closing Date, as the case may be, each 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, in all material respects, 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; and
(ii) Such Selling Shareholder has performed and/or complied, in
all material respects, 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
or the Option Closing Date, as the case may be.
(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.
<PAGE>
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, severally and not
jointly, 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
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; and
provided further that if the statement or omission has been corrected in
the Prospectus with respect to any untrue statement or omission or alleged
untrue statement or omission made in any Preliminary Prospectus, the
indemnity agreement contained in this paragraph shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages, liabilities or expenses purchased the Shares concerned (or
to the benefit of any person controlling such Underwriter) to the extent
that any such loss, claim, damage, liability or
<PAGE>
expense of such copy of the Prospectus was not sent or given to such person
at or prior to the written confirmation of sale of such Shares to such
person as required by the Act, unless such failure to deliver the
Prospectus was a result of non-compliance by the Company with its
obligations under Section 4(a)(iv) hereof. 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 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
<PAGE>
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 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
<PAGE>
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. 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
on a quarterly basis 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.
(g) In no event shall the liability of any Selling Shareholder for
indemnification under Section 8(a), contribution under Section 8(d) or
liability for breach of Section 1(b)(iv) hereof, 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 net proceeds received by such Selling Shareholder from the
Underwriters in the offering.
9. Default by Underwriters.
-----------------------
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
<PAGE>
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; if to the Sellling Stockholders, to the such
stockholders last address of record in the Company's stock transfer
records, 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:
(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
<PAGE>
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, taken as a whole, or the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and its Subsidiaries, taken as a
whole, 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 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
<PAGE>
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.
<PAGE>
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.
Very truly yours,
CRA MANAGED CARE, INC.
By ________________________________________
Donald J. Larson, President
Selling Shareholders listed on Schedule II
-----------
By ________________________________________
, 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: ___________________________________
Authorized Officer
<PAGE>
SCHEDULE I
----------
Schedule of Underwriters
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------------
<S> <C>
Alex. Brown & Sons Incorporated
Dean Witter Reynolds Inc.
Montgomery Securities
J.P. Morgan & Co.
Total 2,500,000
=========
</TABLE>
<PAGE>
SCHEDULE II
-----------
Schedule of Selling Shareholders
<TABLE>
<CAPTION>
Number of Firm Shares
Selling Shareholder to be Sold
------------------- ---------------------
<S> <C>
Total
=========
</TABLE>
<PAGE>
SCHEDULE III
------------
Schedule of Option Shares
<TABLE>
<CAPTION>
Maximum Number Percentage of
of Option Shares Total Number of
Name of Seller to be Sold Option Shares
-------------- ---------------- ----------------
<S> <C> <C>
Total 100%
======= ====
</TABLE>
<PAGE>
EXHIBIT A
---------
Subsidiaries
------------
Alta Pacific Corporation
FOCUS Healthcare Management, Inc.
QMC3, Inc.
<PAGE>
The Commonwealth of Massachusetts
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
Federal Identification
No. 04-2658593
RESTATED ARTICLES OF ORGANIZATION
GENERAL LAWS, CHAPTER 156B, SECTION 74
This certificate must be submitted to the Secretary of the Commonwealth
within sixty days after the date of the vote of stockholders adopting the
restated articles of organization. The fee for filing this certificate is
prescribed by General Laws, Chapter 156B, Section 114. Make check payable to
the Commonwealth of Massachusetts.
We, Donald J. Larson, President, and Lois E. Silverman, Clerk, of CRA Managed
Care, Inc., located at 312 Union Wharf, Boston, MA 02109, do hereby certify that
the following restatement of articles of organization of the corporation was
duly adopted by unanimous written consent on April 28, 1995 by vote of
3,001,537.5 shares of Common Stock out of 3,001,537.5 shares outstanding, and
1,698,462.5 shares of Series A Convertible Preferred Stock out of 1,698,462.5
shares outstanding, being at least two-thirds of each class of stock outstanding
and entitled to vote and of each class or series of stock adversely affected
thereby:
1. The name by which the corporation shall be know is CRA Managed Care, Inc.
2. The purposes for which the corporation is formed are as follows:
To provide field case management and specialized cost containment services
designed to reduce workers' compensation costs, and generally to do any and
all acts and things permitted to be done by business corporations under the
provisions of Chapter 156B, as amended, of the General Laws of
Massachusetts.
- --------------------
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on separate 8-1/2 X 11 sheets of
paper leaving a left hand margin of at least 1 inch for binding. Additions to
more than one article may be continued on a single sheet so long as each article
requiring each such addition is clearly indicated.
<PAGE>
3. The total number of shares and the par value, if any, of each class of stock
which the corporation is authorized to issue is as follows:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE WITH PAR VALUE
----------------- --------------
CLASS OF STOCK NUMBER OF SHARES NUMBER OF SHARES PAR VALUE
- ---------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
Preferred None 1,000,000 $.01 per share
Common None 10,000,000 $.01 per share
</TABLE>
*4. If more than one class is authorized, a description of each of the
different classes of stock with, if any, the preferences, voting powers,
qualifications, special or relative rights or privileges as to each class
thereof and any series now established:
See Continuation Pages which are attached hereto and incorporated by
reference.
*5. The restrictions, if any, imposed by the articles of organization upon the
transfer of shares of stock of any class are as follows:
None.
*6. Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or
for limiting, defining or regulating the powers of the corporation, or of
its directors or stockholders, or of any class of stockholders:
See Continuation Pages which are attached hereto and incorporated by
reference.
*We further certify that the foregoing restated articles of organization
effect no amendments to the articles of organization of the corporation as
heretofore amended, except amendments to the following articles 2, 3, 4 and 6.
Briefly describe amendments in space below:
Article 2: Revise purposes for which the Corporation was formed.
- ---------------------
*If there are no such provisions, state "None".
<PAGE>
Article 3: Reduce the total number of no par value common stock the Corporation
is authorized to issue to 0, increase the total number of shares of
Preferred Stock, $.01 par value per share the Corporation is
authorized to issue, from 0 to 1,000,000 and reduce the total number
of Preferred Stock, no par value, the Corporation is authorized to
issue to 0.
Article 4: Add provisions relating to Preferred Stock and delete all provisions
to Class B and Class C Common Stock and Series A and Series B
Convertible Preferred Stock.
Article 6: Creation of a classified Board of Directors and a restatement of
other lawful provisions for the conduct and regulation of the
business affairs of the Corporation.
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our
names this 10th day of May in the year 1995.
