As Filed with the Securities and Exchange Commission on November 7, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CRA MANAGED CARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MASSACHUSETTS 8099 04-2658593
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S.
OF CLASSIFICATION CODE NUMBER) EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION
NO.)
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312 UNION WHARF
BOSTON, MASSACHUSETTS 02109
(617) 367-2163
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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DONALD J. LARSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CRA MANAGED CARE, INC.
312 UNION WHARF
BOSTON, MASSACHUSETTS 02109
(617) 367-2163
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
JAMES WESTRA, ESQUIRE LESLIE E. DAVIS, ESQUIRE
HUTCHINS, WHEELER & DITTMAR TESTA, HURWITZ & THIBEAULT, LLP
A PROFESSIONAL CORPORATION 125 HIGH STREET
101 FEDERAL STREET BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02110 (617) 248-7000
(617) 951-6600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in correlation with dividend or
interest reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
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CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
Common Stock, par value $.01 per 2,300,000
share.............................. shares $50.25 $115,575,000 $35,023
(1) Includes an aggregate of 300,000 shares which the Underwriters have the
option to purchase from the Company solely to cover over-allotments, if any.
See "Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee based
on the average of the high and low sales prices of the Common Stock as
reported on the Nasdaq National Market on November 1, 1996, in accordance
with Rule 457 under the Securities Act of 1933, as amended.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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SUBJECT TO COMPLETION
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
NOVEMBER 7, 1996
2,000,000 SHARES
[LOGO]
COMMON STOCK
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Of the 2,000,000 shares of Common Stock offered hereby, 500,000 are being
sold by CRA Managed Care, Inc. ("CRA" or the "Company") and 1,500,000 are being
sold by certain stockholders of the Company (the "Selling Stockholders"). The
Company will not receive any of the proceeds from the sale of shares of Common
Stock by the Selling Stockholders. The Company's Common Stock is quoted on the
Nasdaq National Market (the "Nasdaq National Market") under the symbol "CRAA."
On November 6, 1996, the last reported sale price of the Company's Common Stock
was $55.13 per share.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" APPEARING ON PAGES 6 THROUGH 9.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
Per Share............... $ $ $ $
Total(2)................ $ $ $ $
(1) Before deducting expenses of the offering estimated at $600,000 payable by
the Company.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ , and $ , respectively. See "Use of Proceeds" and
"Underwriting."
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The shares of Common Stock are offered by the several Underwriters subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland on or about ,
1996.
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
MONTGOMERY SECURITIES
J.P. MORGAN & CO.
THE DATE OF THIS PROSPECTUS IS , 1996.
[MAP OF COMPANY OFFICE LOCATIONS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND OTHER SELLING
GROUP MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THE COMPANY
CRA provides field case management and specialized cost containment services
designed to reduce workers' compensation costs. Field case management services
involve working on a one-on-one basis with injured employees and their various
health care professionals, employers and insurance company adjusters to assist
in maximizing medical improvement and, where appropriate, to expedite return to
work. The Company operates one of the largest field case management
organizations in the United States, consisting of 115 field case management
offices with approximately 1,070 field case managers who provide medical
management and return to work services in 49 states and the District of
Columbia. CRA also provides a broad range of higher margin specialized cost
containment services, including utilization management, workers' compensation
network management, telephonic case management and retrospective medical bill
review services. Revenues from specialized cost containment services comprised
approximately 32.2% of revenues for the first nine months of 1996, up from
approximately 27.1% for the corresponding period of the prior year. The Company
markets its services primarily to workers' compensation insurers, third party
administrators, self-insured employers and payors of automobile accident medical
claims through a direct sales and marketing organization consisting of over 125
dedicated personnel. CRA currently has over 1,250 customers nationwide.
Workers' compensation is a state-mandated, comprehensive insurance program
that requires employers to fund medical expenses, lost wages and other costs
resulting from work-related injuries and illnesses. According to statistics
published in the 1994 WORKERS' COMPENSATION YEAR BOOK, total workers'
compensation costs to employers were approximately $60 billion in 1992
(excluding costs associated with productivity losses) and approximately $22.8
billion in 1982. In response to rising workers' compensation costs, insurance
carriers and employers have become increasingly focused on applying managed care
techniques to reduce lost work time, medical costs and other costs associated
with workers' compensation. The Company estimates that the workers' compensation
managed care services industry generated total 1993 revenues of approximately
$2.6 billion. While the industry is fragmented with a large number of
competitors, CRA believes that it is one of only a small number of companies
that offer a comprehensive line of workers' compensation managed care services
on a nationwide basis.
The Company's objective is to expand and capitalize on its presence as a
national provider of comprehensive managed care services to workers'
compensation payors. CRA's strategy is to: (i) maintain its primary focus on the
workers' compensation marketplace where the Company believes that its
specialized skills provide it with a significant competitive advantage; (ii)
leverage its national organization and local market presence to expand its
relationships with national payors who are increasingly seeking national
solutions to their workers' compensation problems; (iii) capitalize on its
traditional customer base by cross-selling specialized cost containment services
to its existing field case management customers; (iv) increase its marketing of
early intervention services to identify cases that have the potential to result
in significant expenses and to take appropriate measures to control these
expenses before they are incurred; (v) take advantage of recent enabling
legislation to apply managed care techniques to the automobile insurance market;
and (vi) expand its product offerings and enhance its opportunities for growth
through strategic acquisitions.
