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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file 02-25856
CRA MANAGED CARE, INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2658593
(State or other jurisdiction of (I.R.S. employer identification No.)
incorporation or organization)
312 Union Wharf, Boston Massachusetts 02109
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code)
(617) 367-2163
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
the filing requirements for the past 90 days. Yes /X/ No/ /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K /X/.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant totaled $313,209,000 (based on the closing price of the Company's
Common Stock on The Nasdaq National Market on March 19, 1997).
As of March 19, 1997, the Registrant had outstanding an aggregate of
8,961,985 shares of its Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Registrant's 1996 Annual Report to Stockholders are
incorporated by reference into Part II and IV of this report.
Certain parts of the Registrant's definitive Proxy Statement dated April 4,
1997 are incorporated by reference into Part III of this report.
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CRA MANAGED CARE, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1996
INDEX
PART I PAGE
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ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 17
ITEM 3. LEGAL PROCEEDINGS 17
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OFSECURITY HOLDERS 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 18
ITEM 6. SELECTED FINANCIAL DATA 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 19
ITEM 11. EXECUTIVE COMPENSATION 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 20
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This document 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. Reference is hereby made
to Risk Factors contained later in this document that could cause actual
results to differ materially from those contained in this document.
PART I
ITEM 1. BUSINESS
CRA Managed Care, Inc. (the "Company" or "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 118 field
case management offices with approximately 1,125 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 preferred provider organization ("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 33.8% of revenues for 1996, up
from approximately 27.1% for 1995. The Company markets its services to
workers' compensation insurers, third-party administrators ("TPAs"),
self-insured employers, and payors of automobile accident medical claims
through a direct sales and marketing organization consisting of over 150
dedicated personnel. CRA currently has over 1,250 customers nationwide.
INDUSTRY OVERVIEW
Workers' compensation
Workers' compensation is a state-mandated, comprehensive insurance program
that requires employers to fund medical expenses, lost wages and other costs
resulting from work-related injuries and illnesses. Since their introduction
in the early 1900s, these programs have been expanded to all fifty states and
the District of Columbia. Each state is responsible for implementing and
regulating its own program. Consequently, workers' compensation benefits and
arrangements vary on a state-by-state basis and are often highly complex.
According to statistics published in the 1994 and 1996 Workers' Compensation
Year Books, employers in the United States incurred approximately $57.3
billion in total costs of workers' compensation in 1993 and approximately
$22.8 billion in 1982.
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.
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Workers' compensation managed care services
The workers' compensation managed care services market is served by the
Company and a small number of other competitors that offer a comprehensive
line of workers' compensation managed care services on a nationwide basis. A
large number of additional companies offer some managed care services on a
limited geographic basis. The result is a fragmented market with what the
Company believes is only a small number of companies offering a fully
integrated and comprehensive approach to managing workers' compensation costs
on a nationwide basis.
Workers' compensation managed care services broadly fall into two categories:
field case management services and specialized cost containment services.
Field case management services involve working on a one-on-one basis with
injured employees and their various health care professionals, employers and
insurance company adjusters. Field case management services are designed both
to assist in maximizing medical improvement and, where appropriate, to
expedite return to work. Specialized cost containment services are designed
to reduce the cost of workers' compensation claims through a variety of
techniques such as first report of injury services, utilization management
(precertification, concurrent review and retrospective bill review),
telephonic case management, PPO network access, independent medical
examinations ("IMEs"), peer reviews and hospital bill auditing.
Managed care techniques are intended to control the cost of health care
services and to measure the performance of providers through intervention and
on-going review of services proposed and actually provided. Managed care
techniques were originally developed to stem the rising costs of group health
medical care. Historically, employers were slow to apply managed care
techniques to workers' compensation costs primarily because the aggregate
costs are relatively small compared to costs associated with group health
benefits and because state-by-state regulations related to workers'
compensation are far more complex than those related to group health.
However, in recent years, employers and insurance carriers have been
increasing their focus on applying managed care techniques to control their
workers' compensation costs.
Since workers' compensation benefits are mandated by law and are subject to
extensive regulation, payors and employers do not have the same flexibility
to alter benefits as they have with other health benefit 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 20 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, a number of states have adopted
legislation encouraging the use of workers' compensation managed care
organizations ("MCOs") in an effort to allow employers to control their
workers' compensation costs. MCO laws generally provide employers an
opportunity to channel injured employees into provider networks. In certain
states, MCO laws require licensed MCOs to offer certain specified services,
such as utilization management, case management, peer review and provider
bill review. Most of the MCO laws adopted to date establish a framework
within which a company such as CRA can provide its customers a full range of
managed care services for greater cost control.
CRA'S BUSINESS STRATEGY
The Company's objective is to expand and capitalize on its presence as a
national provider of comprehensive managed care services to workers'
compensation payors and take advantage of developing opportunities in related
industries. The Company's strategy for achieving this objective is as follows:
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Focus on Workers' Compensation Managed Care
The Company intends to continue its primary focus on providing workers'
compensation managed care services to workers' compensation insurers, TPAs
and self-insured employers. The Company believes that to serve this complex
market, a core understanding of medical-related issues, a thorough
understanding of return to work issues and techniques, and an in-depth
understanding of the state-by-state regulatory environment is required. CRA
has developed such expertise through its years of serving this market. CRA
believes it can leverage its expertise as a highly skilled provider of
workers' compensation managed care services to further expand its national
market presence and increase its market share.
Increase National Accounts Penetration
The Company intends to increase its penetration of large, national payors by
leveraging its broad-based workers' compensation expertise and its experience
with its existing base of national accounts. Many large, national insurance
carriers and self-insured employers are seeking workers' compensation managed
care service providers that have the ability to provide services on a
nationwide basis. These large payors want a comprehensive solution to their
workers' compensation needs from a service provider that is adept at
understanding and working with many different and complex state legislative
environments. The Company's national organization of local service locations
enables the Company to meet the needs of these large, national payors while
maintaining the local market presence necessary to monitor changes in
state-specific regulations and to facilitate case resolution through locally
provided managed care services.
Cross-Sell Comprehensive Product Offering
The Company intends to capitalize on the relationships developed through its
118 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 70 service
locations nationwide that provide one or more specialized cost containment
services. Of the Company's approximately 1,250 case management customers,
only approximately 20% are also utilizing the Company's specialized cost
containment services. The Company believes that this low utilization rate
among CRA's existing customers provides a significant opportunity to expand
CRA's specialized cost containment business.
Emphasize Early Intervention
The Company intends to increase its marketing of early intervention services,
such as first report of injury, precertification, telephonic case management
and access to PPO networks. Early intervention enables the Company to
promptly identify cases that have the potential to result in significant
expenses and to take appropriate measures to control these expenses before
they are incurred. In addition, the Company believes that providing early
intervention services generally results in the Company obtaining earlier
access to claims files, thereby improving the Company's opportunity to
provide the full range of its managed care services.
Leverage Managed Care Expertise To Automobile Insurance Market
The Company intends to capitalize on the recent introduction of managed care
techniques to the automobile insurance market through the recent acquisition
of QMC3, Inc. ("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.
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Execute Strategic Acquisitions
The Company will continue to seek complementary strategic acquisitions, such
as Focus HealthCare Management, Inc. ("Focus"), QMC3 and Prompt Associates.
Inc. ("Prompt"), 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 1,125 field case managers
serving 49 states and the District of Columbia from CRA's 118 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 76.0%, 72.9% and 66.2% of
the Company's revenues for the years ended December 31, 1994, 1995, and 1996,
respectively.
The Company believes that the following factors will contribute to the
continued growth of its field case management services: (i) increased
employer acceptance of field case management techniques due to greater
exposure to the workers' compensation managed care market; (ii) earlier
identification of individuals in need of field case management services due
to increased utilization of the Company's specialized cost containment
services, particularly early intervention services; and (iii) increased
market share at the expense of smaller, undercapitalized competitors.
Specialized Cost Containment Services
In 1990, as part of the Company's strategy of providing a comprehensive range
of services, CRA began broadening its business by providing a number of
additional services focused directly on helping to reduce the medical costs
associated with workers' compensation for its clients. Today, these
specialized cost containment services include first report of injury service,
utilization management (precertification, concurrent review and retrospective
bill review), telephonic case management, PPO network access, IMEs, peer
reviews and hospital bill auditing. By adding these services to CRA's
traditional strength and national breadth in field case management, the
Company now offers its clients an integrated workers' compensation managed
care program. CRA is able to offer its services on a combined basis as a full
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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 24.0%, 27.1% and 33.8% of the Company's revenues
for the fiscal years ending December 31, 1994, 1995 and 1996, respectively.
The Company believes that the demand for specialized cost containment
services will continue to increase due to a number of factors, including: (i)
the increasing payor awareness of the availability of these techniques for
managing workers' compensation costs; (ii) the perceived effectiveness of
managed care techniques at reducing costs for group health insurance plans;
(iii) the verifiable nature of the savings that can be obtained by
application of specialized cost containment techniques applicable to workers'
compensation; and (iv) the broad applicability of these techniques to all
injured employees, not just severely injured employees likely to be absent
from work.
FIRST REPORT OF INJURY SERVICE. The Company provides a computerized first
report of injury reporting service in which an employer or claims adjuster
phones in all injuries as soon as they occur to the Company's centralized
service center. Each report is electronically transferred or mailed to the
state agency, the employer and the insurance company. This service assists in
the timely preparation and distribution of state-mandated injury reports and
also provides CRA and its customers with an early intervention tool to
maximize control over workers' compensation claims.
UTILIZATION MANAGEMENT: PRECERTIFICATION AND CONCURRENT REVIEW. CRA's
precertification and concurrent review services are used by clients to ensure
that certain medical procedures are precertified by a CRA registered nurse
and/or physician for medical necessity and appropriateness of treatment
before the medical procedure can be performed. CRA's determinations represent
only recommendations to the customer, the ultimate decision to approve or
disapprove the request is made by the claims adjuster. Precertification calls
are made by either the claimant or the provider to one of CRA's national
utilization management reporting units. Once a treatment plan has been
precertified, a CRA employee performs a follow-up call (concurrent review) at
the end of an approved time period to evaluate compliance and/or discuss
alternative plans.
UTILIZATION MANAGEMENT: RETROSPECTIVE BILL REVIEW. Through a sophisticated
software program, CRA reviews and reduces its customers' medical bills
(including hospital bills) to either the various state-mandated fee schedules
for workers' compensation claims or a percentage of the UCR rates that exist
in non-fee schedule states. Additionally, this automated retrospective bill
review service enables clients to access certain PPO pricing schedules that
represent additional savings below the fee schedules or UCR rates. The
savings that accrue to CRA's clients for this service can be significant.
Retrospective bill review also creates an important historical database for
provider practice patterns and managed care provider compliance requirements.
CRA provides retrospective bill review service from 38 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'
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compensation process, the discounts associated with these PPO arrangements
generate additional savings through the retrospective bill review program
described above. Focus' national network includes approximately 142,000
individual providers and 2,300 hospitals covering 36 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 five 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 17 of
the Company's service locations and, upon completion, prepare reports
describing their findings.