/s/ Donald J. Larson
- --------------------------------- President
Donald J. Larson
/s/ Lois E. Silverman
- --------------------------------- Clerk
Lois E. Silverman
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(GENERAL LAWS, CHAPTER 156B, SECTION 74)
I hereby approve the within restated articles of organization and, the
filing fee in the amount of $600 having been paid, said articles are deemed to
have been filed with me this 10th day of May, 1995
/s/ William Francis Galvin
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF RESTATED ARTICLES OF ORGANIZATION TO BE SENT
TO:
W. Brett Davis, Esq.
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
Telephone: (617) 951-6600
<PAGE>
Continuation Sheet 4A
---------------------
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is 11,000,000 shares, consisting of the following
classes of stock: (A) 10,000,000 shares of Common Stock, $.01 par value per
share (the "Common Stock"), and (B) 1,000,000 shares of Preferred Stock, $.01
par value per shares (the "Preferred Stock").
The designations, powers, preferences and relative, participating, optional
or other special rights, and the qualifications, limitations and restrictions
thereof in respect of each class of authorized capital stock of the Corporation
are as follows:
A. COMMON STOCK
------------
1. After the requirements with respect to preferential dividends on the
Preferred Stock shall have been met and after the Corporation shall have
complied with all the requirements, if any, with respect to the setting aside of
sums as sinking funds or redemption or purchase accounts, then and not otherwise
the holders of Common Stock shall be entitled to receive such dividends as may
be declared from time to time by the Board of Directors.
2. After distribution in full of the preferential amount to be distributed
to the holders of Preferred Stock in the event of voluntary or involuntary
liquidation, distribution or sale of assets, dissolution or winding up of the
Corporation, the holders of the Common Stock shall be entitled to receive all
the remaining assets of the Corporation, tangible or intangible, of whatever
kind available for distribution to the stockholders ratably in proportion to the
number of shares of Common Stock held by them respectively.
3. Except as may otherwise be required by law or the provisions of these
Articles, or by the Board of Directors pursuant to authority granted in these
Articles, each holder of Common Stock shall have one vote in respect of each
share of stock held by him in all matters voted upon by the stockholders.
B. UNDESIGNATED PREFERRED STOCK
----------------------------
Up to 1,000,000 shares of Preferred Stock may be issued in one or more
series at such time or times and for such consideration or considerations as the
Board of Directors may determine. Each series shall be so designated as to
distinguish the shares thereof from the shares of all other series and classes.
Except as to the relative preferences, powers, qualifications, rights and
privileges referred to below, in respect of any or all of which there may be
variations between different series, all shares of Preferred Stock shall not be
construed to constitute different classes of shares for the purpose of voting by
classes.
<PAGE>
Continuation Sheet 4A (continued)
---------------------------------
The Board of Directors is expressly authorized, subject to the limitations
prescribed by law and the provisions of these Articles of Organization, to
provide by adopting a vote or votes, a certificate of which shall be filed in
accordance with the Business Corporation Law of the Commonwealth of
Massachusetts, for the issuance of the Preferred Stock in one or more series,
each with such designations, preferences, voting powers, qualifications, special
or relative rights and privileges as shall be stated in the vote or votes
creating such series. The authority of the Board of Directors with respect to
each such series shall include without limitation of the foregoing the right to
determine and fix:
(1) The distinctive designation of such series and the number of shares to
constitute such series;
(2) The rate at which dividends on the shares of such series shall be
declared and paid, or set aside for payment, whether dividends at the rate so
determined shall be cumulative, and whether the shares of such series shall be
entitled to any participating or other dividends in addition to dividends at the
rate so determined, and if so on what terms;
(3) The right, if any, of the Corporation to redeem shares of the
particular series and, if redeemable, the price, terms and manner of such
redemption;
(4) The special and relative rights and preferences, if any, and the
amount or amounts per share, which the shares of such series shall be entitled
to receive upon any voluntary or involuntary liquidation, dissolution or winding
up of the Corporation;
(5) The terms and conditions, if any, upon which shares of such series
shall be convertible into, or exchangeable for, shares of stock of any other
class or classes, including the price or prices or the rate or rates of
conversion or exchange and the terms of adjustment, if any;
(6) The obligation, if any, of the Corporation to retire or purchase
shares of such series pursuant to a sinking fund or fund of a similar nature or
otherwise, and the terms and conditions of such obligation;
(7) Voting rights, if any;
(8) Limitations, if any, on the issuance of additional shares of such
series or any shares of any other series of Preferred Stock; and
(9) Such other preferences, powers, qualifications, special or relative
rights and privileges thereof as the Board of Directors may deem advisable and
are not inconsistent with law and the provisions of these Articles.
<PAGE>
Continuation Sheet 6A
---------------------
Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the Corporation, for its voluntary dissolution, or for
limiting, defining, or regulating the powers of the Corporation, or of its
directors or stockholders, or of any class of stockholders:
I. General Provisions
l. The Corporation eliminates the personal liability of each director to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director notwithstanding any provision of law imposing such liability;
provided, however, that, to the extent provided by applicable law, this
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 61 or 62 or
successor provisions of the Massachusetts Business Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
This provision shall not eliminate or limit the liability of a director of the
Corporation for any act or omission occurring prior to the date on which this
provision becomes effective. No amendment to or repeal of this provision shall
apply to or have any effect on the liability or alleged liability of any
director for or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal.
2. Meetings of the stockholders of the Corporation may be held anywhere in
the United States.
3. The directors of the Corporation may make, amend or repeal the by-laws
in whole or in part, except with respect to any provision thereof which by law
or the by-laws requires action by the stockholders.
4. The whole or any part of the authorized but unissued shares of capital
stock of the Corporation may be issued at any time or from time to time by the
Board of Directors without further action by the stockholders.
5. The Corporation may become a partner in any business.
<PAGE>
Continuation Sheet 6A (continued)
II. Classified Board of Directors
1. The Directors of the Corporation shall be divided into three classes:
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the whole number of the Board of Directors. If the
number of Directors is not evenly divisible by three, the Board of Directors
shall determine the number of Directors to be elected initially into each class.