3
RECENT DEVELOPMENTS
As part of its strategy to expand its product offerings and enhance its
opportunities for growth through strategic acquisitions, the Company has
recently completed three acquisitions. On April 2, 1996 CRA acquired all
outstanding capital stock of FOCUS Healthcare Management, Inc. ("Focus"), which
maintains one of the nation's largest workers' compensation networks of
preferred provider organizations ("PPO"). The acquisition of Focus enables the
Company to offer its customers access to a specialized PPO controlled by the
Company. On May 29, 1996 CRA acquired all the outstanding capital stock of QMC3,
Inc. ("QMC3"), a leading managed care company servicing the automobile insurance
market. This acquisition positions CRA to capitalize on the introduction of
managed care techniques to the automobile insurance market. On October 29, 1996,
CRA acquired all of the outstanding capital stock of Prompt Associates, Inc.
("Prompt"), a leading provider of hospital bill audit services. This acquisition
complements CRA's existing line of bill review services and allows the Company
to offer line-item hospital and outpatient facility bill review services to
health care payors. See "Recent Developments."
The Company's executive office is located at 312 Union Wharf, Boston,
Massachusetts 02109, and its telephone number is (617) 367-2163.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk including,
among others, risks associated with the Company's operations, the market in
which it competes, the implementation of its growth strategy and material
benefits to insiders as a result of this offering. See "Risk Factors."
THE OFFERING
Common Stock offered by the Company................. 500,000 shares
Common Stock offered by the Selling Stockholders.... 1,500,000 shares
Common Stock to be outstanding after the offering... 9,407,532 shares(1)
Use of proceeds..................................... Repayment of short-term debt and
general corporate purposes, including
acquisitions.
Nasdaq National Market symbol....................... CRAA
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(1) Based on the number of shares outstanding as of September 30, 1996. Excludes
options to purchase 629,889 shares at September 30, 1996, with a weighted
average exercise price of $23.87 per share. See Note 10 to the Consolidated
Financial Statements of the Company.
4
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
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1991 1992 1993 1994 1995 PRO FORMA
------- ------- -------- -------- -------- 1995(1)
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(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues..................................................... $58,969 $80,851 $100,546 $121,295 $146,055 $165,122
Gross profit................................................. 6,548 11,997 14,464 17,499 23,440 28,187
Operating income(2).......................................... 1,965 4,990 4,533 8,746 12,419 13,182
Interest expense............................................. 78 66 16 4,087 2,484 498
Provision for income taxes(3)................................ 118 307 355 5,302 3,974 5,485
Net income (loss) before extraordinary items(2)(3)........... $ 1,798 $ 4,677 $ 4,178 $ (713) $ 5,961 $ 7,261
Weighted average shares outstanding.......................... 4,815 6,540 8,579
Pro forma and actual earnings per share(4)................... $ 0.57 $ 0.91 $ 0.85
STATISTICAL DATA:
Total number of service locations 93 122 150 160 163
FIELD CASE MANAGEMENT SERVICES:
Revenues..................................................... $67,366 $ 80,948 $ 92,232 $106,462 $106,462
Percentage of total revenue.................................. 83.3% 80.5% 76.0% 72.9% 64.5%
Number of service locations.................................. 78 87 102 110 110
SPECIALIZED COST CONTAINMENT SERVICES:
Revenues..................................................... $13,485 $ 19,598 $ 29,063 $ 39,593 $ 58,660
Percentage of total revenue.................................. 16.7% 19.5% 24.0% 27.1% 35.5%
Number of service locations(5)............................... 15 35 48 50 53
NINE MONTHS
ENDED SEPTEMBER 30,
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PRO FORMA
1995 1996 1996(1)
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(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues..................................................... $107,881 $131,032 $142,782
Gross profit................................................. 17,281 23,051 26,859
Operating income(2).......................................... 9,101 12,560 13,825
Interest expense............................................. 2,260 658 113
Provision for income taxes(3)................................ 2,736 5,124 6,034
Net income (loss) before extraordinary items(2)(3)........... $ 4,105 $ 7,224 $ 7,781
Weighted average shares outstanding.......................... 6,223 8,261 8,928
Pro forma and actual earnings per share(4)................... $ 0.66 $ 0.87 $ 0.87
STATISTICAL DATA:
Total number of service locations 152 175 177
FIELD CASE MANAGEMENT SERVICES:
Revenues..................................................... $78,604 $88,900 $88,900
Percentage of total revenue.................................. 72.9% 67.8% 62.3%
Number of service locations.................................. 102 115 115
SPECIALIZED COST CONTAINMENT SERVICES:
Revenues..................................................... $29,277 $42,132 $53,882
Percentage of total revenue.................................. 27.1% 32.2% 37.7%
Number of service locations(5)............................... 50 60 62
SEPTEMBER 30, 1996
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ACTUAL PRO FORMA(1) AS ADJUSTED(6)
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(UNAUDITED)
BALANCE SHEET DATA:
Working capital.............................................................. $ 48,609 $ 18,635 $ 39,335
Total assets................................................................. 94,694 105,946 126,646
Total debt................................................................... 77 5,077 77
Stockholders' equity......................................................... 73,210 73,210 98,910
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(1) Pro forma to give effect to the acquisitions of Focus and Prompt, and the
public offerings of the Company's Common Stock in May 1995 and June 1996 and
the application of the proceeds therefrom, as if such transactions had
occurred on January 1, 1995 for the statement of operations data. The
balance sheet data is pro forma as if the acquisition of Prompt had occurred
on September 30, 1996. See "Financial Statements--Consolidated Pro Forma
Financial Statements of CRA Managed Care, Inc., Focus Healthcare Management,
Inc. and Prompt Associates, Inc."