PEER REVIEWS. This service is provided by a physician, therapist,
chiropractor or other provider who reviews medical files to confirm that the
care being provided appears to be necessary and appropriate. The reviewer
does not meet with the patient, but merely reviews the file as presented.
HOSPITAL BILL AUDITS. This service is provided by the Company's registered
nurses who review hospital bills for appropriateness, relatedness and medical
necessity. The nurse may subsequently negotiate fees and obtain discounts for
prompt payment or inappropriate charges. Through its recently announced
acquisition of Prompt, the Company has expanded its client base for hospital
bill audits to include the group health payor community. Prompt is a leading
provider of out-of-network bill review services to the group health payor
community. These services reduce clients' costs by utilizing the Company's
team of negotiators and proprietary data base systems to reprice inpatient
hospital and outpatient facility bills on a line-by-line basis. Such bills
are repriced to either a usual and customary rate, a PPO contract rate, or a
combination thereof. Prompt operates offices in Frederick, Maryland and Salt
Lake City, Utah, with 107 full time employees. Prompt has created a data base
over the past seven years from the details of inpatient hospital and
outpatient facility bills from across the country which has allowed it to
standardize a high percentage of hospital charge codes for a significant
number of such institutions.
AUTOMOBILE INSURANCE MANAGED CARE. The Company, through the acquisition of
QMC3, has expanded its product line to offer an integrated service to the
automobile insurance market that permits insurers to direct automobile
accident victims into networks of medical providers. QMC3 currently provides
this integrated service in Colorado and has produced significant savings for
its insurance company clients since the initiation of its services. QMC3, in
cooperation with a third party PPO, has been in discussions for more than a
year with the State of New York Insurance Department regarding approval of
this PPO as a certified provider of fully integrated managed care services to
the New York automobile insurance market using QMC3 as its exclusive
utilization review agent. The State of New York Insurance Department has
approved this arrangement for the New York City metropolitan area and Long
Island, effective as of June 1, 1996. Such an arrangement is the first to
offer automobile insurance managed care services in New York. The Company and
QMC3, in cooperation with the third party PPO, are continuing their
discussions with the State of New York Insurance Department regarding further
approvals for offerings of managed care services to automobile insurers in
the balance of the State of New York. Services offered to the automobile
insurance market include precertification, telephonic case management,
direction of injured persons into specialized PPO networks, medical bill
review and field case management.
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CUSTOMERS
CRA has over 1,250 customers across the United States and Canada, including
most of the major underwriters of workers' compensation insurance, large TPAs
and self-insured employers. The Company's largest customer in 1996 accounted
for approximately 5% of total revenue. 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 150 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 the
Company believes they 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 will continue to focus on
the marketing of national headquarters offices of insurance companies and
self-insured companies. CRA has a dedicated staff of national accounts
salespeople responsible for marketing and coordinating a full selection of
services to corporate offices.
QUALITY ASSURANCE
The Company regularly evaluates its quality of service delivery by means of
audits of compliance with special instructions, completion of activities in a
timely fashion, quality of reporting, identification of savings, accuracy of
billing and professionalism in contacts with health care providers and the
effectiveness of the Company's services. Audits are conducted on a nationwide
basis for a particular customer or on a local office basis by selecting
random files for review. A detailed report is generated outlining the audit
findings and providing specific recommendations for service delivery
improvements. When appropriate, follow-up audits are conducted to ensure that
recommendations from the initial audit have been implemented.
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
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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. 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 or require licensor, certification or other approval of such
programs; (ii) laws that require licensing, certification or other approval
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.
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 co-payments and deductibles by employees. In addition,
certain states restrict employers' rights
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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.
In some instances, such health plans are required to obtain licensor,
certification or other approvals 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
prospective or concurrent review of requests for medical care or therapy.
Approximately half of the states have enacted laws that require licensor,
certification or other approval of businesses, such as the Company, that
provide medical review services. Some of these laws apply to medical review
of care covered by workers' compensation. These laws typically establish
minimum standards for qualifications of personnel, confidentiality, internal
quality control, and dispute resolution procedures. These regulatory programs
may result in increased costs of operation for the Company, which may have an
adverse impact upon the Company's ability to compete with other available
alternatives for health care cost control.
Use Of Provider Networks
The Company's ability to provide comprehensive workers' compensation managed
care services depends in part on its ability to contract with or create
networks of health care providers which share the Company's objectives. For
some of its clients, the Company offers injured workers access to networks of
providers who are selected by the Company for quality of care and pricing.
New laws regulating the operation of managed care provider networks have been
adopted by a number of states. These laws may apply to managed care provider
networks having contracts with the Company or to provider networks which the
Company may organize or acquire. To the extent the Company is governed by
these regulations, it may be subject to additional licensing requirements,
financial oversight and procedural standards for beneficiaries and providers.
Automobile Insurance Legislation
The automobile insurance industry, like the workers' compensation industry,
is regulated on a state-by-state basis. While regulatory approval is not
required for the Company to offer most of its services to the automobile
insurance market, state regulatory approval is required in order to offer
automobile insurers products that permit them to direct claimants into a
network of medical providers. To date, only Colorado and New York have
legislation that permits such direction of care and QMC3 offers this managed
care service to automobile insurers in Colorado. QMC3, in cooperation with a
third party PPO, has been in discussions for more than a year with the State
of New York Insurance
11
<PAGE>
Department regarding approval of this PPO as a certified provider of fully
integrated managed care services to the New York automobile insurance market
using QMC3 as its exclusive utilization review agent. The State of New York
Insurance Department has approved this arrangement for the New York City
metropolitan area and Long Island, effective as of June 1, 1996. Such an
arrangement is the first to offer automobile insurance managed care services
in New York. The Company and QMC3, in cooperation with the third party PPO,
are continuing their discussions with the State of New York Insurance
Department regarding further approvals for offerings of managed care services
to automobile insurers in the balance of the State of New York. While the
Company believes that approval from the State of New York Insurance
Department will be forthcoming with respect to the remaining portions of the
state, there can be no assurance that New York will issue such approval. In
addition, no assurance can be given that other states will adopt legislation
permitting such direction of care for automobile accident victims or, if such
legislation is adopted, that the Company will be able to obtain regulatory
approval to provide such services.
Health Care Reform
Increasing health care costs have caused the federal government and many
states to advance health care reform proposals. One of the proposals being
considered is 24-hour health coverage, in which the coverage of traditional
employer-sponsored health plans is combined with workers' compensation
coverage to provide a single insurance plan for work-related and
non-work-related health problems. Incorporating workers' compensation
coverage into conventional health plans may adversely affect the market for
the Company's services.
EMPLOYEES
As of December 31, 1996, the Company had approximately 2,725 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.
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Executive Officers
Donald J. Larson 46 President, Chief Executive Officer and Director
Joseph F. Pesce 48 Senior Vice President--Finance and Administration,
Chief Financial Officer and Treasurer
John A. McCarthy, Jr. 38 Senior Vice President--Cost Containment Services and
Corporate Development
Peter R, Gates 45 Senior Vice President--Marketing and Sales
Anne E. Kirby 43 Vice President--Marketing and Product Development
Directors
Lois E. Silverman 56 Chairman of the Board
George H. Conrades 58 Director
Jeffrey R. Jay, M.D. 38 Director
Mitchell T. Rabkin, M.D. 66 Director
</TABLE>
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.
12
<PAGE>
Mr. Pesce has served as Senior Vice President--Finance and Administration
since August 1996 and Chief Financial Officer and Treasurer of the Company
since October 1994. Mr. Pesce served as Vice President--Finance and
Administration of the Company from October 1994 to August 1996. From October
1981 to September 1994, Mr. Pesce held various financial positions with
Computervision Corporation and its predecessor Prime Computer, Inc.,
including Director of Corporate Planning and Analysis, Director of Leasing,
Corporate Controller, Treasurer and, most recently, Vice President--Finance
and Chief Financial Officer. Prior to October 1981, Mr. Pesce held various
financial positions with Compugraphic Corporation and GCA Corporation. Mr.
Pesce is a graduate of Boston College and the Wharton School of Finance at
the University of Pennsylvania.
Mr. McCarthy has served as Senior Vice President--Cost Containment Services
and Corporate Development since August 1996. He previously served as Vice
President--Cost Containment Services and Corporate Development since August
1994. From June 1992 to July 1994, Mr. McCarthy was Senior Vice President and
Chief Financial Officer of MedChem Products, Inc., a manufacturer of
specialty medical products. From March 1989 to June 1992, Mr. McCarthy was a
Partner at Kaufman & Company, an investment banking firm. From August 1987 to
February 1989, Mr. McCarthy was an Associate at Morgan Stanley & Co.
Incorporated, an investment banking firm. Mr. McCarthy is a graduate of
Lehigh University and Harvard Business School.
Mr. Gates has served as Senior Vice President--Marketing and Sales since
August 1996. From May 1995 to July 1996, Mr. Gates was Vice President of
Mercer Management Consulting. From January 1990 to January 1995, Mr. Gates
was Manager of Business Development, and later General Manager of the x-ray
business of GE Medical Systems. From April 1988 to December 1989, Mr. Gates
was an independent management consultant and from July 1978 to April 1988,
Mr. Gates was a Consultant and Vice President with Bain & Company, a
management consulting firm. Mr. Gates is a graduate of Princeton University
and Harvard Business School.
Ms. Kirby joined the Company in July 1979 and has served as Vice President
- -Marketing and Product Development since March 1990. From 1979 to 1990, Ms.
Kirby served the Company in a variety of roles on a local and regional level,
including Regional Vice President for the New England area. Prior to joining
the Company, Ms. Kirby worked as a clinical nurse for Massachusetts General
Hospital and managed a group medical practice in two different specialty
areas. Ms. Kirby is a graduate of Boston College and the St. Louis University
Accelerated Curriculum in Nursing.
Directors
Ms. Silverman, a founder of the Company, has served as the Chairman of the
Board since March 1994 and served as its Chief Executive Officer from 1988
through January 1, 1996. Prior to founding the Company, Ms. Silverman held
the position of Northeast Regional Manager at IntraCorp., a division of Cigna
Corporation. Ms. Silverman is a director of Sun Healthcare Group, Inc. and
CareGroup, Inc., parent corporation of Beth Israel Deaconess Medical Center,
and serves as a Trustee of Simmons College and Overseer of Tufts Medical
School. Ms. Silverman is a graduate of Beth Israel School of Nursing.
Mr. Conrades has served as a Director of the Company since June 1994. Mr.
Conrades has been President and Chief Executive Officer of BBN Corporation
since 1994 and has been Chairman of the Board of BBN Corporation since
November 1995. From 1992 to 1994, Mr. Conrades was a partner in
Conrades/Reilly Associates, a business consulting company. From 1961 to 1992,
Mr. Conrades held a number of management positions with International
Business Machines Corp., most recently as Senior Vice President for Corporate
Marketing and Services. Mr. Conrades is also a director of BBN Corporation,
Westinghouse Electric Corp. and Cubist Pharmaceuticals, 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 venture capital firm, since
September 1993. Dr. Jay has more than ten years experience in venture capital
investing. Dr. Jay is a graduate of Harvard Business School and received his
13
<PAGE>
M.D. from the Boston University School of Medicine. Dr. Jay also serves as a
director of Advance ParadigM, Inc., Nitinol Medical Technologies, Inc. and
several other private companies.