The initial members of Class I shall be George H. Conrades and Jeffrey R. Jay,
M.D., and they shall hold office for a term to expire at the annual meeting of
the stockholders to be held in 1996; the initial members of Class II shall be
Donald J. Larson and Mitchell T. Rabkin, M.D., and they shall hold office for a
term to expire at the annual meeting of the stockholders to be held in 1997; and
the initial members of Class III shall be Lois E. Silverman and William
Laverack, Jr., and they shall hold office for a term to expire at the annual
meeting of the stockholders to be held in 1998, and in the case of each class,
until their respective successors are duly elected and qualified. At each
annual election held commencing with the annual election in 1996, the Directors
elected to succeed those whose terms expire shall be identified as being of the
same class as the Directors they succeed and shall be elected to hold office for
a term to expire at the third annual meeting of the stockholders after their
election, and until their respective successors are duly elected and qualified.
If the number of Directors changes, any increase or decrease in Directors shall
be apportioned among the classes so as to maintain all classes as equal in
number as possible, and any additional Director elected to any class shall hold
office for a term which shall coincide with the terms of the other Directors in
such class and until his successor is duly elected and qualified.
2. Notwithstanding any other provisions of these Articles of Organization
or the By-Laws of the corporation or the fact that a lesser percentage may be
specified by law, these Articles of Organization or the By-Laws of the
corporation, the affirmative vote of the holders of at least eighty (80%)
percent of the combined voting power of the outstanding stock of the corporation
entitled to vote generally in the election of Directors, voting together as a
single class, shall be required to amend, alter or adopt any provision
inconsistent with, or to repeal, this Section II.
64941-1
- 8 -
<PAGE>
FEDERAL IDENTIFICATION
NO. 04-2658593
THE COMMONWEALTH OF MASSACHUSETTS
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
We, Donald J. Larson, President, and James Westra, Assistant Clerk, of CRA
Managed Care, Inc., located at 312 Union Wharf, Boston, Massachusetts 02109,
certify that these Articles of Amendment affecting articles numbered: Article 3
of the Articles of Organization were duly adopted at a meeting held on May 21,
1996, by vote of: ____________________ shares of Common Stock of 7,373,024
shares outstanding, being at least a majority of each type, class or series
outstanding and entitled to vote thereon:
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ----------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: 10,000,000 $.01 per share
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Preferred: Preferred: 1,000,000 $.01 per share
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
Change the total authorized to:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ----------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: 40,000,000 $.01 per share
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Preferred: Preferred: 1,000,000 $.01 per share
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
RESOLVED: That the Articles of Organization of this corporation be amended so
- -------- as to increase the total number of shares of Common Stock which this
corporation shall have authority to issue from 10,000,000 shares,
with a par value of $.01 per share, to 40,000,000 shares, with a par
value of $.01 per share.
<PAGE>
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date:
-----------------------------------------------
SIGNED UNDER THE PENALTIES OF PERJURY, this 21st day of May, 1996,
, President
- --------------------------------------
Donald J. Larson
, Assistant Clerk
- --------------------------------------
James Westra
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(GENERAL LAWS, CHAPTER 156B, SECTION 72)
I hereby approve the within Articles of Amendment and, the filing fee in the
amount of $____________ having been paid, said articles are deemed to have been
filed with me this _________ day of ______________ ,
19 __________ .
Effective date:
________________________________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF DOCUMENT TO BE SENT TO:
Thomas M. Camp, Esq.
Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, MA 02110
64936-1
<PAGE>
REGISTRATION RIGHTS AGREEMENT
AGREEMENT made as of the 24th day of October, 1995, by and among CRA
MANAGED CARE, INC., a Massachusetts corporation (the "Company"), and LAURENCE G.
ERNST and MICHAEL J. SPILDE, individuals (collectively, the "ALTA
Shareholders").
WHEREAS, the Company, CRA Acquisition Corp., a wholly-owned subsidiary of
the Company ("Merger Sub"), ALTA Pacific Corporation, a Washington corporation
("ALTA"), and the ALTA Shareholders have entered into an Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which Merger Sub is merging with and
into ALTA, with ALTA being the surviving corporation in consideration of the
issuance by the Company to the ALTA Shareholders of 136,150 shares of Common
Stock, par value $.01 per share, of the Company (the "Common Stock") with an
aggregate value of $2,900,000, as determined in accordance with the Merger
Agreement (the "Merger"); and
WHEREAS, Comprehensive Rehabilitation Associates, Inc. (predecessor to
CRA), 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 are parties to a certain Registration Rights Agreement, dated March 8,
1994 (the "CRA Registration Rights Agreement"); and
WHEREAS, pursuant to the terms of the Merger Agreement, the Company has
agreed to grant the ALTA Shareholders certain rights to require the Company to
register their shares of Common Stock in accordance with the terms of this
Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission, or any
----------
other federal agency at the time administering the Securities Act (as
defined below).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, or any similar federal statute, and the rules and regulations
of the Commission thereunder, all as the same shall be in effect at the
time.
"Permitted Transferee" shall mean the ALTA Shareholders who received
--------------------
shares of Common Stock pursuant to the Merger.
"Person" means a corporation, an association, a partnership, an
------
organization, a business, an individual, a governmental or political
subdivision thereof, or a governmental agency.
<PAGE>
"Registrable Securities" shall mean the _______ shares of Common Stock
----------------------
received by the ALTA Shareholders pursuant to the Merger and held by
them on the date hereof (together with any other shares of Common Stock
which may be issued by the Company in respect of such shares by means
of stock splits, stock dividends or similar events), excluding shares
of Common Stock which have been sold, assigned or otherwise transferred
to a person who is not a Permitted Transferee.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
2. Securities Subject to this Agreement.
------------------------------------
(a) Registrable Securities. For the purposes of this Agreement,
----------------------
Registrable Securities will cease to be Registrable Securities when (i) a
registration statement covering such Registrable Securities has been declared
effective under the Act by the SEC and such Registrable Securities have been
disposed of pursuant to such effective registration statement or (ii) the entire
amount of Registrable Securities proposed to be sold in a single sale are or, in
the opinion of counsel satisfactory to the Company and the Holder, each in their
reasonable judgment, may be distributed to the public pursuant to Rule 144 (or
any successor provision then in effect) under the Act.
(b) Holders of Registrable Securities. A Person is deemed to be a
---------------------------------
holder of Registrable Securities (a "Holder") whenever such Person (i) is a
party to this Agreement (or a Permitted Transferee thereof) and (ii) owns of
record Registrable Securities. If the Company receives conflicting
instructions, notices, or elections from two or more persons with respect to the
same Registrable Securities, the Company may act upon the basis of the
instructions, notice, or election received from the registered owner of such
Registrable Securities.