(2) In 1994 the Company completed a recapitalization (the "Recapitalization").
Expenses for the period prior to the Recapitalization include certain
compensation and other expenses, the levels of which are not comparable to
the levels of such expenses for 1994. Expenses for 1994 include increased
investments in management information systems, personnel and certain other
items. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 1 to the Consolidated Financial Statements
of the Company.
(3) In connection with the Recapitalization, the Company was required to change
from an S to a C corporation. This change resulted in the Company recording
an incremental tax provision of $3,772,000 in the first quarter of 1994.
(4) The pro forma earnings per share for the year ended December 31, 1994 and
the Company's pro forma net income for the year ended December 31, 1994 of
$2,753,000 have been computed as if the Company had been subject to federal
and state income taxes during the entire period, based upon an effective tax
rate indicative of the statutory rate in effect during the period.
(5) Most of the Company's specialized cost containment service locations are
located with the Company's field case management offices.
(6) Adjusted to give effect to the application of the net proceeds of this
offering, as described under "Use of Proceeds."
5
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
POTENTIAL ADVERSE IMPACT OF GOVERNMENT REGULATION. Many states, including a
number of those in which the Company transacts business, have licensing and
other regulatory requirements applicable to the Company's business.
Approximately half of the states have enacted laws that require licensing of
businesses which provide medical review services, such as the Company. Some of
these laws apply to medical review of care covered by workers' compensation.
These laws typically establish minimum standards for qualifications of
personnel, confidentiality, internal quality control, and dispute resolution
procedures. These regulatory programs may result in increased costs of operation
for the Company, which may have an adverse impact upon the Company's ability to
compete with other available alternatives for health care cost control. In
addition, new laws regulating the operation of managed care provider networks
have been adopted by a number of states. These laws may apply to managed care
provider networks having contracts with the Company or to provider networks
which the Company has organized and may organize in the future. To the extent
the Company is governed by these regulations, it may be subject to additional
licensing requirements, financial oversight and procedural standards for
beneficiaries and providers. Regulation in the health care and workers'
compensation fields is constantly evolving. The Company is unable to predict
what additional government regulations, if any, affecting its business may be
promulgated in the future. The Company's business may be adversely affected by
failure to comply with existing laws and regulations, failure to obtain
necessary licenses and government approvals or failure to adapt to new or
modified regulatory requirements. In addition, the automobile insurance
industry, like the workers' compensation industry, is regulated on a
state-by-state basis. While regulatory approval is not required for the Company
to offer most of its services to the automobile insurance market, state
regulatory approval is required in order to offer automobile insurers products
that permit them to direct claimants into a network of medical providers. See
"Business-- Government Regulation."
RELIANCE ON DATA PROCESSING AND LICENSED SOFTWARE. Certain aspects of the
Company's business are dependent upon its ability to store, retrieve, process
and manage data and to maintain and upgrade its data processing capabilities.
Interruption of data processing capabilities for any extended length of time,
loss of stored data, programming errors or other computer problems could have a
material adverse effect on the Company's business and results of operations. The
software used by the Company within its medical bill review operation is
licensed from an independent third party software company pursuant to a
non-exclusive license with a three-year term expiring February 1998 that may be
terminated by either party upon six months' prior written notice. While the
Company has historically maintained a good relationship with the licensor, there
can be no assurance that this software license will not be terminated or that
the licensor will renew the license upon expiration. Although management
believes that alternative software would be available if the existing license
were terminated, such termination could be disruptive and could have a material
adverse effect on the Company's business and results of operations.