Dr. Rabkin has served as a Director of the Company since February 1995. From
1966 to September 1996, Dr. Rabkin served as Chief Executive Officer of
Boston's Beth Israel Hospital, where he currently holds the rank of Professor
of Medicine. Since October 1, 1996, Dr. Rabkin has been Chief Executive
Officer of CareGroup, Inc., parent corporation of Beth Israel Deaconess
Medical Center. Dr. Rabkin is a graduate of Harvard College and received his
M.D. from Harvard Medical School.
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.
RISK FACTORS
Potential Adverse Impact Of Government Regulation
Many states, including a number of those in which the Company transacts
business, have licensing and other regulatory requirements applicable to the
Company's business. Approximately half of the states have enacted laws that
require licensing of businesses which provide medical review services, such
as the Company. Some of these laws apply to medical review of care covered by
workers' compensation. These laws typically establish minimum standards for
qualifications of personnel, confidentiality, internal quality control, and
dispute resolution procedures. These regulatory programs may result in
increased costs of operation for the Company, which may have an adverse
impact upon the Company's ability to compete with other available
alternatives for health care cost control. In addition, new laws regulating
the operation of managed care provider networks have been adopted by a number
of states. These laws may apply to managed care provider networks having
contracts with the Company or to provider networks which the Company has
organized and may organize in the future. To the extent the Company is
governed by these regulations, it may be subject to additional licensing
requirements, financial oversight and procedural standards for beneficiaries
and providers. Regulation in the health care and workers' compensation fields
is constantly evolving. The Company is unable to predict what additional
government regulations, if any, affecting its business may be promulgated in
the future. The Company's business may be adversely affected by failure to
comply with existing laws and regulations, failure to obtain necessary
licenses and government approvals or failure to adapt to new or modified
regulatory requirements. In addition, the automobile insurance industry, like
the workers' compensation industry, is regulated on a state-by-state basis.
While regulatory approval is not required for the Company to offer most of
its services to the automobile insurance market, state regulatory approval is
required in order to offer automobile insurers products that permit them to
direct claimants into a network of medical providers.
Reliance On Data Processing And Licensed Software
Certain aspects of the Company's business are dependent upon its ability to
store, retrieve, process and manage data and to maintain and upgrade its data
processing capabilities. Interruption of data processing capabilities for any
extended length of time, loss of stored data, programming errors or other
computer problems could have a material adverse effect on the Company's
business and results of operations. The software used by the Company within
its medical bill review operation is licensed from an independent third party
software company pursuant to a non-exclusive license with a three-year term
expiring February 1998 that may be terminated by either party upon six
months' prior written notice. While the Company has historically maintained a
good relationship with the licensor, there can be no assurance that this
software license will not be terminated or that the licensor will renew the
license upon expiration. Although management believes that alternative
software would be available if the existing license were terminated, such
termination could be disruptive and could have a material adverse effect on
the Company's business and results of operations.
14
<PAGE>
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.
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.
Competition
The Company faces competition from large insurers, HMOs, PPOs, TPAs and other
managed health care companies. The Company believes that, as managed care
techniques continue to gain acceptance in the workers' compensation
marketplace, CRA's competitors will increasingly consist of nationally
focused workers' compensation managed care service companies, insurance
companies, HMOs and other significant providers of managed care products.
Legislative reforms in some states permit employers to designate health plans
such as HMOs and PPOs to cover workers' compensation claimants. Because many
health plans have the ability to manage medical costs for worker's
compensation claimants, such legislation may intensify competition in the
market served by the Company. Many of the Company's current and potential
competitors are significantly larger and have greater financial and marketing
resources than those of
15
<PAGE>
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.
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.
Importance Of Intellectual Property Rights
The Company has made significant investments in the development and
maintenance of its proprietary data, including proprietary data base
information acquired through the acquisition of Prompt. The Company does not
own any patents or federally-registered copyrights relating to its databases.
The Company relies largely on its own security systems, confidentiality
procedures and employee nondisclosure agreements to maintain the
confidentiality and trade secrecy of its proprietary data. Misappropriation
of the Company's proprietary information or independent development of
similar products may have a material adverse effect on the Company's
competitive position.
Possible Volatility Of Stock Price
There have been significant fluctuations in the market price for the
Company's Common Stock. Factors such as variations in the Company's revenues,
earnings and cash flow, general market trends in the workers' compensation
managed care market, and announcements of innovations or acquisitions by the
Company or its competitors could cause the market price of the Common Stock
to fluctuate substantially. In addition, the stock market has experienced
price and volume fluctuations that have particularly affected companies in
the health care and managed care markets, resulting in changes in the market
price of the stock of many companies which may not have been directly related
to the operating performance of those companies. Such broad market
fluctuations may adversely affect the market price of the Common Stock.
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.
Concentration Of Ownership
At February 28, 1997, the Company's officers, directors, principal
stockholders and their respective affiliates own approximately 16.3% of the
outstanding Common Stock. 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.
16
<PAGE>
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.
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.
ITEM 2. PROPERTIES
The Company's principal corporate office is located in Boston, Massachusetts.
The Company leases the 11,000 square feet of space in this site pursuant to a
lease agreement expiring in 2003. The Company also leases all of its offices
located in 49 states and three Canadian provinces. Thirteen of the Company's
offices are leased from Colonial Realty Trust, of which Ms. Silverman and Mr.
Larson are the trustees and beneficiaries. The Company believes that its
facilities are adequate for its current needs and that suitable additional
space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
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.
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ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matter was submitted to a vote of
security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Nasdaq National Market is the principal market in which the Company's
Common Stock is traded under the symbol "CRAA". At March 14, 1997, there were
approximately 700 stockholders of record of the Company's Common Stock. The
quarterly market prices subsequent to the Company's initial public offering
on May 3, 1995 were as follows:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1995
Second Quarter $ 25.00 $ 16.50
Third Quarter $ 24.50 $ 19.00
Fourth Quarter $ 24.50 $ 20.75
1996
First Quarter $ 36.75 $ 22.13
Second Quarter $ 47.00 $ 34.00
Third Quarter $ 56.75 $ 33.00
Fourth Quarter $ 58.38 $ 42.50
</TABLE>
The Company has neither declared nor paid cash dividends on its Common Stock
during 1996. The Company intends to retain all of its earnings to finance the
development and expansion of its business and therefore does not intend to
pay dividends on its Common Stock in the foreseeable future. Any future
declaration of dividends will be subject to the discretion of the Board of
Directors of the Company, will be subject to applicable law and will depend
upon the Company's results of operations, earnings, financial condition,
contractual limitations, cash requirements, future prospects and other
factors deemed relevant by the Company's Board of Directors. In addition, the
Company's existing credit facility limits the payment of dividends on the
Company's Common Stock to 25% of the Company's consolidated net income each
fiscal year, subject to continued compliance with the financial covenants
contained in the credit facility.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data appears on page 38 of the Company's 1996 Annual
Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
"Management Discussion and Analysis of Financial Condition and Results of
Operations" on pages 17 through 20 of the Company's 1996 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements, which are included on pages 22 through 39 of the 1996 Annual
Report to Stockholders, together with the "Report of
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Independent Accountants" on page 21 of the 1996 Annual Report to Stockholders
and unaudited supplementary data that is included in Note 14--Selected
Quarterly Operating Results (Unaudited) on page 39 of the 1996 Annual Report
to Stockholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the captions "Election of Directors" and
"Information Concerning the Board of Directors" in the Company's definitive
Proxy Statement, which will be filed with the Commission on or about April 4,
1997, is incorporated herein by reference. See ITEM 1 "Executive Officers and
Directors" for information concerning the Company's executive officers and
Directors.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the captions "Executive Compensation" in the
Company's definitive Proxy Statement, which will be filed with the Commission
on or about April 4, 1997, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND
OFFICERS
Information contained under the captions "Security Ownership of Certain
Beneficial Owners, Directors And Officers" in the Company's definitive Proxy
Statement, which will be filed with the Commission on or about April 4, 1997,
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the captions "Compensation Committee Interlocks
and Insider Participation" in the Company's definitive Proxy Statement, which
will be filed with the Commission on or about April 4, 1997, is incorporated
herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements
The following Consolidated Financial Statements of CRA Managed Care, Inc.
included in the Company's 1996 Annual Report to Stockholders, are
incorporated herein by reference in Item 8 of Part II of this report.
* Consolidated Balance Sheets for the years ended December 31, 1995 and 1996
on page 22 of the 1996 Annual report to Stockholders
* Consolidated Statements of Operations for the years ended December 31,
1994, 1995, and 1996, on page 23 of the 1996 Annual Report to Stockholders
* Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, on page 24 of the 1996 Annual Report to Stockholders
* Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1994, 1995, and 1996 on page 25 of the 1996 Annual Report
to Stockholders
* Report of Independent Accountants on page 21 of the 1996 Annual Report to
Stockholders
(2) Financial Statement Schedule
The financial statement schedule, Supplemental Schedule II--Allowance for
Doubtful Accounts, is filed with this report and appears on page 24.
The Report of Independent Accountants on Financial Statement Schedules is
filed with this report and appears on page 25.
All other schedules for which provision is made in Regulation S-X of the
Securities and Exchange Commission, are not required under the related
instructions or are not applicable and, therefore, have been omitted.
(3) Exhibits
The following is a list of exhibits filed as part of the Form 10-K:
EXHIBIT
NUMBER TITLE
- ----------- --------------------------------------------------------
#2.1 Stock Purchase Agreement, dated as of March 19, 1996, by
and between the Company and United Healthcare Services,
Inc.
*2.2 Agreement and Plan of Merger, dated as of October 28,
1996, by and among the Company, PAI Acquisition Corp.,
Prompt Associates, Inc., and certain other signatories
thereto.
*3.1 Restated Articles of Organization of the Company.
*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.
**3.1 Articles of Organization of the Company, as amended.
**3.2 Form of Amended and Restated Articles of Organization of
the Company.
**3.3 By-Laws of the Company.
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**3.4 Form of By-Laws of the Company, as amended and restated.
**4.1 Specimen stock certificate representing the shares of
Common Stock.
**4.2 Subordinated Note and Common Stock Purchase Agreement,
dated as of March 8, 1994, among the Company, Whitney
Subordinated Debt Fund, L.P., J.H. Whitney & Co., Lois
E. Silverman and Donald J. Larson.
**4.3 Subordinated Note and Common Stock Purchase Agreement,
dated as of March 8, 1994, among the Company, First
Union Corporation, Lois E. Silverman and Donald J.
Larson.
**10.1 Employment Agreement, dated as of March 8, 1994, between
the Company and Lois E. Silverman.
**10.2 Employment Agreement, dated as of March 8, 1994, between
the Company and Donald J. Larson.
**10.3 1994 Non-Qualified Stock Option Plan for Non-Employee
Directors.
**10.4 Form of Non-Qualified Stock Option Agreement pursuant to
the 1994 Non-Qualified Option Plan for Non-Employee
Directors.