3. Required Registration. If the Company shall receive a written consent
---------------------
therefor from any record holder or holders of an aggregate of at least fifty
percent (50%) of the Registrable Securities then held by the Alta Shareholders
(but in no event less than 50,000 Registrable Securities), the Company shall
prepare and file a registration statement on Form S-3 under the Securities Act
covering the Registrable Securities which are the subject of such request and
shall use its best efforts to cause such registration statement to become
effective - provided that the Registrable Securities to be sold pursuant to such
registration statement should not be sold pursuant to an underwriter offering.
In addition, unless such request is made on behalf of all ALTA Shareholders,
upon the receipt of such request, the Company shall promptly give written notice
to all other ALTA Shareholders. CRA shall include in such registration
statement such Registrable Securities for which it has received written requests
to register by such other ALTA Shareholders within 30 days after the delivery of
the Company's written notice to such other ALTA Shareholders. The Company shall
be obligated to prepare, file and cause to become effective only one
registration statement (on Form S-3 or any successor
2
<PAGE>
form promulgated by the SEC ("Form S-3")) pursuant to this Section 3, and to pay
the expenses associated with such registration statement. Holders may not
exercise any right pursuant to this Section 3 until such time as financial
results (including combined sales and net income) covering at least 30 days of
post-merger operations have been published by the Company.
On one occasion, the Board of Directors may, by delivery of written notice
to the Holders of Registrable Securities requesting registration, cause the
requested registration to be delayed for not more than sixty (60) days if the
Board of Directors determines in good faith that, in connection with such
registration, the Company would be required to disclose information regarding a
proposed transaction involving the Company which, if disclosed, could have an
adverse effect on the Company, the other party or parties to such transaction,
or the probability that such transaction would be consummated on terms no less
favorable to the Company as would be available without such disclosure.
If, prior to the time of any request by holders of Registrable Securities
pursuant to this Section 3, the Company has publicly announced its intention to
register any of its securities for a public offering under the Securities Act,
no registration of Registrable Securities shall be initiated pursuant to this
Section 3 until 180 days after the effective date of the registration so
announced unless the Company is no longer proceeding diligently to effect such
registration, whether such registration is for the sale of securities for the
Company's own account or for the account of others.
Without the written consent of the holders of a majority of the Registrable
Securities for which registration has been requested pursuant to this Section 3,
neither CRA nor any other holder of securities of CRA may include securities in
such registration.
4. Piggy Back Rights. In the case of any offering of securities by the
-----------------
Company under the Securities Act for its own account, or the account of any
selling shareholder of the Company, of any class of security (other than a
registration statement on Form S-4 or S-8 or any successor form thereto) under
the Act, then the Company shall give written notice of such proposed filing to
each of the Holders at least thirty (30) days before the anticipated filing
date, and such notice shall describe in detail the proposed registration and
distributions (including those jurisdictions where registration under the
securities or blue sky laws is intended) and offer such Holders the opportunity
to register the number of Registrable Securities as each such Holder may
request. The Company shall use its best efforts to cause the managing
underwriter or underwriters of an underwritten offering proposed by the Company
(the "Company Underwriter") to permit the Holders who have requested and are
eligible to participate in the registration for such offering (within ten (10)
days of notice provided for in the preceding sentence) to include such
Registrable Securities in such offering on the same terms and conditions as the
securities of the Company included therein. All Holders of Registrable
Securities shall be entitled to include Registrable Securities in such proposed
offering; provided that if the offering is an underwritten offering and the
managing underwriter shall inform the Company (or, in the case of a secondary
offering, the selling stockholders initiating such offering) of its belief that
the number or type of
3
<PAGE>
Registrable Securities and other securities (if any) requested to be included in
such registration would materially adversely affect such offering, then the
Company will include in such registration, to the extent of the number and type
which the Company is (or the selling stockholders initiating such offer are) so
advised can be sold in (or during the time of) such offering, first, all
securities proposed by the Company (or, in the case of a secondary offering, the
selling stockholders initiating such offering) to be sold for its (or their) own
account, second, such Registrable Securities requested to be included in such
registration and all other shares of Common Stock requested to be included in
such registration by any Person entitled to piggy back registration rights
ranking pari passu with the rights of Holders pursuant to the CRA Registration
---- -----
Rights Agreement or a similar agreement with the Company, pro rata among all
such Holders on the basis of the estimated gross proceeds of the securities of
such Holders requested to be so included, and, if all such Registrable
Securities and other shares of Common Stock can be so included, third, any other
securities of the Company requested to be included in such registration.
5. Holdback Agreements. In the case of any underwritten public offering
-------------------
by the Company of shares of Common Stock, whether for its own account or for the
account of any stockholder of the Company, each Holder agrees not to effect any
public disposition (including any sale pursuant to Rule 144 under the Securities
Act) (a "Disposition") of any Registrable Securities, and not to effect any such
Disposition of any other equity security of the Company or of any security
convertible into or exchangeable or exercisable for any equity security of the
Company (in each case, other than as part of such underwritten public offering)
during the 90-day period beginning on the effective date of such registration
statement (except as part of such registration), provided that each Holder of
Registrable Securities has received notice of such registration at least seven
(7) days prior to such effective date.
6. Registration Procedure. If and whenever CRA is required by the
----------------------
provisions of Section 3 hereof to effect the registration of Registrable
Securities under the Securities Act, the Company will:
(a) prepare and file with the SEC a registration statement with respect
to such securities, and use its best efforts to cause such registration
statement to become and remain effective for such period as may be reasonably
necessary to effect the sale of such securities, not to exceed thirty (30) days
from the date such registration statement is declared effective by the SEC;
(b) prepare and file with the SEC such amendments to such registration
statement and supplements to the prospectus contained therein as may be
necessary to keep such registration statement effective for such period as may
be reasonably necessary to effect the sale of such securities, not to exceed
thirty (30) days from the date such registration statement is declared effective
by the SEC;
(c) furnish to the security holders participating in such registration
such reasonable number of copies of the registration statement, preliminary
prospectus, final
4
<PAGE>
prospectus and such other documents as such security holders or underwriters may
reasonably request in order to facilitate the public offering of such
securities;
(d) use its best efforts to register or qualify the securities covered by
such registration statement under such state securities or blue sky laws of such
jurisdictions as such participating holders may reasonably request in writing,
except that the Company shall not for any purpose be required to execute a
general consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
(e) notify the security holders participating in such registration,
promptly after it shall receive notice thereof of the time when such
registration statement has become effective or a supplement to any prospectus
forming a part of such registration statement has been filed;
(f) notify such holders promptly of any such request by the SEC for the
amending or supplementing of such registration statement or prospectus or for
additional information;
(g) prepare and file with the SEC, promptly upon the request of any such
holders, any amendments or supplements to such registration statement or
prospectus which, in the opinion of counsel for such holders (and concurred in
by counsel for the Company), is required under the Securities Act or the rules
and regulations thereunder in connection with the distribution of the
Registrable Shares by such holder;
(h) promptly notify such holders of the filing of such amendment or
supplement to such registration statement or prospectus as may be necessary to
correct any statements or omissions if, at the time when a prospectus relating
to such securities is required to be delivered under the Securities Act, any
event shall have occurred as the result of which any such prospectus or any
other prospectus as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading; and
(i) advise such holders, promptly after it shall receive notice or obtain
knowledge thereof, of the issuance of any stop order by the SEC suspending the
effectiveness of such registration statement or the initiation or threatening of
any proceeding for that purpose and promptly use its best efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such stop order should
be issued.