RISKS RELATED TO GROWTH STRATEGY; FLUCTUATIONS IN OPERATING RESULTS. The
Company's strategy is to continue its internal growth and, as strategic
opportunities arise in the workers' compensation managed care industry and other
related industries, to pursue additional acquisitions of, or relationships with,
other companies. As a result, the Company is subject to certain growth-related
risks, including the risk that it will be unable to retain personnel or acquire
other resources necessary to service such growth adequately. Expenses arising
from the Company's efforts to increase its market penetration may have a
negative impact on operating results. In addition, there can be no assurance
that any suitable opportunities for future strategic acquisitions or
relationships will arise or, if they do arise, that the transactions
contemplated thereby could be completed. There can be no assurance that the
Company will be able to integrate effectively into the Company the businesses
that the Company has acquired or those that it may acquire in the future. In
addition, such transactions are subject to various risks generally associated
with the acquisition of businesses,
6
including the financial impact of expenses associated with the integration of
businesses and the diversion of management resources. There can be no assurance
that any recent or future acquisition or other strategic relationship will not
have an adverse impact on the Company's business or results of operations. If
suitable opportunities arise in the future, the Company anticipates that it
would finance such transactions, as well as its internal growth, through working
capital or, in certain instances, through additional debt or equity financing.
There can be no assurance, however, that such debt or equity financing would be
available to the Company on acceptable terms when, and if, suitable strategic
opportunities arise. In addition, the Company's quarterly and annual results
have varied and may vary significantly in the future due to a number of factors,
including the impact of current or proposed governmental regulations related to
the Company's businesses, expenses associated with the Company's growth
strategy, the Company's ability to integrate strategic acquisitions with
existing operations, competitive pressures, the loss of key management personnel
and customer acceptance of current and new products and services. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Selected Quarterly Operating Results."
POSSIBLE LITIGATION AND LEGAL LIABILITY. The Company, through its
utilization management services, makes recommendations concerning the
appropriateness of providers' proposed medical treatment plans of patients
throughout the country, and it could share in potential liabilities for adverse
medical consequences. The Company does not grant or deny claims for payment of
benefits and the Company does not believe that it engages in the practice of
medicine or the delivery of medical services. There can be no assurance,
however, that the Company will not be subject to claims or litigation related to
the grant or denial of claims for payment of benefits or allegations that the
Company engages in the practice of medicine or the delivery of medical services.
In addition, there can be no assurance that the Company will not be subject to
other litigation that may adversely affect the Company's business or results of
operations. The Company maintains professional liability insurance and such
other coverages as the Company believes are reasonable in light of the Company's
experience to date. There can be no assurance, however, that such insurance will
be sufficient or available at reasonable cost to protect the Company from
liability which might adversely affect the Company's business or results of
operations. See "Business--Legal Matters."
COMPETITION. The Company faces competition from large insurers, health
maintainance organizations ("HMOs"), PPOs, third party administrators ("TPAs")
and other managed health care companies. The Company believes that, as managed
care techniques continue to gain acceptance in the workers' compensation
marketplace, CRA's competitors will increasingly consist of nationally focused
workers' compensation managed care service companies, insurance companies, HMOs
and other significant providers of managed care products. Legislative reforms in
some states permit employers to designate health plans such as HMOs and PPOs to
cover workers' compensation claimants. Because many health plans have the
ability to manage medical costs for worker's compensation claimants, such
legislation may intensify competition in the market served by the Company. Many
of the Company's current and potential competitors are significantly larger and
have greater financial and marketing resources that those of the Company, and
there can be no assurance that the Company will continue to maintain its
existing performance or be successful with any new products or in any new
geographical markets it may enter. See "Business--Competition" and
"Business--Government Regulation."
CHANGES IN MARKET DYNAMICS. Legislative reforms in some states permit
employers to designate health plans such as HMOs and PPOs to cover workers'
compensation claimants. Because many health plans have the capacity to manage
health care for workers' compensation claimants, such legislation may intensify
competition in the market served by the Company. Within the past few years,
several states have experienced decreases in the number of workers' compensation
claims and the average cost per claim which have been reflected in workers'
compensation insurance premium rate reductions in those states. The Company
believes that declines in workers' compensation costs in these states are due
principally to intensified efforts by payors to manage and control claim costs,
to improved risk management by employers and to legislative reforms. If declines
in workers' compensation costs occur in many states and persist over the
long-term, they may have an adverse impact on the Company's business and results
of operations.
7
IMPORTANCE OF INTELLECTUAL PROPERTY RIGHTS. The Company has made
significant investments in the development and maintenance of its proprietary
data, including proprietary data base information acquired through the
acquisition of Prompt. The Company does not own any patents or
federally-registered copyrights relating to its databases. The Company relies
largely on its own security systems, confidentiality procedures and employee
nondisclosure agreements to maintain the confidentiality and trade secrecy of
its proprietary data. Misappropriation of the Company's proprietary information
or independent development of similar products may have a material adverse
effect on the Company's competitive position.
POSSIBLE VOLATILITY OF STOCK PRICE. There have been significant
fluctuations in the market price for the Company's Common Stock. Factors such as
variations in the Company's revenues, earnings and cash flow, general market
trends in the workers' compensation managed care market, and announcements of
innovations or acquisitions by the Company or its competitors could cause the
market price of the Common Stock to fluctuate substantially. In addition, the
stock market has experienced price and volume fluctuations that have
particularly affected companies in the health care and managed care markets,
resulting in changes in the market price of the stock of many companies which
may not have been directly related to the operating performance of those
companies. Such broad market fluctuations may adversely affect the market price
of the Common Stock. See "Price Range of Common Stock."