**10.5 1994 Non-Qualified Time Accelerated Restricted Stock
Option Plan.
**10.6 Form of Non-Qualified Stock Option Agreement pursuant to
the 1994 Non-Qualified Time Accelerated Restricted Stock
Option Plan.
**10.7 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.
**+10.8 Software License Agreement between CompReview, Inc. and
the Company, dated February 10, 1995.
**10.9 Lease Agreement, dated January 1, 1994, by and between
Colonial Realty Trust and the Company for office space
located at 168 U.S. Route 1, Falmouth, ME 04105.
**10.10 Lease Agreement, dated January 1, 1994, by and between
Colonial Realty Trust and the Company for office space
located at 46 Austin Street, Newtonville, MA 02160.
**10.11 Lease Agreement, dated January 1, 1994, by and between
Colonial Realty Trust and the Company for office space
located at 46 Austin Street, Newtonville, MA 02160.
**10.12 Lease Agreement, dated January 1, 1994, by and between
Colonial Realty Trust and the Company for office space
located at 46 Austin Street, Newtonville, MA 02160.
**10.13 Lease Agreement, dated January 1, 1994, by and between
Colonial Realty Trust and the Company for office space
located at 46 Austin Street, Newtonville, MA 02160.
**10.14 Lease Agreement, dated January 1, 1994, by and between
Colonial Realty Trust and the Company for office space
located at 46 Austin Street, Newtonville, MA 02160.
**10.15 Lease Agreement, dated January 1, 1994, by and between
Colonial Realty Trust and the Company for office space
located at 46 Austin Street, Newtonville, MA 02160.
**10.16 Lease Agreement, dated January 1, 1994, by and between
Colonial Realty Trust and the Company for office space
located at 312 Union Wharf, Boston, MA 02109.
**10.17 Lease Agreement, dated January 1, 1994, by and between
Colonial Realty Trust and the Company for office space
located at 565 Turnpike Street, North Andover, MA 01845.
**10.18 Lease Agreement, dated January 1, 1994, by and between
Colonial Realty Trust and the Company for office space
located at 15A Riverway Place, Bedford, NH 03110.
**10.19 Lease Agreement, dated January 1, 1994, by and between
Colonial Realty Trust and the Company for office space
located at 509 Stillwells Corner Road, Freehold, NJ
07728.
**10.20 Lease Agreement, dated January 1, 1994, by and between
Colonial Realty Trust and the Company for office space
located at 732 Thimble Shoals Blvd., Newport News, VA
23606.
**10.21 Lease Agreement, dated January 1, 1994, by and between
Colonial Realty Trust and the Company for office space
located at 10132 Colvin Run Road, Suite A, Great Falls,
VA 22066.
**10.22 Waiver of Registration Rights and Participation Notice,
dated as of March 17, 1995, among the Company and the
other parties to the Registration Rights Agreement.
21
<PAGE>
**10.23 Termination of Management Fee and Amendment to Executive
Bonus Plan among the Company, J.H. Whitney & Co.,
Whitney 1990 Equity Fund, L.P., Ms. Silverman and Mr.
Larson.
**10.24 1995 Employee Stock Purchase Plan.
**10.25 Letter dated September 9, 1994 from the Company to
Joseph F. Pesce regarding terms of employment.
#10.26 Letter dated June 30, 1995 from the Company to Joseph F.
Pesce regarding continuation of compensation.
#10.27 Letter dated June 30, 1995 from the Company to John A.
McCarthy Jr. regarding continuation of compensation.
#10.28 Letter dated June 30, 1995 from the Company to Anne E.
Kirby regarding continuation of compensation.
#10.29 Amendment to Employment Agreement, dated as of January
24, 1996, between the Company and Lois E. Silverman.
#10.30 Definitive agreement to acquire Focus HealthCare
Management, Inc., dated March 19, 1996, between the
Company and United HealthCare Corporation.
#10.31 Amendment, dated as of March 29, 1996, to Loan
Agreement, by and among the Company, First Union
National Bank of North Carolina and certain other
Lenders, and the First Union National Bank of North
Carolina, as Agent.
**10.32 Landlord Agreement, dated as of March 8, 1994, between
Lois E. Silverman and Donald J. Larson, Trustees of
Colonial Realty Trust and the Company in favor of First
Union National Bank of North Carolina (previously filed as
exhibit 4.12).
**10.33 Loan Agreement, dated as of April 28, 1995, by and among
the Company, First Union National Bank of North Carolina
and certain other Lenders, and the First Union National
Bank of North Carolina, as Agent (previously filed as
exhibit 4.23).
**10.34 Form of Revolving Credit Note issued by the Company to
First Union National Bank of North Carolina (previously
filed as exhibit 4.24).
**10.35 Form of Security Agreement between the Company and First
Union National Bank of North Carolina (previously filed
as exhibit 4.25).
**10.36 Form of Collateral Assignment of Leases between the
Company and First Union National Bank of North Carolina
(previously filed as exhibit 4.26).
**10.37 Form of Trademark Security Agreement between the Company
and First Union National Bank of North Carolina
(previously filed as exhibit 4.27).
**10.38 Form of Landlord Agreement between Lois E. Silverman and
Donald J. Larson, Trustees of Colonial Realty Trust and
the Company in favor of First Union National Bank of
North Carolina (previously filed as exhibit 4.28).
11.1 Statement regarding computation of earnings per share.
13.1 Excerpts from the Company's 1996 Annual Report to
stockholders.
**16.1 Letter from KPMG Peat Marwick LLP regarding change in
principal accountant.
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
29.1 Financial Data Schedule
- ------------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-90426), as filed on November 7, 1996.
** Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 33-90426), as filed on March 17, 1995, as amended.
+ Confidential treatment granted.
# Incorporated by reference to the Annual Report on Form
10-K for the year ended December 31, 1995, as filed on March 29, 1996.
22
<PAGE>
(b) Reports on Form 8-K.
Form 8-K, dated January 7, 1997, regarding the acquisition of Prompt
Associates, Inc. including audited financial statements for the three years
ended December 31, 1995, consolidated pro forma statements of operations of
the Company and Prompt for the year ended December 31, 1995 and the nine
months ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, therunto duly authorized, on the 28th day
of March, 1997.
CRA MANAGED CARE, INC.
By:/s/ JOSEPH F. PESCE
--------------------------
Jospeph F. Pesce
Senior Vice President-Finance and
Administration, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
Signature Title Date
--------- ----- ----
/s/ DONALD J. LARSON President, Chief Executive March 28, 1997
- ----------------------- Officer and Director
Donald J. Larson (Principal Executive Officer
/s/ JOSEPH F. PESCE Senior Vice President-Finance March 28, 1997
- ----------------------- and Administration, Chief
Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
/s/ LOIS E. SILVERMAN Chairman of the Board of March 28, 1997
- ----------------------- Directors
Lois E. Silverman
/s/ JEFFREY R. JAY Director March 28, 1997
- -----------------------
Jeffrey R. Jay
/s/ GEORGE H. CONRADES Director March 28, 1997
- -----------------------
George H. Conrades
/s/ MITCHELL T. RABKIN Director March 28, 1997
- -----------------------
Mitchell T. Rabkin
23
<PAGE>
CRA MANAGED CARE, INC.
Allowance for Doubtful Accounts
for the Years Ended December 31, 1994, 1995 and 1996
SCHEDULE II
<TABLE>
<CAPTION>
BALANCE
BALANCE THE
THE ADDITIONS ADDITIONS AT
AT CHARGED TO ACQUIRED DEDUCTIONS END
BEGINNING COSTS AND THROUGH FROM OF THE
OF THE YEAR EXPENSES ACQUISITIONS RESERVES YEAR
------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
1994 $ 80,000 $ 353,000 $ -- $ 53,000 $ 380,000
1995 380,000 186,000 -- 136,000 430,000
1996 430,000 1,213,000 1,735,000 1,211,000 2,167,000
</TABLE>
24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To CRA Managed Care, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of CRA Managed Care, Inc. incorporated by reference in
this Form 10-K and have issued our report thereon dated January 27, 1997. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of the
financial statement schedules is presented for the purpose of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
Arthur Andersen LLP
Boston, Massachusetts
January 27, 1997
25
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
- ----------- ------
<C> <S>
11.1 Statement regarding calculation of shares used in determining earnings per share and pro forma earnings
per share.
13.1 Excerpts from the Company's 1996 Annual Report to Stockholders.
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule
</TABLE>
26
<PAGE>
CRA MANAGED CARE, INC.
Calculation of Shares Used in Determining
Earnings Per Share and Pro Forma Earnings Per Share
for the Years Ended December 31, 1994, 1995 and 1996
Exhibit 11.1
<TABLE>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average number of shares of 4,700,000 6,413,000 8,284,000
common stock outstanding during the
period
Common stock equivalents, under the 115,000 127,000 191,000
treasury stock method --------- --------- ---------
4,815,000 6,540,000 8,475,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This document 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. Reference is hereby made
to the Company's Annual Report on Form 10-K for the year ended December 31,
1996 filed with the Securities and Exchange Commission for certain
considerations that could cause actual results to differ materially from
those contained in this document.
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 118 field case management
offices with approximately 1,125 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 specialized cost containment
services, including utilization management, telephonic case management and
retrospective medical bill review services, that are designed to reduce costs
associated with work-related injuries. The Company markets its services to
workers' compensation insurers, third-party administrators and self-insured
employers through a direct sales and marketing organization consisting of
over 150 dedicated personnel. CRA currently has over 1,250 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.
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 15 new field case management offices in 1994,
eight in 1995, all of which were in connection with the acquisition of Alta
Pacific Corporation and eight in 1996. The Company believes that its field
case management office network is of sufficient size to serve adequately the
needs of its nationwide customers. As a result, the Company expects that it
will need to open only a few new field case management offices per year to
satisfy client needs in selected regions.
Since 1990, the Company has offered specialized cost containment services
which in 1996 represented approximately 33.8% of revenues. The Company
provides specialized cost containment services from 70 service locations
across the country. The Company opened 13 new specialized cost containment
locations in 1994, two in 1995 and 20 in 1996.
Set forth below for each of the three most recent years is the percentage
of the Company's revenues generated from its field case management services
and its specialized cost containment services.
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
Field case management services 76.0% 72.9% 66.2%
Specialized cost containment services 24.0% 27.1% 33.8%
On March 8, 1994, the Company completed a recapitalization
("Recapitalization"), pursuant to which the Company redeemed an aggregate of
49.0% of the then outstanding shares of Common Stock from the Company's
principal stockholders for a total consideration of $50,412,000 in cash and
$5,000,000 in junior subordinated notes ("Junior
<PAGE>
Subordinated Notes"). To finance these redemptions and related expenses, the
Company issued an aggregate of $10,000,000 of Preferred Stock, borrowed
$17,000,000 in term loans ("Term Loans")and $5,000,000 in revolving credit
("Former Revolving Credit Facility")and issued $21,000,000 in senior
subordinated notes ("Senior Subordinated Notes").