7. Expenses. With respect to such registration, the Company shall bear
--------
the following fees, costs and expenses: all registration, qualification, filing
and NASD fees, printing expenses, fees and disbursements of counsel and
accountants for the Company, including expenses of any regular or special audits
incident to or required by such registration, all internal expenses of the
5
<PAGE>
Company, and all legal fees and disbursements and other expenses of complying
with state securities or blue sky laws of any jurisdictions in which the
securities to be offered are to be registered or qualified. Fees and
disbursements of counsel and accountants for the selling security holders,
underwriting discounts and commissions, broker's fees and commissions and
transfer taxes, and any other expenses incurred by the security holders not
expressly included above shall be borne by the selling security holders.
8. Indemnification. With respect to such registration:
---------------
(a) The Company will indemnify and hold harmless each Holder of
Registrable Securities which are included in a registration statement pursuant
to the provisions of this Agreement from and against, and will reimburse such
Holder with respect to, any and all loss, damage, liability, cost and expense to
which such Holder may become subject under the Securities Act or otherwise,
insofar as such losses, damages, liabilities, costs or expenses are caused by
any untrue statement or alleged untrue statement of any material fact contained
therein or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading; provided, however,
-------- -------
that the Company will not be liable in any such case to the extent that any such
loss, damage, liability, cost or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in reliance upon and in strict conformity with information furnished by
such Holder in writing specifically for use in the preparation thereof.
(b) Each Holder of Registrable Securities which are included in a
registration pursuant to the provisions of this Agreement will indemnify and
hold harmless the Company, its directors and officers, and any controlling
person from and against, and will reimburse the Company, its directors and
officers, and any controlling person with respect to, any and all loss, damage,
liability, cost or expense to which the Company, its directors or officers,
and/or any controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, damages, liabilities, costs or expenses are
caused by any untrue or alleged untrue statement of any material fact contained
in such registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was so made in reliance upon and in
strict conformity with written information furnished by such Holder specifically
for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 6 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim
6
<PAGE>
thereof is to be made against the indemnifying party pursuant to the provisions
of said paragraph (a) or (b), promptly notify the indemnifying party of the
commencement thereof; but the failure to so notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
unless the indemnifying party is unduly prejudiced by the failure to receive
prompt notice. In case such action is brought against any indemnified party and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party shall have the right to participate in, and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party,
provided, however, if the defendants in any action include both the indemnified
- -------- -------
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are are different from or additional to those
available to the indemnifying party, or if there is a conflict of interest which
would prevent counsel for the indemnifying party from also representing the
indemnified party, the indemnified party or parties shall have the right to
select separate counsel to participate in the defense of such action on behalf
of such indemnified party or parties. After notice from the indemnifying party
to such indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party pursuant to the
provisions of said paragraph (a) or (b) for any legal or other expense
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation, unless (i) the indemnified
party shall have employed counsel in accordance with the provision of the
preceding sentence, (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after the notice of the commencement of the action or (iii)
the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party.
9. Miscellaneous.
-------------
(a) All covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto (including without
limitation Permitted Transferees of any Registrable Securities), whether so
expressed or not.
(b) All notices, requests, consents and other communications hereunder
shall be in writing and shall be mailed by certified or registered mail, return
receipt requested, postage prepaid, or telecopied or sent by other facsimile
method to the addresses set forth in the Merger Agreement.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Massachusetts.
7
<PAGE>
(d) This Agreement may not be amended or modified, and no provision
hereof may be waived, without the written consent of the Company and the Holders
of at least a majority of the outstanding Registrable Securities.
(e) 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.
(f) If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
(g) In the event that any party hereto initiates an action or claim to
enforce any provision of this Agreement, the costs and expenses (including
attorneys' fees) of the prevailing party shall be paid by the other party, such
party to be deemed to have prevailed if such action or claim is concluded
pursuant to a court order or final judgment which is not subject to appeal, a
settlement agreement or dismissal of the principle claims.
******************
8
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by a duly authorized
officer of the Company and by the ALTA Shareholders as of the date and year
first above written.
CRA MANAGED CARE, INC.
By: /s/ Donald J. Larson
------------------------------------------------
Donald J. Larson, President
ALTA SHAREHOLDERS:
/s/ Laurence G. Ernst
---------------------------------------------------
Laurence G. Ernst
/s/ Michael J. Spilde
---------------------------------------------------
Michael J. Spilde
1768-2
9
<PAGE>
HW&D Draft
May 1, 1996
-----------
REGISTRATION RIGHTS AGREEMENT
AGREEMENT made as of the __th day of _____, 1996, by and among CRA MANAGED
CARE, INC., a Massachusetts corporation (the "Company"), and the Shareholders of
QMC3, Inc. listed on the signature pages hereto (collectively, the "QMC3
Shareholders").
WHEREAS, the Company, QMC3 Acquisition Corp., a wholly-owned subsidiary of
the Company ("Merger Sub"), QMC3, Inc., a Colorado corporation ("QMC3"), and the
QMC3 Shareholders have entered into an Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which Merger Sub is merging with and into QMC3, with
QMC3 being the surviving corporation in consideration of the issuance by the
Company to the QMC3 Shareholders of _________ shares of Common Stock, par value
$.01 per share, of the Company (the "Common Stock") in accordance with the
Merger Agreement (the "Merger"); and
WHEREAS, Comprehensive Rehabilitation Associates, Inc. (predecessor to 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 are parties to a certain Registration Rights Agreement, dated
March 8, 1994 (the "CRA Registration Rights Agreement"); and
WHEREAS, pursuant to the terms of the Merger Agreement, the Company has
agreed to grant the QMC3 Shareholders certain rights to require the Company to
register their shares of Common Stock in accordance with the terms of this
Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission, or any
----------
other federal agency at the time administering the Securities Act (as
defined below).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, or any similar federal statute, and the rules and regulations
of the Commission thereunder, all as the same shall be in effect at the
time.