DEPENDENCE UPON KEY PERSONNEL. The Company is dependent to a substantial
extent upon the continuing efforts and abilities of certain key management
personnel. In addition, the Company faces competition for experienced employees
with professional expertise in the workers' compensation managed care area. The
loss of, or the inability to attract, qualified employees could have a material
adverse effect on the Company's business and results of operations.
MATERIAL BENEFIT TO INSIDERS. In connection with the sale of the shares
offered hereby, the Selling Stockholders will receive an aggregate of
$82,695,000 in gross proceeds, based on a public offering price of $55.13 per
share. See "Use of Proceeds" and "Principal and Selling Stockholders."
CONCENTRATION OF OWNERSHIP. Upon completion of this offering, the Company's
officers, directors, principal stockholders and their respective affiliates will
own approximately 11.9% of the outstanding Common Stock (11.5% of the
outstanding Common Stock if the over-allotment option is exercised in full). As
a result, these stockholders, if acting together, would be able to exert
substantial influence over the Company and matters requiring approval by the
stockholders of the Company, including the election of directors. The voting
power of these stockholders under certain circumstances could have the effect of
delaying or preventing a change in control of the Company. See "Management" and
"Principal and Selling Stockholders."
COMPANY DOES NOT ANTICIPATE PAYING DIVIDENDS. The Company does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
Credit Facility limits the payment of dividends. Accordingly, it is not
anticipated that holders of the Common Stock will receive any current income
with respect to their shares of Common Stock for the foreseeable future. See
"Dividends."
ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS, BY-LAWS AND STATE LAWS; POSSIBLE
ADVERSE EFFECTS OF ISSUANCE OF PREFERRED STOCK. The Company's Amended and
Restated Articles of Organization and By-Laws, as well as Massachusetts law,
contain provisions that could discourage a proxy contest, make more difficult
the acquisition of a substantial block of the Company's Common Stock, which
could make the payment of a premium to shareholders in connection with a change
in control less likely, and increase the difficulty of removing incumbent
management and board members. In addition, such provisions could limit the price
that investors might be willing to pay in the future for shares of the Company's
Common Stock. The Board of Directors is authorized to issue, without stockholder
approval, Preferred Stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of Common Stock. Although the Company has no current plans to issue any
shares of Preferred Stock, the issuance of Preferred Stock or rights to purchase
Preferred Stock could be used to discourage an unsolicited acquisition proposal.
The Board of Directors is divided into three "staggered" classes, with each
class serving
8
for a term of three years. Dividing the Board of Directors in this manner
increases the difficulty of removing incumbent members and could discourage a
proxy contest or the acquisition of a substantial block of the Company's Common
Stock. Massachusetts law contains certain anti-takeover provisions, including a
so-called Business Combination Statute that restricts certain stockholders that
own (together with their affiliates) 5.0% or more of the outstanding voting
stock of a Massachusetts corporation from engaging in certain business
combinations with such corporation and a so-called Control Share Statute that
limits any person or entity that has acquired 20% or more of a corporation's
stock from voting such shares unless the corporation's stockholders, other than
such acquiring person or entity, authorize such voting rights by a vote of the
holders of the majority of stock of the corporation entitled to vote on such
matters. Such provisions of Massachusetts law could have the effect of
discouraging a potential acquiror from making an offer for the Common Stock,
which would make the payment of a premium to stockholders in connection with a
change in control less likely, and could increase the difficulty of removing
incumbent management and board members. See "Description of Capital Stock."
9
RECENT DEVELOPMENTS
As part of CRA's strategy to expand its product offerings and enhance its
opportunities for growth through strategic acquisitions, the Company has
recently completed three acquisitions.
On April 2, 1996, CRA acquired from United HealthCare Corporation all
outstanding capital stock of Focus for $21,000,000 in cash. This acquisition was
funded with amounts borrowed under the Company's senior revolving credit
facility with First Union National Bank of North Carolina ("First Union Bank").
Focus, based in Brentwood, Tennessee, has built and maintains one of the
nation's largest workers' compensation PPO networks, and last year had annual
revenues of approximately $9,900,000. Focus' national PPO network includes more
than 101,000 individual providers and 2,300 hospitals servicing 32 states and
the District of Columbia. The acquisition of Focus enables the Company to
provide its customers with cost containment services through a specialized PPO
controlled by the Company.
On May 29, 1996, CRA acquired all outstanding capital stock of QMC3 in
exchange for 230,442 shares of the Company's Common Stock, which was valued at
approximately $8,500,000 as of the date of the acquisition agreement. QMC3 is a
leading managed care services company serving the automobile insurance market,
and has been instrumental in helping to obtain the passage of legislation in
Colorado and New York enabling the mandatory direction of medical care for
automobile accident victims. QMC3 had revenues in 1995 of approximately
$2,000,000. The acquisition of QMC3 positions CRA to capitalize on the
introduction of managed care techniques to the automobile insurance market. This
acquisition was accounted for as a pooling of interests and was not material to
the Company from an accounting perspective.