On May 10, 1995, the Company completed the sale 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 under a
new credit facility ("Credit Facility") ($5,000,000) were used to repay fully
the Term Loan ($16,250,000), the Former Revolving Credit Facility
($4,226,000) and the Senior Subordinated Notes ($21,000,000). The early
repayment of this debt resulted in a loss on the retirement of debt of
$2,460,000.
<PAGE>
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 of
interests 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 to the Company's financial statements and the
Company restated its opening retained earnings as of the acquisition date to
reflect the net assets of Alta Pacific Corporation. As such, the results for
the year ended December 31, 1995 only include the operating results of Alta
Pacific Corporation subsequent to the acquisition date.
On April 2, 1996, the Company purchased FOCUS HealthCare Management, Inc.
("FOCUS") from United HealthCare Corporation for $21,000,000 in cash. FOCUS,
based in Brentwood, Tennessee, has built and maintains one of the nation's
largest workers' compensation preferred provider organization ("PPO")
networks, and had annual revenues of approximately $9,900,000 for the year
ended December 31, 1995. 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.
On May 29, 1996, the Company acquired all the outstanding capital stock of
QMC3, Inc. ("QMC3") in exchange for 230,441 shares of the Company's Common
Stock in a pooling of interests, which was valued at approximately $8,500,000
as of the date of the acquisition agreement. QMC3, based in Denver, Colorado,
is a leading managed care services company serving the automobile liability
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 annual revenues in
1995 of approximately $2,000,000. This acquisition, which was accounted for
as a pooling of interests, was not material to the Company's financial
statements and the Company restated its opening retained earnings as of the
acquisition date to reflect the net assets of QMC3. As such, the results for
the year ended December 31, 1996 only include the operating results of QMC3
subsequent to the acquisition date.
On June 7, 1996, the Company completed the sale of 2,875,000 shares of its
Common Stock, including the exercise of the underwriters' over-allotment
option, at a price of $46.00 per share. Of the aggregate shares of Common
Stock sold, 1,200,000 shares were sold for the account of the Company
generating net proceeds to the Company of approximately $51,840,000 and
1,675,000 shares were sold for account of certain stockholders of the
Company. The Company used approximately $29,000,000 of the net proceeds to
repay borrowings under the expanded Credit Facility with First Union Bank.
On October 29, 1996, the Company purchased Prompt Associates, Inc. ("Prompt")
for approximately $30,000,000 in cash. Prompt, which is based in Salt Lake
City, Utah, is one of the leading providers of hospital bill audit services
to the group health payor community for claims that fall outside of an
indemnity carrier's, third-party administrator's ("TPA") or health
maintenance organization's ("HMO") network of hospital or outpatient
facilities. Prompt had annual revenues of approximately $10,000,000 for the
year ended December 31, 1995. In order to finance this acquisition, the
Company utilized approximately $25,000,000 of its existing cash, supplemented
by borrowings of approximately $5,000,000 under the Company's Credit Facility.
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.
Result of Operations
Years Ended December 31, 1996 and 1995
Revenues
Revenues increased 23.0% in 1996 to $179,652,000 from $146,055,000
in 1995. Field case management revenues increased 11.6% in 1996 to
$118,864,000 from $106,462,000 in 1995, while specialized cost containment
revenues increased 53.5% in 1996 to $60,788,000 from $39,593,000 in 1995. The
field case management revenue growth is primarily attributable to the
acquisition of Alta Pacific Corporation in the fourth quarter of 1995, the
opening of eight offices during 1996 and growth in revenues from existing
service locations. The specialized cost containment revenue growth is
primarily attributable to the acquisition of FOCUS on April 2, 1996, QMC3 on
May 29, 1996 and Prompt on October 29, 1996. Excluding these acquisitions,
cost containment revenues would have increased
<PAGE>
approximately 27.0% over 1995. This revenue growth is attributable to the
addition of 15 service locations during 1996, excluding the service locations
associated with the FOCUS, QMC3 and Prompt acquisitions, and continued growth
in retrospective bill review and telephonic case management services in
existing service locations. The Company expects to experience substantial
revenue growth from its specialized cost containment offerings in 1996 due to
its acquisitions and continued growth in its other cost containment product
offerings.
<PAGE>
Cost Of Services
Cost of services increased 20.5% in 1996 to $147,747,000 from $122,615,000 in
1995 due to an increase in revenues and the acquisitions of FOCUS, QMC3 and
Prompt. Cost of services as a percentage of revenue decreased to 82.2% in
1996 compared to 84.0% in 1995. This improvement in gross margin is primarily
the result of productivity gains in field case management services coupled
with a shift in the Company's revenue mix towards specialized cost
containment services, including the services provided by FOCUS, QMC3 and
Prompt, which historically have had higher gross profit margins than revenues
derived from field case management services. The Company's cost of services
consists primarily of salaries and related benefits, rent, travel, marketing,
telephone expenses and other office-related costs.
General and Administrative Expenses
General and administrative expensesincreased 31.0% in 1996 to $14,439,000
from $11,021,000 in 1995, or to 8.0% from 7.5% as a percentage of revenue for
1996 and 1995, respectively. The increase in general and administrative
expenses in 1996 primarily was due to increased expenditures for marketing
initiatives, additional investments in the information technology group and
general and administrative expense associated with FOCUS and Prompt.
Other Expense
Other expense for 1996 consisting entirely of interest income and expense,
decreased by $2,285,000 to $199,000 in 1996 from $2,484,000 in 1995. The
Company recorded interest income of $571,000 which was the result of the
investment of excess proceeds from the sale of Common Stock in June of 1996
until such cash was utilized for the purchase of Prompt in October 1996.
Interest expense decreased $1,714,000 in 1996 to $770,000 compared to
interest expense of $2,484,000 in 1995. The decrease in interest expense in
1996 was due primarily to the repayment of the Term Loan and Senior
Subordinated Notes with the proceeds from the sale of Common Stock in May
1995. This decrease in interest expense was partially offset by interest
expense associated with Credit Facility borrowings utilized to finance the
FOCUS acquisition in April of 1996 (until repaid with a portion of the
proceeds from the Company's sale of Common Stock in June of 1996) and
additional Credit Facility borrowings utilized to finance the Prompt
acquisition in October 1996.
Provision for Income Taxes
The Company's provision for income taxes for 1996 was $7,166,000, or an
effective tax rate of 41.5%, compared to a tax provision for 1995 of
$3,974,000, or an effective tax rate of 40.3%. The Company expects its
effective tax rate to increase to approximately 44% for 1997 due to the
non-deductibility of goodwill amortization associated with the FOCUS and
Prompt acquisitions.
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
experienced 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. 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% from 85.6% in 1994. This improvement is the result of increased field
case management gross profit margins due to productivity gains coupled with a
further shift in the Company's revenue mix towards the specialized cost
containment services, especially bill review, which historically have had
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
the information technology
<PAGE>
group, national marketing, PPO network development and other administrative
functions. These additions and investments occurred primarily in the second
half of 1994.
<PAGE>
Other Expense
Other expense for 1995 consisted 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 sale of Common
Stock on May 10, 1995.
Provision for Income Taxes
The Company's effective tax rate was 40.3% for 1995 which resulted in a tax
provision of $3,974,000. In connection with the Recapitalization during 1994,
the Company converted from S to C corporation status and was required to
report income on an accrual basis for tax purposes rather than on a cash
basis.
Loss on Retirement of Debt
The Company used the net proceeds ($36,507,000) from the sale of Common
Stock, supplemented by borrowings under the New Credit Facility ($5,000,000)
to fully repay the Term Loan ($16,250,000), the Former Revolving Credit
Facility ($4,226,000) and the Senior Subordinated Notes ($21,000,000). 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 loan agreement ($158,000), offset by a
tax benefit of $1,610,000.
Liquidity and Capital Resources
The Company has historically funded its working capital requirements and
capital expenditures primarily from cash flow generated from operations
supplemented by short-term borrowings under revolving credit facilities and
the proceeds of its public offerings of Common Stock. Cash flows generated
from operations were $5,594,000, $4,114,000 and $2,723,000 for the years
ended December 31, 1994, 1995 and 1996, respectively. During 1996, working
capital used $10,368,000 of cash primarily due to an increase in accounts
receivable of $8,299,000 and a decrease in accounts payable and accrued
expenses of $2,494,000, offset by a decrease in prepaid expenses of $425,000.
Accounts receivable increased due to continued revenue growth while accounts
payable and accrued expenses decreased due to the timing of payments,
especially those associated with the Company's acquisition of FOCUS and
Prompt. Prepaid expenses decreased primarily due to the decrease in prepaid
income taxes.
The Company used net cash of $49,973,000 in connection with the acquisitions
of FOCUS and Prompt. The Company purchased FOCUS in April 1996 for
approximately $21,000,000 in cash and Prompt in October 1996for approximately
$30,000,000 in cash. The Company also used $3,907,000 of cash to purchase
property and equipment during 1996, the majority of which was spent on new
computers and software packages.
On January 16, 1996, the Company utilized borrowings under the Credit
Facility to retire the $5,000,000 10% Junior Subordinated Notes issued in
connection with the Recapitalization.
In June of 1996, the Company sold an aggregate of 1,200,000 shares of its
Common Stock, including the exercise of the underwriters' over-allotment
option, at a price of $46.00 per share generating net proceeds to the Company
of approximately $51,840,000. The Company used approximately $29,000,000 of
the net proceeds to repay all of the outstanding borrowings under the Credit
Facility with First Union Bank.
The Company has a $40,000,000 Credit Facility with First Union Bank. 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. At December 31, 1996, the Company had borrowings under the Credit
Facility of $5,700,000 at an average rate of interest of 7.61%.