<PAGE>
"Permitted Transferee" shall mean any QMC3 Shareholder who receives
--------------------
shares of Common Stock pursuant to the Merger and the spouse, children,
parents or siblings of a QMC3 Shareholder, or a trust for the benefit
of any such persons.
"Person" means a corporation, an association, a partnership, an
------
organization, a business, an individual, a governmental or political
subdivision thereof, or a governmental agency.
"Registrable Securities" shall mean the _______ shares of Common Stock
----------------------
received by the QMC3 Shareholders pursuant to the Merger and held by
them on the date hereof (together with any other shares of Common Stock
which may be issued by the Company in respect of such shares by means
of stock splits, stock dividends or similar events), excluding shares
of Common Stock which have been sold, assigned or otherwise transferred
to a person who is not a Permitted Transferee.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
2. Securities Subject to this Agreement.
------------------------------------
(a) Registrable Securities. For the purposes of this Agreement,
----------------------
Registrable Securities will cease to be Registrable Securities when (i) a
registration statement covering such Registrable Securities has been declared
effective under the Act by the SEC and such Registrable Securities have been
disposed of pursuant to such effective registration statement or (ii) the entire
amount of Registrable Securities proposed to be sold in a single sale are or, in
the opinion of counsel satisfactory to the Company and the Holder, each in their
reasonable judgment, may be distributed to the public pursuant to Rule 144 (or
any successor provision then in effect) under the Act.
(b) Holders of Registrable Securities. A Person is deemed to be a
---------------------------------
holder of Registrable Securities (a "Holder") whenever such Person (i) is a
party to this Agreement (or a Permitted Transferee thereof) and (ii) owns of
record Registrable Securities. If the Company receives conflicting
instructions, notices, or elections from two or more persons with respect to the
same Registrable Securities, the Company may act upon the basis of the
instructions, notice, or election received from the registered owner of such
Registrable Securities.
3. Required Registration. If a registration statement covering any of the
---------------------
Company's equity securities (other than a registration statement on Form S-4 or
S-8 or any successor form thereto) is declared effective under the Securities
Act (i) during the period (the "Pooling Restriction Period") commencing on the
date of the Merger Agreement and ending at such time as financial results
(including combined sales and net income of QMC3, Inc.) covering at least 30
days of post-Merger operations have been published by the Company or (ii)
thereafter if the
2
<PAGE>
holders of Registerable Securities would be prevented by Section 6.5 of the
Merger Agreement from exercising their rights under Section 4 hereof (any
registration referred to in clause (i) or (ii) referred to herein as a
"Triggering Registration") then, if the Company shall receive a written request
from any record holder or holders of an aggregate of at least thirty-five
percent (35 %) of the Registrable Shares issued in the Merger, the Company shall
prepare and file a registration statement on Form S-3 under the Securities Act
covering the Registrable Shares which are the subject of such request and shall
use its best efforts to cause such registration statement to become effective;
provided that the Registrable Securities to be sold pursuant to such
registration statement should not be sold pursuant to an underwriter offering.
In addition, unless such request is made on behalf of all QMC3 Shareholders,
upon the receipt of such request, the Company shall promptly give written notice
to all other QMC3 Shareholders. The Company shall include in such registration
statement such Registrable Securities for which it has received written requests
to register by such other QMC3 Shareholders within 30 days after the delivery of
the Company's written notice to such other QMC3 Shareholders. The Company shall
be obligated to prepare, file and cause to become effective only one
registration statement (on Form S-3 or any successor form promulgated by the SEC
("Form S-3")) pursuant to this Section 3, and to pay the expenses associated
with such registration statement.
The Board of Directors may, by delivery of written notice to the Holders of
Registrable Securities requesting registration, cause the requested registration
to be delayed for not more than sixty (60) days if the Board of Directors
determines in good faith that, in connection with such registration, the Company
would be required to disclose information regarding a proposed transaction
involving the Company which, if disclosed, could have an adverse effect on the
Company, the other party or parties to such transaction, or the probability that
such transaction would be consummated on terms no less favorable to the Company
as would be available without such disclosure.
If, prior to the time of any request by holders of Registrable Securities
pursuant to this Section 3, the Company has publicly announced its intention to
register any of its securities for a public offering under the Securities Act,
whether such registration is for the sale of securities for the Company's own
account or for the account of others, no registration of Registrable Securities
shall be initiated pursuant to this Section 3 until the first to occur of (i)
120 days after the effective date of the registration so announced unless the
Company is no longer proceeding diligently to effect such registration, and (ii)
the expiration of any lock-up period agreed to by the Company in connection with
such registration.
4. Piggy Back Rights. In the case of any registered offering of
-----------------
securities by the Company under the Securities Act for its own account, or the
account of any selling shareholder of the Company, of any class of equity
security (other than a registration statement on Form S-4 or S-8 or any
successor form thereto and other than a Triggering Registration) under the
Securities Act, then the Company shall give written notice of such proposed
registered offering to each of the Holders at least thirty (30) days before the
anticipated effective date of the registration statement relating thereto, and
such notice shall describe in detail the proposed
3
<PAGE>
registered offering (including those jurisdictions where registration under the
securities or blue sky laws is intended) and offer such Holders the opportunity
to include in such registration the number of Registrable Securities as each
such Holder may request. The Company shall include in such registration such
Registrable Securities as the Holders request within fifteen (15) days after the
notice provided for in the preceding sentence. If the registration relates to
an underwritten public offering, the right of a Holder to include such
Registrable Securities in the registration shall be conditioned upon such
Holder's agreement to include such Registrable Securities in that offering on
the same terms and conditions that other securities of the same class are
included therein; provided that if the managing underwriter shall inform the
Company (or, in the case of a secondary offering, the selling stockholders
initiating such offering) of its belief that the number or type of Registrable
Securities and other securities (if any) requested to be included in such
registered offering would materially adversely affect such offering, then the
Company will include in such registered offering, to the extent of the number
and type which the Company is (or the selling stockholders initiating such offer
are) so advised can be sold in (or during the time of) such offering, first, all
securities proposed by the Company (or, in the case of a secondary offering, the
selling stockholders initiating such offering) to be sold for its (or their) own
account, second, such Registrable Securities requested to be included in such
registration and all other shares of Common Stock requested to be included in
such registration by any Person entitled to piggy back registration rights
ranking pari passu with the rights of Holders pursuant to the CRA Registration
---- -----
Rights Agreement or a similar agreement with the Company, pro rata among all
such Holders on the basis of the estimated gross proceeds of the securities of
such Holders requested to be so included, and, if all such Registrable
Securities and other shares of Common Stock can be so included, third, any other
securities of the Company requested to be included in such registration. The
Company shall not grant any piggyback registration rights that purport to rank
senior to the rights of the Holders granted by the Company pursuant to this
Section 4.