On October 29, 1996, CRA acquired all of the outstanding capital stock of
Prompt for $30,000,000 in cash. This acquisition was funded with the Company's
cash reserves and amounts borrowed under the Company's senior revolving credit
facility with First Union Bank. Prompt, based in Salt Lake City, Utah, is one of
the leading providers of hospital bill audit services to health care payors for
claims that fall outside of the payors' networks of hospitals or outpatient
facilities. Prompt utilizes its group of experienced negotiators, as well as
proprietary data base systems, to reduce its clients' expenses by repricing
inpatient hospital and outpatient facility bills on a line-by-line basis to
either a usual and customary rate, a PPO contract rate or a combination thereof.
In 1995, Prompt had annual revenues of over $10,000,000. CRA believes that the
Prompt acquisition provides the Company with the opportunity to establish
partnerships with large group health carriers for a 24-hour coordinated care
product. Additionally, CRA believes that this acquisition will enable it to
create a data base of statistical benchmarks against which the costs of
prospective procedures can be evaluated.
10
USE OF PROCEEDS
The net proceeds from the sale of the 500,000 shares of Common Stock offered
by the Company hereby are estimated to be $25,700,000, based upon a public
offering price of $55.13 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company. If the over-allotment option is exercised in full, the total net
proceeds to the Company are estimated to be $41,480,000.
The Company intends to apply the net proceeds it receives from this offering
as follows: (i) repay approximately $5,000,000 of senior debt outstanding under
the $40,000,000 revolving credit facility (the "Credit Facility") between the
Company and First Union Bank, all of which was incurred to fund the acquisition
of Prompt; and (ii) use the balance for working capital and general corporate
purposes. Borrowings under the Credit Facility bear interest at First Union
Bank's prime rate plus an additional percentage of up to 0.375%, or LIBOR plus
an additional percentage of up to 1.875%, depending on certain financial
criteria. The Credit Facility expires by its terms on March 29, 1999. The
Company may from time to time pursue additional strategic acquisitions, and may
use funds held for general corporate purposes to fund such acquisitions in whole
or in part. Pending use of the net proceeds of the offering, the Company will
invest the net proceeds in short-term, investment-grade, interest-bearing
securities.
The Company will not receive any proceeds from the sale of the shares of
Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company has been included for quotation in the
Nasdaq National Market under the symbol "CRAA" since the Company's initial
public offering of Common Stock on May 3, 1995. Prior to that time, there was no
public market for the Common Stock. The following tables set forth the high and
low closing prices for the Common Stock for the periods indicated as reported by
the Nasdaq National Market:
HIGH LOW
--------- ---------
1995:
Second Quarter............................................................................... $ 25.00 $ 16.50
Third Quarter................................................................................ $ 24.50 $ 19.00
Fourth Quarter............................................................................... $ 24.50 $ 20.75
1996:
First Quarter................................................................................ $ 36.75 $ 22.13
Second Quarter............................................................................... $ 47.00 $ 34.00
Third Quarter................................................................................ $ 56.75 $ 33.00
Fourth Quarter (through November 6, 1996).................................................... $ 58.38 $ 47.25
On November 6, 1996, the last reported sale price was $55.13 per share. As
of April 5, 1996, there were 369 holders of record of the Company's Common
Stock. The Company believes that there are approximately 1,050 beneficial owners
of the Company's Common Stock.
DIVIDEND POLICY
The Company made cash distributions in the form of bonuses and dividends to
its stockholders in prior periods when it was an S corporation. The Credit
Facility limits the payment of cash dividends by the Company in any one year to
an aggregate of 25.0% of the prior year's consolidated net income. In addition,
the Company currently intends to retain all of its earnings for use in its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
11
CAPITALIZATION
The following table sets forth: (i) the capitalization of the Company at
September 30, 1996; (ii) the pro forma capitalization of the Company at
September 30, 1996 giving effect to the consummation of the Prompt acquisition;
and (iii) the adjusted pro forma capitalization of the Company at September 30,
1996 giving effect to the sale of 500,000 shares of Common Stock offered by the
Company hereby, based upon a public offering price of $55.13 per share, after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company and application of the net proceeds as described in "Use
of Proceeds." This table should be read in conjunction with the Unaudited Pro
Forma Combined Financial Statements and the related Notes thereto, the
Consolidated Financial Statements and related Notes thereto of the Company and
the Financial Statements and Notes thereto of Focus included elsewhere in this
Prospectus. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SEPTEMBER 30, 1996
-----------------------------------------
PRO FORMA
PRO FORMA(1) AS ADJUSTED(2)
------------------------ --------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Revolving credit facility and current portion of
capital leases.................................. $ 5,071 $ 71
Long-term debt:
Capital leases.................................. 6 6
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000
shares
authorized; no shares issued and
outstanding................................... -- --
Common Stock, $.01 par value; 40,000,000 shares
authorized; 8,907,532 shares issued and
outstanding and 9,407,532 shares issued and
outstanding, as adjusted (3).................. 89 94
Additional paid-in capital...................... 90,743 116,438
Retained deficit................................ (17,622) (17,622)
-------- --------------
Total stockholders' equity................ 73,210 98,910
-------- --------------
Total capitalization.................. $ 78,287 $ 98,987
-------- --------------
-------- --------------
- ---------
(1) Pro forma to give effect to the acquisition of Prompt as if such transaction
had occurred on September 30, 1996. See "Unaudited Pro Forma Combined
Condensed Financial Statements."