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,
available borrowings under the Credit Facility and, if necessary, future debt
or equity financing. There can be no assurance that any future debt or equity
financing will be available on terms favorable to the Company.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
CRA Managed Care, Inc.:
We have audited the accompanying consolidated balance sheets of CRA Managed
Care, Inc. (a Massachusetts corporation) as of December 31, 1996 and 1995,
and the related consolidated statements of operations, cash flows and
stockholders' equity (deficit) for each of the three years in the period
ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 27, 1997
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
<S> <C> <C>
ASSETS 1995 1996
- ------------------------------------------- ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $3,005,000 $2,596,000
Accounts receivable, less allowance for
doubtful accounts of $430,000 and
$2,167,000 respectively 26,380,000 36,446,000
Prepaid expenses 629,000 1,012,000
Prepaid taxes 319,000 --
----------- -----------
Total current assets 30,333,000 40,054,000
PROPERTY AND EQUIPMENT, AT COST 11,732,000 20,906,000
Less: Accumulated depreciation and
amortization 5,864,000 12,016,000
----------- -----------
Net property and equipment 5,868,000 8,890,000
OTHER ASSETS:
Goodwill, net of amortization -- 48,788,000
Other assets 355,000 396,000
----------- -----------
Total other assets 355,000 49,184,000
----------- -----------
$36,556,000 $98,128,000
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------
CURRENT LIABILITIES:
Revolving credit facilities $4,300,000 $5,700,000
Current portion of long-term debt 5,000,000 56,000
Accrued interest expense 18,000 --
Accounts payable and accrued expenses 5,927,000 7,975,000
Accrued payroll and related
expenses 7,595,000 6,663,000
Accrued income taxes -- 315,000
----------- -----------
Total current liabilities 22,840,000 20,709,000
LONG-TERM DEFERRED TAX LIABILITIES 2,056,000 841,000
COMMITMENTS AND CONTINGENCIES (Notes 8 and 12)
STOCKHOLDERS' EQUITY:
Preferred Stock -- $.01 par value;1,000,000
authorized; none issued and outstanding -- --
Common stock-- $.01 par value; 10,000,000
and 40,000,000 authorized; 7,372,424 and
8,921,403 shares issued and outstanding,
respectively 74,000 89,000
Paid-in capital 36,839,000 91,234,000
Retained deficit (25,253,000) (14,745,000)
----------- -----------
Total stockholders' equity 11,660,000 76,578,500
----------- -----------
$36,556,000 $98,128,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1994 1995 1996
------------ ------------ ------------
REVENUES............................... $121,295,000 $146,055,000 $179,652,000
COST OF SERVICES....................... 103,796,000 122,615,000 147,747,000
------------ ------------ ------------
GROSS PROFIT....................... 17,499,000 23,440,000 31,905,000
GENERAL AND ADMINISTRATIVE EXPENSES.... 8,753,000 11,021,000 14,439,00
------------ ------------ ------------
OPERATING INCOME....................... 8,746,000 12,419,000 17,466,000
OTHER (INCOME) EXPENSE:
Interest (income)..................... (62,000) -- (571,000)
Interest expense...................... 4,087,000 2,484,000 770,000
Other expense......................... 132,000 -- --
------------ ------------ ------------
Total other (income) expense....... 4,157,000 2,484,000 199,000
INCOME BEFORE INCOME TAXES......... 4,589,000 9,935,000 17,267,000
PROVISION FOR INCOME TAXES
Current year operations............... 1,530,000 3,974,000 7,166,000
Change in tax status.................. 3,772,000 -- --
------------ ------------ ------------
Total provision for income taxes... 5,302,000 3,974,000 7,166,000
------------ ------------ ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS................................ (713,000) 5,961,000 10,101,000
LOSS ON RETIREMENT OF DEBT, NET OF
TAXES OF $1,610,000.................. -- (2,460,000) --
------------ ------------ ------------
NET INCOME (LOSS)...................... ($713,000) $3,501,000 $10,101,000
------------ ------------ ------------
------------ ------------ ------------
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 $1.19
Loss on retirement of debt, net of
taxes............................... -- (0.37) --
------------ ------------ ------------
Net income............................ $0.57 $0.54 $1.19
------------ ------------ ------------
Weighted average shares outstanding... 4,815,000 6,540,000 8,475,000
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1994 1995 1996
---------- ---------- -----------
CASH FLOWS FROM OPERATIONS:
Net income (loss)................. ($713,000) $3,501,000 $10,101,000
Items not requiring cash:
Depreciation of property and equipment 1,274,000 1,601,000 2,330,000
Amortization of goodwill.......... -- -- 662,000
Provision for doubtful accounts... 353,000 186,000 1,213,000
Amortization of deferred finance
costs and debt discount......... 521,000 228,000 --
Loss on retirement of debt........ -- 3,912,000 --
Loss on disposal of fixed
assets.......................... 134,000 -- --
Provision for deferred taxes...... 2,758,000 208,000 (1,215,000)
Change in assets and liabilities:
Accounts receivable............... (4,730,000) (5,570,000) (8,299,000)
Prepaid expenses and deposits..... (1,407,000) 344,000 425,000
Accounts payable, accrued expenses
and income taxes................ 7,404,000 (296,000) (2,494,000)
---------- ---------- -----------
Cash flows from operations...... 5,594,000 4,114,000 2,723,000
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of FOCUS, QMC3 and
Prompt, net of cash acquired.... -- -- (49,973,000)
Purchase of property and
equipment....................... (2,788,000) (2,492,000) (3,907,000)
Other investing activities........ (10,000) (12,000) (8,000)
---------- ---------- -----------
Cash flows used for investing
activities................... (2,798,000) (2,504,000) (53,888,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under
revolving credit facilities,
net............................. 4,716,000 (416,000) 1,400,000
Proceeds from the issuance of Term
Loan............................ 17,000,000 -- --
Payments on Term Loan............. (750,000) (16,250,000) --
Proceeds (payment) on Senior
Subordinated Notes.............. 21,000,000 (21,000,000) --
Proceeds (payment) on Junior
Subordinated Notes.............. 5,000,000 -- (5,000,000)
Payments on other long-term
debt............................ -- -- (52,000)
Net proceeds from the issuance of
Preferred Stock................. 9,249,000 -- --
Net proceeds from the sale of
Common Stock..................... -- 36,507,000 51,840,000
Proceeds for the sale of Common
Stock under the employee stock
purchase plan and stock option
plans........................... -- 357,000 2,568,000
Costs associated with the issuance
of debt......................... (2,154,000) -- --
Repurchase of common stock........ (55,412,000) -- --
---------- ---------- -----------
Cash flows provided by (used for)
financing activities........... (1,351,000) (802,000) 50,756,000
---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS.............. 1,445,000 808,000 (409,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR................. 752,000 2,197,000 3,005,000
---------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................ $2,197,000 $3,005,000 $2,596,000
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid...................... $2,902,000 $2,865,000 $987,000
Income taxes paid.................. $3,690,000 $3,392,000 $6,579,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE CLASS A $0.01 PAR VALUE
PREFERRED STOCK COMMON STOCK COMMON STOCK
-------------------------- ----------------------- -----------------------[caad 214]
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, 1993.. $ -- 4,700,000 $ 1,000 -- $ -- $ -- $ 15,855,000
Treasury --
Stock
Purchase.. -- -- -- -- -- -- --
Treasury --
Stock
Reissuance.. -- -- -- -- -- -- (12,039,000)
Issuance of 1,698,463
Preferred
Stock..... 9,249,000 -- -- -- -- -- --
Net Loss.... -- -- -- -- -- -- -- (713,000)
BALANCE 1,698,463
DECEMBER
31,1994... 9,249,000 4,700,000 1,000 -- -- -- 3,103,000
Conversion (1,698,463)
of
Convertible
Preferred
Stock into
Class A
Common
Stock..... -- (9,249,000) -- -- -- -- -- (31,617,000)
Conversion
of Class A
into $0.01
par value
Common
Stock..... -- -- (4,700,000) (1,000) 4,700,000 47,000 -- (46,000)
Sale of Common
Stock..... -- -- -- -- 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
and option
plans..... -- -- -- 20,649 -- 357,000 --
Net Income.. -- -- -- -- -- -- -- 3,501,000
---------- --------- --------- ---------- --------- -------- ----------- -----------
BALANCE --
DECEMBER
31, 1995.. -- -- -- 7,372,424 74,000 36,839,000 (25,253,000)
---------- --------- --------- ---------- --------- -------- ----------- -----------
---------- --------- --------- ---------- --------- -------- ----------- -----------
Sale of Common
Stock..... -- -- -- -- 1,200,000 12,000 51,828,000
Common Stock
issued for
the
acquisition
of QMC3... -- -- -- -- 230,441 2,000 -- 407,000
Common Stock
issued
under
employee
stock
purchase
and option
plans..... -- -- -- -- 118,538 1,000 2,567,000 --
Net Income.. -- -- -- -- -- -- -- 10,101,000
---------- --------- --------- ---------- --------- -------- ----------- -----------
BALANCE
DECEMBER
31, 1996.. -- $ -- -- $ -- 8,921,403 $ 89,000 $ 91,234,000 ($ 14,745,000)
---------- --------- --------- ---------- --------- -------- ----------- -----------
---------- --------- --------- ---------- --------- -------- ----------- -----------
<CAPTION>
SERIES A
TREASURY STOCK STOCK-
------------------------- HOLDERS'
NUMBER EQUITY
OF SHARES VALUE (DEFICIT)
------------ ----------- -------------
<S> <C> <C> <C>
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
into $0.01
par value
Common
Stock..... -- -- --
Sale of Common
Stock..... -- -- 36,507,000
Common Stock
issued for the
acquisition
of Alta
Pacific
Corporation -- -- (192,000)
Common Stock
issued
under
employee
stock
purchase
and option
plans..... -- -- 357,000
Net Income.. -- -- 3,501,000
----------- ------------ ------------
BALANCE
DECEMBER
31, 1995.. -- -- 11,660,000
----------- ------------ ------------
----------- ------------ ------------
Sale of Common
Stock..... -- -- 51,840,000
Common Stock
issued for the
acquisition
of QMC3... -- -- 409,000
Common Stock
issued
under
employee
stock
purchase
and option
plans..... -- -- 2,568,000
Net Income.. -- -- 10,101,000
----------- ------------ ------------
BALANCE
DECEMBER
31, 1996.. -- $ -- $ 76,578,000
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Organization, Capitalization and Acquisitions
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 604,538 shares of Common Stock from its treasury stock to Whitney
(546,963 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 $25,000,000 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 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 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 as of the
acquisition date to reflect the net assets of Alta Pacific Corporation. As such,
the results for the year ended December 31, 1995 include the operating results
of Alta Pacific Corporation subsequent to the acquisition date.
On April 2, 1996, the Company purchased FOCUS HealthCare Management, Inc.
("FOCUS") from United HealthCare Corporation for $21,000,000 in cash. FOCUS,
based in Brentwood, Tennessee, has built and maintains one of the nation's
and had annual revenues of approximately $9,900,000 for the year ended
December 31, 1995. 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.
5
<PAGE>
On May 21, 1996, at the Company's Stockholder Meeting, the Stockholders voted
to restate the Company's Amended and Restated Articles of Organization to
increase to 40,000,000 the number of authorized shares of Common Stock.
On May 29, 1996, the Company acquired all the outstanding capital stock of
QMC3, Inc. ("QMC3") in exchange for 230,441 shares of the Company's Common Stock
in a pooling of interest transaction, which was valued at approximately
$8,500,000 as of the date of the acquisition agreement. QMC3, based in Denver,
Colorado, is a leading managed care services company serving the automobile
liability insurance market which was 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 annual revenues of
approximately $2,000,000 for the year ended December 31, 1995. This acquisition,
which was accounted for as a pooling of interests, was not material to the
Company's financial statements and the Company restated its opening retained
earnings as of the acquisition date to reflect the net assets of QMC3. As such,
the results for the year ended December 31, 1996 include the operating results
of QMC3 subsequent to the acquisition date.
On June 7, 1996, the Company completed the sale of 2,875,000 shares of its
Common Stock, including the exercise of the underwriters' over-allotment option,
at a price of $46.00 per share. Of the aggregate shares of Common Stock sold,
1,200,000 were sold for the account of the Company generating net proceeds to
the Company of approximately $51,840,000 and 1,675,000 shares were sold for the
account of certain stockholders of the Company. The Company used approximately
$29,000,000 of the net proceeds to repay borrowings under the expanded Credit
Facility with First Union Bank.
On October 29, 1996, the Company purchased Prompt Associates, Inc.