5. Holdback Agreements. In the case of any underwritten public offering
-------------------
by the Company of shares of Common Stock, whether for its own account or for the
account of any stockholder of the Company, each Holder selling shares of Common
Stock pursuant thereto agrees not to effect any public disposition (including
any sale pursuant to Rule 144 under the Securities Act) (a "Disposition") of any
Registrable Securities, and not to effect any such Disposition of any other
equity security of the Company or of any security convertible into or
exchangeable or exercisable for any equity security of the Company (in each
case, other than as part of such underwritten public offering) during the 90-day
period beginning on the effective date of such registration statement (except as
part of such registration), provided that each Holder of Registrable Securities
has received notice of such registration at least seven (7) days prior to such
effective date.
6. Registration Procedure. If and whenever the Company effects the
----------------------
registration of Registrable Securities under the Securities Act, the Company
will:
4
<PAGE>
(a) prepare and file with the SEC a registration statement with respect
to such securities, and, with respect to registrations effected pursuant to
Section 3, use its reasonable best efforts to cause such registration statement
to become and remain effective for such period as may be reasonably necessary to
effect the sale of such securities, not to exceed thirty (30) days from the date
such registration statement is declared effective by the SEC;
(b) with respect to registrations effected pursuant to Section 3,
prepare and file with the SEC such amendments to such registration statement and
supplements to the prospectus contained therein as may be necessary to keep such
registration statement effective for such period as may be reasonably necessary
to effect the sale of such securities, not to exceed thirty (30) days from the
date such registration statement is declared effective by the SEC;
(c) furnish to the security holders participating in such registration
such reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such security holders
or underwriters may reasonably request in order to facilitate the public
offering of such securities;
(d) use its best efforts to register or qualify the securities covered
by such registration statement under such state securities or blue sky laws of
such jurisdictions as such participating holders may reasonably request in
writing, except that the Company shall not for any purpose be required to
execute a general consent to service of process or to qualify to do business as
a foreign corporation in any jurisdiction wherein it is not so qualified;
(e) notify the security holders participating in such registration,
promptly after it shall receive notice thereof of the time when such
registration statement has become effective or a supplement to any prospectus
forming a part of such registration statement has been filed;
(f) notify such holders promptly of any such request by the SEC for the
amending or supplementing of such registration statement or prospectus or for
additional information;
(g) prepare and file with the SEC, promptly upon the request of any
such holders, any amendments or supplements to such registration statement or
prospectus which, in the opinion of counsel for such holders (and concurred in
by counsel for the Company), is required under the Securities Act or the rules
and regulations thereunder in connection with the distribution of the
Registrable Securities by such holder;
(h) promptly notify such holders of the filing of such amendment or
supplement to such registration statement or prospectus as may be necessary to
correct any statements or omissions if, at the time when a prospectus relating
to such securities is required to be delivered under the Securities Act, any
event shall have occurred as the result of which any such prospectus or any
other prospectus as then in effect would include an untrue statement of a
5
<PAGE>
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading; and
(i) advise such holders, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the SEC
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued.
7. Expenses. With respect to such registration, the Company shall bear
--------
the following fees, costs and expenses: all registration, qualification, filing
and NASD fees, printing expenses, fees and disbursements of counsel and
accountants for the Company, including expenses of any regular or special audits
incident to or required by such registration, fees and expenses for up to one
counsel representing selling security holders in connection therewith, which
counsel shall be reasonably acceptable to the Company and shall be chosen by a
majority in interest of the shares being sold therein (whether being sold by
Holders or other security holders pursuant to such registration), all internal
expenses of the Company, and all legal fees and disbursements and other expenses
of complying with state securities or blue sky laws of any jurisdictions in
which the securities to be offered are to be registered or qualified. Fees and
disbursements of counsel and accountants for the selling security holders (other
than the one selling security holder counsel described in the immediately
preceding sentence), underwriting discounts and commissions, broker's fees and
commissions and transfer taxes, and any other expenses incurred by the security
holders not expressly included above shall be borne by the selling security
holders.
8. Indemnification. With respect to such registration:
---------------
(a) The Company will indemnify and hold harmless each Holder of
Registrable Securities which are included in a registration statement pursuant
to the provisions of this Agreement from and against, and will reimburse such
Holder with respect to, any and all loss, damage, liability, cost and expense to
which such Holder may become subject under the Securities Act or otherwise,
insofar as such losses, damages, liabilities, costs or expenses are caused by
any untrue statement or alleged untrue statement of any material fact contained
in such registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however, that
-------- -------
the Company will not be liable in any such case to the extent that any such
loss, damage, liability, cost or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in reliance upon and in strict conformity with information furnished by
such Holder in writing specifically for use in the preparation thereof.
(b) Each Holder of Registrable Securities which are included in a
registration pursuant to the provisions of this Agreement will indemnify and
hold harmless the Company, its
6
<PAGE>
directors and officers, and any controlling person from and against, and will
reimburse the Company, its directors and officers, and any controlling person
with respect to, any and all loss, damage, liability, cost or expense to which
the Company, its directors or officers, and/or any controlling person may become
subject under the Securities Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue or alleged untrue
statement of any material fact contained in such registration statement, any
prospectus contained therein or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was so made in
reliance upon and in strict conformity with written information furnished by
such Holder specifically for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 8 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of said paragraph
(a) or (b), notify the indemnifying party of the commencement thereof; but the
failure to so notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party unless the indemnifying
party is unduly prejudiced by the failure to receive prompt notice. In case
such action is brought against any indemnified party and it notifies the
indemnifying party of the commencement thereof, the indemnifying party shall
have the right to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party, provided, however,
-------- -------
if the defendants in any action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, or if there is a conflict of interest which would prevent
counsel for the indemnifying party from also representing the indemnified party,
the indemnified party or parties shall have the right to select separate counsel
to participate in the defense of such action on behalf of such indemnified party
or parties. After notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party pursuant to the provisions of said
paragraph (a) or (b) for any legal or other expense subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless (i) the indemnified party shall have
employed counsel in accordance with the provision of the preceding sentence,
(ii) the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after the notice of the commencement of the action or (iii) the indemnifying
party has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party.