(2) Adjusted to give effect to the sale by the Company of 500,000 shares of
Common Stock at an offering price of $55.13 per share and the application of
the estimated net proceeds therefrom, as described under "Use of Proceeds."
(3) Excludes options to purchase 629,889 shares outstanding at September 30,
1996, with a weighted average exercise price of $23.87 per share. See
"Description of Capital Stock" and Note 10 to the Company's Financial
Statements.
12
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
each of the five fiscal years in the period ended December 31, 1995. The
selected financial data below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
Prospectus, which have been audited by Arthur Andersen LLP, independent public
accountants. The statement of operations data set forth below with respect to
years ended December 31, 1993, 1994, and 1995 and the balance sheet data at
December 31, 1994 and 1995 are derived from the financial statements included
elsewhere in this Prospectus. The data presented for the nine months ended
September 30, 1995 and 1996 are derived from unaudited consolidated financial
statements and include, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the data for such periods. The balance sheet data at December 31, 1993 is also
derived from financial statements audited by Arthur Andersen LLP, but are not
included herein. The statement of operations data for the years ended December
31, 1991 and 1992 and the balance sheet data at December 31, 1991 are derived
from financial statements audited by the Company's predecessor accountants not
included herein.
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 58,969 $ 80,851 $ 100,546 $ 121,295 $ 146,055 $ 107,881 $ 131,032
Cost of service.......................... 52,421 68,854 86,082 103,796 122,615 90,600 107,981
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................. 6,548 11,997 14,464 17,499 23,440 17,281 23,051
General and administrative
expenses(1)............................ 4,583 7,007 9,931 8,753 11,021 8,180 10,491
--------- --------- --------- --------- --------- --------- ---------
Operating income(1)...................... 1,965 4,990 4,533 8,746 12,419 9,101 12,560
Other expenses:
Interest (income)...................... (32) (5) (11) (62) -- -- (446)
Interest expense....................... 78 66 16 4,087 2,484 2,260 658
Other (income) expense................. 3 (55) (5) 132 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total other (income) expense....... 49 6 -- 4,157 2,484 2,260 212
Income before income taxes(1)............ 1,916 4,984 4,533 4,589 9,935 6,841 12,348
Provision for income taxes(2)
Current year operations................ 118 307 355 1,530 3,974 2,736 5,124
Change in tax status................... -- -- -- 3,772 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total provision for income taxes... 118 307 355 5,302 3,974 2,736 5,124
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before extraordinary
items(1)(2)............................ 1,798 4,677 4,178 (713) 5,961 4,105 7,224
--------- --------- --------- --------- --------- --------- ---------
Loss on retirement of debt, net of
taxes.................................. -- -- -- -- (2,460) (2,460) --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)........................ $ 1,798 $ 4,677 $ 4,178 $ (713) $ 3,501 $ 1,645 $ 7,224
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro Forma and Actual Earnings Per Share:
Net income before extraordinary
items(3)............................... $ 0.57 $ 0.91 $ 0.66 $ 0.87
Loss on retirement of debt, net of tax... -- (0.37) (0.40) --
--------- --------- --------- ---------
Net income............................... $ 0.57 $ 0.54 $ 0.26 $ 0.87
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding...... 4,815 6,540 6,223 8,261
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
BALANCE SHEET DATA: 1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
Working capital.......................... $ 5,366 $ 9,114 $ 12,126 $ 5,609 $ 7,493 $ 12,732 $ 48,609
Total assets............................. 11,704 15,894 20,836 31,345 36,556 33,754 94,694
Total debt............................... 453 337 -- 44,716 9,300 4,800 77
Total stockholders' equity (deficit)..... 7,616 11,896 15,856 (28,513) 11,660 9,639 73,210
- ---------
(1) Expenses for the period prior to the Recapitalization include certain
compensation and other expenses, the levels of which are not comparable to
the levels of such expenses for 1994. Expenses for 1994 include increased
investments in management information systems, personnel and certain other
items. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(2) Prior to the Recapitalization, the Company elected to be taxed as an S
corporation. In connection with the Recapitalization, the Company was
required to change from an S to a C corporation. This change resulted in the
Company recording an incremental net tax provision of $3,772,000 in the
first quarter of 1994.
(3) The pro forma earnings per share for the year ended December 31, 1994 and
the Company's pro forma net income for the year ended December 31, 1994 of
$2,753,000 have been computed as if the Company had been subject to federal
and state income taxes during the entire period, based upon an effective tax
rate indicative of the statutory rate in effect during the period.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
OVERVIEW
CRA provides field case management and specialized cost containment services
designed to reduce worker's compensation costs. Field case management services
involve working on a one-on-one basis with injured employees and their various
health care professionals, employers and insurance company adjusters to assist
in maximizing medical improvement and, where appropriate, to expedite return to
work. Specialized cost containment services include various techniques designed
to reduce the cost of workers' compensation claims and automobile accident
injury claims.