("Prompt") for $30,000,000 in cash. Prompt, which is based in Salt Lake City,
Utah, is one of the leading providers of hospital bill audit services to the
group health payor community for claims that fall outside of an indemnity
carrier's, third-party administrator's ("TPA") or health maintenance
organization's ("HMO") network of hospital or outpatient facilities and had
annual revenues of approximately $10,000,000 for the year ended December 31,
1995. In order to finance this acquisition, the Company utilized approximately
$25,000,000 of its existing cash, supplemented by borrowings of approximately
$5,000,000 under the Company's Credit Facility.
The acquisitions of FOCUS and Prompt have been accounted for by the Company
as purchases whereby the basis for accounting for FOCUS' and Prompt's assets
and liabilities are based upon their fair values at the dates of acquisition.
The allocation of the purchase price to these assets and liabilities is as
follows with the excess of cost over fair value of net assets acquired
(goodwill) being amortized over thirty years:
<TABLE>
<CAPTION>
FOCUS PROMPT
-------------- -------------
<S> <C> <C>
Purchase price including fees and expenses:.................... $ 21,555,000 $ 30,594,000
Purchase price allocated to:
Current assets................................................. 1,795,000 2,181,000
Property and equipment......................................... 929,000 450,000
Other long term assets......................................... 5,000 --
Current liabilities............................................ (711,000) (1,587,000)
Long-term deferred tax liabilities............................. (324,000) --
Other long-term debt........................................... (39,000) --
------------- -------------
Net assets acquired............................................ 1,655,000 1,044,000
------------- -------------
Excess of cost over fair value of net assets acquired
(goodwill)................................................... $ 19,900,000 $ 29,550,000
------------- -------------
------------- -------------
</TABLE>
6
<PAGE>
(2) Actual, Pro Forma and Supplemental Pro Forma Earnings Per Share
(a) Earnings per share
Earnings per share for the years ended December 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.
(b) Pro forma earnings per share
Pro forma earnings per share for the year ended December 31, 1994 has been
calculated as if the Company had been subject to federal and state income taxes
for the period based upon an effective tax rate indicative of the statutory
rates in effect during the period (prior to the Recapitalization on March 8,
1994, the Company elected to be taxed as an S corporation on a cash basis, and
accordingly, was not subject to federal income taxes and certain state income
tax jurisdictions).
(c) Supplemental Pro Forma Earnings Per Share--1995 (Unaudited)
Supplemental pro forma earnings per share has been calculated as if the
Company repaid the Term Loan, Former Revolving Credit Facility and Senior
Subordinated Notes at the beginning of 1995 utilizing the net proceeds
($36,507,000) from its sale of Common Stock and borrowings under the Credit
Facility ($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 were $6,871,000 or $0.93 per share.
(d) Supplemental Pro Forma Earnings Per Share--1996 (Unaudited) Supplemental
pro forma earnings per share for 1996 has been calculated as if (i) the
acquisitions of FOCUS and Prompt had been consummated on January 1, 1996,
(ii) the Company repaid all its outstanding debt at the beginning of 1996
utilizing the net proceeds of $51,840,000 from the sale of 1,200,000 shares
of Common Stock in June, 1996 and (iii) the Company borrowed under its
Revolving Credit Facility at an interest rate of 7.0% for its remaining
borrowing requirements. Supplemental pro forma revenue, net income and
earnings per share for the year ended December 31, 1996 would have been
$194,508,000 and $10,972,000 and $1.22, respectively. The supplemental pro
forma weighted average number of shares of 8,975,000 is the actual weighted
average number of shares of Common Stock and Common Stock equivalents
outstanding plus the impact of the 1,200,000 shares of Common Stock that were
sold.
(3) Summary of Significant Accounting Policies
(a) Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
(b) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents. The carrying
amount approximates fair value due to the short maturity of those instruments.
(c) Revenue Recognition
The Company recognizes revenue primarily as services have been rendered
based 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, 1995
and 1996 include $4,350,000 and $4,500,000, respectively, of unbilled accounts
receivable relating to services rendered during the period but not invoiced
until after the period-end.
7
<PAGE>
A portion of the alllowance for doubful accounts attributable to Prompt is
based on historical experience of ineligible claims which are either charged
back or given a negotiated discount. Prompt utilizes several methods to project
unpresented discounts and chargebacks including a tracking of the actual
experience of contractual discounts. Other factors that affect collectibility
and bad debts for each service line are also evaluated and additional allowance
amounts may be provided.
Insurance claims are modeled by Prompt prior to the insurance company's
review procedures to determine if the claims are payable. During the insurance
company's review process, some claims have PPO or HMO arrangements, pre-existing
conditions, or other disqualifying situations. When these situations occur, a
refund (chargeback) is requested for the amounts paid (invoiced) on these
claims.
Prompt's policy is to record the allowance as an offset to sales and
accounts receivable based on the historical tracking of discounts and/or
chargebacks. Prompt recorded net provisions to the allowance for the two months
ended December 31, 1996 of $689,000.
(d) Depreciation
The Company provides for depreciation on property and equipment using
straight-line and accelerated methods by charges to operations in amounts that
allocate the cost of depreciable assets over their estimated lives as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Furniture and fixtures 7 Years
Office and computer equipment 3--5 Years
Automobiles 5 Years
Leasehold improvements The shorter of the life of lease or asset life
</TABLE>
(e) Goodwill
Goodwill associated with the FOCUS and Prompt acquisitions is being
amortized using the straight-line method over a period of thirty years.
Accumulated amortization was $659,000 at December 31, 1996. The Company
periodically evaluates whether changes have occurred which would require
revision of the remaining estimated useful life of the assigned goodwill or
render the goodwill non-recoverable.
(f) 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.
(g) 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 in 1994.
8
<PAGE>
(h) Foreign Currency Translation
All assets and liabilities of the Company's Canadian offices are translated
at the year-end exchange rate while revenues and expenses are translated at the
average exchange rate for the year.
(i) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(4) Revolving Credit Facilities
(a) Credit Facility
On April 28, 1995, the Company entered into the $25,000,000 Credit Facility
with First Union Bank. On March 29, 1996, the Company and First Union Bank
signed an amendment to expand the Company's borrowing capacity under the Credit
Facility to $40,000,000 under similar terms and conditions in order to finance
the acquisition of FOCUS. Interest on borrowings under the Credit Facility is
payable, at the Company's option, at First Union Bank's prime rate plus an
additional percentage of up to .375%, or LIBOR plus an additional percentage of
up to 1.875%, depending on certain financial criteria. At December 31, 1995 and
1996, the Company had borrowings under the Credit Facility of $4,300,000 and
$5,700,000, respectively, at an average rate of interest of 7.36% and 7.61%,
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 1996. 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 .25% to
.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.
9
<PAGE>
(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%.
The Company was required to pay First Union Bank a facility fee of .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, 1994, 1995 and 1996, the weighted average
borrowings under these revolving credit facilities were $3,404,000, $4,903,000
and $8,184,000, respectively, and the weighted average interest rates were
7.39%, 8.55% and 6.94%, respectively.
(5) Long-term Debt
(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.
(b) Senior Subordinated Notes
The Company issued $21,000,000, principal amount, of 10.101% Senior
Subordinated Notes due March 8, 2001 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.
(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 10% Junior Subordinated
Notes due March 9, 2002. On January 16, 1996 the Company retired the 10% Junior
Subordinated Notes utilizing borrowings under the Credit Facility.
10
<PAGE>
(6) Income Taxes
The provision for income taxes consists of the following for the years ended
December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
-------------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal................................................................. $ 1,777,000 $ 1,658,000 $ 6,713,000
State................................................................... 767,000 498,000 1,668,000
------------ ------------ ------------
2,544,000 2,156,000 8,381,000
Deferred:
Federal................................................................. 2,822,000 166,000 (964,000)
State................................................................... (64,000) 42,000 (251,000)
------------ ------------ ------------
2,758,000 208,000 (1,215,000)
------------ ------------ ------------
Total................................................................... $ 5,302,000 $ 2,364,000 $ 7,166,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Significant items making up deferred tax liabilities and deferred tax assets
were as follows at December 31:
<TABLE>
<CAPTION>
1995 1996
-------------- ------------
<S> <C> <C>
Deferred Tax Assets:
Allowance for doubtful............................................ $ 169,00 $ 312,000
Accrued expenses.................................................. 452,000 543,000
------------ ------------
$ 621,000 $ 855,000
------------ ------------
------------ ------------
Deferred Tax Liabilities:
Book to tax depreciation.......................................... $ 180,000 $ 418,000
Change in tax status.............................................. 2,497,000 1,278,000
------------ ------------
$ 2,677,000 $ 1,696,000
------------ ------------
------------ ------------
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
tax rate for the years ended December 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 % 1995 % 1996
----------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Tax provision at federal statutory rate.................... $ 1,560,000 34.0% $ 1,994,000 34.0% $ 6,044,000
Income prior to Recapitalization, taxed as an "S"
corporation.............................................. (352,000) -7.7% -- -% --
State taxes, net of federal income tax benefit............. 228,000 5.0% 356,000 6.1% 898,000
Items not deductible for tax purposes...................... 94,000 2.0% 14,000 0.2% 224,000
------------ --- ------------ --- ------------
$ 1,530,000 33.3% $ 2,364,000 40.3% $ 7,166,000
------------ --- ------------ --- ------------
------------ --- ------------ --- ------------
<CAPTION>
%
----------
<S> <C>
Tax provision at federal statutory rate.................... 35.0%
Income prior to Recapitalization, taxed as an "S"
corporation.............................................. -%
State taxes, net of federal income tax benefit............. 5.2%
Items not deductible for tax purposes...................... 1.3%
---
41.5%
---
---
</TABLE>
Prior to the Recapitalization, the Company was an "S" corporation under
Section 1362 of the Internal Revenue Code. In connection with the
Recapitalization, the Company was required to change from an "S" corporation to
a "C" corporation and to report income on a accrual basis for tax purposes as
opposed to a cash basis. This change resulted in an incremental tax provision of
$3,772,000 in 1994.
11
<PAGE>
(7) Stockholders' Equity
(a) 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
anti-dilution 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.
(b) 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 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.
Motor vehicles and office equipment are leased from unrelated parties under
non-cancelable operating leases that expire on various dates through December
31, 1999.
The following is a schedule of rent expense by major category for the years
ended December 31:
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Facilities--related parties............................................. $ 714,000 $ 726,000 $ 726,000
Facilities--unrelated parties........................................... 2,673,000 3,199,000 4,374,000
------------ ------------ ------------
3,387,000 3,925,000 5,100,000
Office equipment........................................................ 150,000 190,000 206,000
Automobiles............................................................. 2,181,000 2,638,000 2,729,000
------------ ------------ ------------
Total rent expense...................................................... $ 5,718,000 $ 6,753,000 $ 8,035,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
12
<PAGE>
The following is a schedule of future minimum lease payments under
non-cancelable operating leases for the years ending December 31:
<TABLE>
<CAPTION>
RELATED UNRELATED
YEAR PARTIES PARTIES TOTAL
- ------------------------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
1998 726,000 3,094,000 3,820,000
1999 726,000 1,924,000 2,650,000
2000 726,000 922,000 1,648,000
2001 726,000 338,000 1,064,000
Thereafter............................................. 1,453,000 181,000 1,634,000
------------ ------------- -------------
$ 5,083,000 $ 10,620,000 $ 15,703,000
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
In addition, the Company, through its wholly owned subsidiary Prompt, has an
exclusive agreement with MEDSTAT Systems, Inc. ("MEDSTAT"), a provider of
researched data in the health care industry, to provide outpatient surgical
facility charge data. Amounts paid to MEDSTAT under this agreement for the year
ended December 31, 1996 were $706,000. Recurring minimum payments associated
with this agreement are approximately $831,000, $956,000 and $525,000 for the
years ended at December 31, 1997, 1998 and 1999, respectively.