7
<PAGE>
(d) If for any reason the foregoing indemnification is unavailable to
any indemnified party or insufficient to hold it harmless as and to the extent
contemplated by the preceding paragraphs of this Section 8, then each
indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such loss, damage, liability, cost or expense
in such proportion as is appropriate to reflect the relative benefits received
by Company, on the one hand, and the applicable indemnified party, as the case
may be, on the other hand, and also the relative of fault of the Company and any
applicable indemnified party, as the case may be, as well as any other relevant
equitable considerations.
9. Miscellaneous.
-------------
(a) All covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto (including without
limitation Permitted Transferees of any Registrable Securities), whether so
expressed or not.
(b) All notices, requests, consents and other communications hereunder
shall be in writing and shall be mailed by certified or registered mail, return
receipt requested, postage prepaid, or telecopied or sent by other facsimile
method to the addresses set forth in the Merger Agreement.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Massachusetts.
(d) This Agreement may not be amended or modified, and no provision
hereof may be waived, without the written consent of the Company and the Holders
of at least a majority of the outstanding Registrable Securities.
(e) 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.
(f) If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
(g) In the event that any party hereto initiates an action or claim to
enforce any provision of this Agreement, the costs and expenses (including
attorneys' fees) of the prevailing party shall be paid by the other party, such
party to be deemed to have prevailed if such action or claim is concluded
pursuant to a court order or final judgment which is not subject to appeal, a
settlement agreement or dismissal of the principle claims.
8
<PAGE>
******************
9
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by a duly authorized
officer of the Company and by the QMC3 Shareholders as of the date and year
first above written.
CRA MANAGED CARE, INC.
By:
--------------------------------------
Donald J. Larson, President and
Chief Executive Officer
QMC3 SHAREHOLDERS:
-----------------------------------------
Kimberly A. Sutphin
-----------------------------------------
Henry J. Roth, M.D.
-----------------------------------------
Howard J. Entin, M.D.
-----------------------------------------
Ryan J. Conlon
-----------------------------------------
John Eric Griffiths, D.C.
-----------------------------------------
Paul M. Baker
-----------------------------------------
John Sbarbaro, M.D.
-----------------------------------------
53078-6 Nick Hilger
S-1
<PAGE>
Exhibit 5.1
COUNSELLORS AT LAW
HUTCHINS, WHEELER & DITTMAR
A PROFESSIONAL CORPORATION
101 FEDERAL STREET, BOSTON, MASSACHUSETTS 02110
TELEPHONE: 617-951-6600 FACSIMILE: 617-951-1295
May 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 2,875,000 shares
of the Company's Common Stock, $.01 par value per share (the "Common Stock")
pursuant to a Registration Statement on Form S-3 (File No. 333 _____) (the
"Registration Statement") including 375,000 shares which may be sold upon
exercise of the underwriters' overallotment option described in the Registration
Statement. Of the Common Stock being registered, 1,100,000 shares are being
offered by the Company, 1,400,000 shares are being offered by certain selling
stockholders (the "Selling Stockholders") and the 375,000 shares subject to the
underwriters' over-allotment option will be offered by the Selling Stockholders
in the event the underwriters exercise their over-allotment option. Certain of
the Selling Stockholders have agreed that the Company may, at its option, sell,
in place of such Selling Stockholders, up to 100,000 shares in the event the
underwriters exercise their over-allotment option.
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. For purposes of rendering this opinion, we have assumed that the
Articles of Amendment to the Articles of Organization of the Company in the form
filed as an Exhibit to the Registration Statement will be filed with the
Secretary of the Commonwealth of Massachusetts prior to the issuance and sale of
the Common Stock under the circumstances contemplated in the Registration
Statement.
Based on the foregoing, and having regard for such legal considerations
as we deem relevant, we are of the opinion that:
<PAGE>
HUTCHINS, WHEELER & DITTMAR
1. The Company is a corporation duly organized and validly existing
under the laws of the Commonwealth of Massachusetts.
2. The Company, as of the effective date of the foregoing Articles of
Amendment to the Articles of Organization, will be 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 1,100,000 shares of Common Stock offered
by the Company will be duly authorized, validly issued, fully paid
and nonassessable.
4. When sold under circumstances contemplated in the Registration
Statement, the 1,400,000 shares of Common Stock offered by the
Selling Stockholders will be duly authorized, validly issued, fully
paid and nonassessable.
5. When sold, or when issued and sold under the circumstances
contemplated in the Registration Statement, the aggregate 375,000
shares of Common Stock to be offered by the Selling Stockholders
(and the Company if it elects to sell any of such shares) upon the
exercise of the underwriters' over-allotment option 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,
/s/ HUTCHINS, WHEELER & DITTMAR
JW/TMC HUTCHINS, WHEELER & DITTMAR
A Professional Corporation
<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.
Arhtur Andersen LLP
Boston, Massachusetts
May 6, 1996
<PAGE>
Exhibit 23.2
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.
Arthur Andersen LLP
Boston, Massachusetts
May 6, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 MAR-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 3,005,000 2,893,000
<SECURITIES> 0 0
<RECEIVABLES> 26,810,000 29,464,000
<ALLOWANCES> 430,000 500,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 30,333,000 32,521,000
<PP&E> 11,732,000 12,307,000
<DEPRECIATION> 5,864,000 6,317,000
<TOTAL-ASSETS> 36,556,000 38,911,000
<CURRENT-LIABILITIES> 22,840,000 23,135,000
<BONDS> 0 0
0 0
0 0
<COMMON> 74,000 74,000
<OTHER-SE> 11,586,000 13,646,000
<TOTAL-LIABILITY-AND-EQUITY> 36,556,000 38,911,000
<SALES> 0 0
<TOTAL-REVENUES> 146,055,000 40,225,000
<CGS> 0 0
<TOTAL-COSTS> 122,615,000 33,422,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 186,000 70,000
<INTEREST-EXPENSE> 2,484,000 194,000
<INCOME-PRETAX> 9,935,000 3,500,000
<INCOME-TAX> 3,974,000 1,453,000
<INCOME-CONTINUING> 5,961,000 2,047,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 2,460,000 0
<CHANGES> 0 0
<NET-INCOME> 3,501,000 2,047,000
<EPS-PRIMARY> .54 .27
<EPS-DILUTED> 0 0
</TABLE>