(9) Employee Benefit Programs
(a) 401(k) Plan
The Company has a defined contribution plan (the "401(k) Plan") pursuant to
which employees who are at least 21 years of age and who have completed at least
six months of service are eligible to participate. Participants in the 401(k)
Plan may not contribute more than the lesser of a specified statutory amount or
15% of his or her pre-tax total compensation. The 401(k) Plan permits, but does
not require, additional contributions to the 401(k) Plan by the Company.
Employees are 100% vested in their own contributions while Company contributions
vest 20% after three years and vest an additional 20% each year thereafter.
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, 1994, 1995 and 1996, the Board of Directors has
elected to match 50% of up to 4% of compensation.
The Company made net contributions to this plan of $518,000, $581,000 and
$855,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
(b) 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.
13
<PAGE>
Alta Pacific Corporation made contributions to this plan of $64,000 and
$73,000 for the years ended December 31, 1994 and 1995, respectively. This plan
was consolidated and combined with the 401(k) Plan effective January 1, 1996.
(c) 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. 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.
(10) Stock Purchase Plan and Stock Option Plans
(a) 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.
13
<PAGE>
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 the following shares of Common Stock for each of the Purchase
Periods:
<TABLE>
<CAPTION>
NUMBER PRICE
PURCHASE PERIOD ENDED OF SHARES PER SHARE
- ------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
December 31, 1995....................................................... 18,299 $ 18.73
June 30, 1996........................................................... 16,287 $ 18.92
December 31, 1996....................................................... 11,671 $ 38.04
</TABLE>
(b) 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 23,500 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.
(c) 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 976,000
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, 1996, options to purchase 840,689 shares of Common
Stock at an average exercise price of $32.92 per share were outstanding, of
which 148,991 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.
14
<PAGE>
A summary of the status of the Company's two stock option plans at December
31, 1994, 1995 and 1996 and changes during the years then ended is presented in
the table below:
<TABLE>
<CAPTION>
OUTSTADING OPTIONS
---------------------------------------------
<S> <C> <C> <C> <C>
WEIGHTED
RESERVED NUMBER PRICE PER AVERAGE PRICE
SHARES OF SHARES SHARE PER SHARE
---------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance December 31, 1993............................. -- -- $ -- $ --
Reserved.............................................. 470,000
Granted............................................... 251,450 $ 5.89 $ 5.89
Exercised............................................. -- -- --
Canceled.............................................. -- -- --
---------- -------------- -------------- ------
Balance December 31, 1994............................. 470,000 251,450 $ 5.89 $ 5.89
Reserved.............................................. --
Granted............................................... 145,500 $ 5.89-22.75 $ 16.76
Exercised............................................. (2,350) $ 5.89 $ 5.89
Canceled.............................................. (9,400) $ 5.89 $ 5.89
---------- -------------- -------------- ------
Balance December 31, 1995............................. 470,000 385,200 $ 5.89-$22.75 $ 10.00
Reserved.............................................. 600,000
Granted............................................... 656,169 $ 7.41-$48.75 $ 40.54
Exercised............................................. (90,580) $ 5.89-$22.75 $ 7.76
Canceled.............................................. (63,100) $ 5.89-$36.12 $ 28.52
---------- -------------- -------------- ------
Balance December 31, 1996............................. 1,070,000 887,689 $ 5.89-$48.75 $ 31.49
---------- -------------- -------------- ------
---------- -------------- -------------- ------
</TABLE>
A further breakdown of the outstanding options at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
EXERCISE PRICE WEIGHTED AVERAGE WEIGHTED AVERAGE OUTSTANDING EXERCISABLE
RANGE EXERCISE PRICE CONTRACTUAL LIFE OPTIONS OPTIONS
- ------------------- ----------------- ------------------- ----------- -----------
<S> <C> <C> <C> <C>
$5.89--$8.15....... $ 6.07 8.3 216,149 84,671
$22.12--$22.75..... $ 22.54 9.3 119,740 34,460
$36.12............. $ 36.12 9.8 196,800 39,360
$41.38--$48.50..... $ 47.41 10.3 355,000 14,000
</TABLE>
The Company accounts for these plans under APB No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with Financial Accounting Standards Board Statement
No. 123 "Accounting for Stock-Based Compensation" ("FASB 123"), the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts:
<TABLE>
<CAPTION>
1995 1996
------------- --------------
<S> <C> <C> <C>
Net Income Before Extraordinary Items:... As reported $ 5,961,000 $ 10,101,000
Pro forma $ 5,346,000 $ 4,093,000
Earnings Per Share:...................... As reported $ 0.91 $ 1.19
Pro forma $ 0.82 $ 0.48
</TABLE>
Because FASB 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. Additionally, the
1995 and 1996 pro forma amounts include $69,000 and $151,000, respectively
related to purchase discount offered on the 1995 Purchase Plan.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: risk-free interest
rates of 6.17% and 6.12%; expected dividend yield of zero for both years;
expected lives of 3.4 for the Director Plan and the 1994 Stock Option Plan; and
expected volatility of 47 percent for both years.
15
<PAGE>
(11) Related Party Transactions
The Company had the following related party transactions during the years
ended December 31, 1994, 1995 and 1996 (also see Footnote 4, "Revolving Credit
Facilities," Footnote 5, "Long-term Debt" and Footnote 8, "Commitments"):
(a) Colonial Realty Trust
The Company made rental payments to Colonial Realty Trust of $714,000,
$726,000 and $726,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. Colonial Realty Trust is a real estate company owned by two
stockholders of the Company.
(b) 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.
(c) First Union Bank
In connection with the Recapitalization, the Company paid First Union Bank a
commitment fee of $405,000 and an up front agent fee of $50,000. 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.
(13) Selected Financial Data
<TABLE>
<CAPTION>
Years ended December31,
-----------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue......................... $ 80,851,000 $ 100,546,000 $ 121,295,000 $ 146,055,000 $ 179,652,000
Operating income (1)............ 4,990,000 4,533,000 8,746,000 12,419,000 17,466,000
Income before taxes (1)......... 4,984,000 4,533,000 4,589,000 9,935,000 17,267,000
Provision for income taxes
(2)........................... 307,000 355,000 5,302,000 3,974,000 7,166,000
Net income before extraordinary
items (1)(2).................. 4,677,000 4,178,000 (713,000) 5,961,000 10,101,000
Pro forma (3) and actual
earnings per share............ $ 0.57 $ 0.91 $ 1.19
Weighted average shares
outstanding................... 4,815,000 6,540,000 8,475,000
Balance Sheet:
Working capital................. $ 9,114,000 $ 12,126,000 $ 5,609,000 $ 7,493,000 $ 19,345,000
Total assets.................... 15,894,000 20,836,000 31,345,000 36,556,000 98,128,000
Total debt...................... 337,000 -- 44,716,000 9,300,000 5,756,000
</TABLE>
16
<PAGE>
1) Expenses for the period 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 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 tax provision of $3,772,000 in
the first quarter of 1994.
3) The pro forma net income of $2,752,000 and earnings per share 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.
(14) Selected Quarterly Operating Results (Unaudited)
The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters ended December 31, 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 document. The operating results for any quarter are not
necessarily indicative of results for any subsequent quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue..................................... $ 40,225,000 $ 44,759,000 $ 46,048,000 $ 48,620,000
Cost of sales............................... 33,422,000 36,747,000 37,812,000 39,766,000
------------- ------------- -------------- -------------
Gross Profit................................ 6,803,000 8,012,000 8,236,000 8,854,000
General and administrative expenses......... 3,109,000 3,636,000 3,746,000 3,948,000
------------- ------------- -------------- -------------
Operating income............................ 3,694,000 4,376,000 4,490,000 4,906,000
(313,000)
Other (income) expense...................... 194,000 331,000 (13,000)
Provision for income taxes.................. 1,453,000 1,678,000 1,993,000 2,042,000
------------- ------------- -------------- -------------
Net income.................................. $ 2,047,000 $ 2,367,000 $ 2,810,000 $ 2,877,000
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue............................................. $ 34,930,000 $ 36,125,000 $ 36,826,000 $ 38,174,000
Cost of sales....................................... 29,545,000 30,212,000 30,843,000 32,015,000
------------- ------------- ------------- -------------
Gross Profit........................................ 5,385,000 5,913,000 5,983,000 6,159,000
General and administrative expenses................. 2,677,000 2,744,000 2,759,000 2,841,000
------------- ------------- ------------- -------------
Operating income.................................... 2,708,000 3,169,000 3,224,000 3,318,000
Other expenses...................................... 1,354,000 655,000 251,000 224,000
Provision for income taxes.......................... 542,000 1,005,000 1,189,000 1,238,000
------------- ------------- ------------- -------------
Net income before extraordinary items............... 812,000 1,509,000 1,784,000 1,856,000
Loss on retirement of debt, net of taxes............ -- (2,460,000) -- --
Net income (loss)................................... $ 812,000 ($ 951,000) $ 1,784,000 $ 1,856,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
17
<PAGE>
CRA MANAGED CARE, INC.
List of Subsidiaries
EXHIBIT 21.1
CRA Managed Care, Inc., of Washington
(formerly known as Alta Pacific Corporation)
Focus HealthCare Management, Inc.
QMC3, Inc.
Prompt Associates, Inc.
28
<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 filing on
Form 10-K.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 21, 1997
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000942136
<NAME> CRA MANAGED CARE INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,596,000
<SECURITIES> 0
<RECEIVABLES> 38,613,000
<ALLOWANCES> 2,167,000
<INVENTORY> 0
<CURRENT-ASSETS> 40,054,000
<PP&E> 20,906,000
<DEPRECIATION> 12,016,000
<TOTAL-ASSETS> 98,128,000
<CURRENT-LIABILITIES> 20,709,000
<BONDS> 0
0
0
<COMMON> 89,000
<OTHER-SE> 76,489,000
<TOTAL-LIABILITY-AND-EQUITY> 98,128,000
<SALES> 0
<TOTAL-REVENUES> 179,652,000
<CGS> 0
<TOTAL-COSTS> 147,747,000
<OTHER-EXPENSES> 14,439,000
<LOSS-PROVISION> 1,213,000
<INTEREST-EXPENSE> 770,000
<INCOME-PRETAX> 17,267,000
<INCOME-TAX> 7,166,000
<INCOME-CONTINUING> 10,101,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,101,000
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 0
</TABLE>