The Company was founded in 1978 to provide field case management services to
workers' compensation payors. In 1990, as part of its strategy to provide a
comprehensive range of managed care services to its customers and to leverage
its national organization and local office network in field case management, CRA
began introducing specialized cost containment services designed to reduce the
cost of workers' compensation claims. The Company believes that specialized cost
containment services represent an important growth opportunity for CRA and that
the majority of such services generate higher gross margins than traditional
field case management services.
Set forth below for each of the three most recent years, and for the nine
months ended September 30, 1995 and 1996, is the percentage of the Company's
revenues generated from its field case management services and its specialized
cost containment services:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
Field case management services...................................... 80.5% 76.0% 72.9% 72.9% 67.8%
Specialized cost containment services............................... 19.5% 24.0% 27.1% 27.1% 32.2%
Historically, the Company's field case management revenue growth has
resulted from both local market share gains as well as geographic office
expansion. The Company opened nine new field case management offices in 1993, 15
in 1994, eight in 1995 and five in the first nine months of 1996. The Company
believes that its field case management office network is of sufficient size to
serve adequately the needs of its customers nationwide. As a result, the Company
expects that it will open only a limited number of new field case management
offices per year to satisfy client needs in selected regions. Revenues from
specialized cost containment services comprised approximately 32.2% of total
revenues for the first nine months of 1996. The Company opened 20 new
specialized cost containment locations in 1993, 13 in 1994, two in 1995 and 10
during the first nine months of 1996.
The Company currently derives most of its revenues on a fee-for-service
basis. Although risk sharing arrangements are not common in today's workers'
compensation managed care services industry, the Company believes that these
arrangements may become more prevalent in the future.
14
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Company's
statements of operations as a percentage of revenues. The Company's past
operating results are not necessarily indicative of future operating results.
PERCENTAGE OF REVENUE
----------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
Revenues...................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services.............................................. 85.6 85.6 84.0 84.0 82.4
Gross profit................................................ 14.4 14.4 16.0 16.0 17.6
General and administrative expenses........................... 9.9 7.2 7.5 7.6 8.0
Operating income............................................ 4.5 7.2 8.5 8.4 9.6
Other expenses................................................ -- 3.4 1.7 2.1 0.2
Provision for income taxes.................................... 0.3 4.4 2.7 2.5 3.9
Net income (loss) before extraordinary items.................. 4.2 (0.6) 2.4 3.8 5.5
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
REVENUES
Revenues increased 21.5% for the nine months of 1996 to $131,032,000 from
$107,881,000 for the nine months of 1995. Field case management revenues
increased 13.1% for the nine months of 1996 to $88,900,000 from $78,604,000 for
the nine months of 1995 while specialized cost containment revenues increased
43.9% for the nine months of 1996 to $42,132,000 from $29,277,000 for the nine
months of 1995. The field case management revenue growth is attributable to the
acquisition of Alta Pacific Corporation in the fourth quarter of 1995, the
opening of five offices during the first nine months of 1996 and growth in
revenues from existing service locations. The specialized cost containment
revenue growth is attributable to the acquisition of Focus on April 2, 1996 and
QMC3 on May 29, 1996, the addition of 10 service locations during the first nine
months of 1996, including the service locations associated with the Focus and
QMC3 acquisitions, and continued growth in retrospective bill review and
telephone case management services in existing service locations.
COST OF SERVICES
Cost of services increased 19.2% for the nine months of 1996 to $107,981,000
from $90,600,000 for the nine months of 1995 due to an increase in revenues and
the acquisition of Focus and QMC3. Cost of services as a percentage of revenue
decreased to 82.4% for the nine months of 1996 compared to 84.0% for the nine
months of 1995. This improvement in gross margins is primarily the result of
productivity gains in field case management services coupled with a continued
shift in the Company's revenue mix towards specialized cost containment
services, especially retrospective bill review, which have higher gross profit
margins than field case management services.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 28.3% for the nine months of
1996 to $10,491,000 from $8,180,000 for the nine months of 1995, or 8.0% and
7.6% as a percentage of revenue for the nine months of 1996 and 1995,
respectively. The increase in general and administrative expenses in 1996 was
primarily due to increased expenditures for marketing initiatives, additional
investments in the information technology group and the acquisition of Focus.
15
INTEREST EXPENSE, NET
Interest expense, net decreased $2,048,000 for the nine months of 1996 to
$212,000 from $2,260,000 for the nine months of 1995. The decrease in interest
expense, net in 1996 was due primarily to the repayment of the Term Loan and
Senior Subordinated Notes with the proceeds from the sale of Common Stock in May
of 1995 and the investment of excess proceeds of the Company's from the sale of
Common Stock in June of 1996, partially offset by interest expense on Credit
Facility borrowings to finance the Focus acquisition in April of 1996 until
these borrowings were repaid with a portion of the proceeds from the Company's
sale of Common Stock in June of 1996.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes for the first nine months of 1996
was $5,124,000, or an effective tax rate of 41.5%, compared to a tax provision
for the first nine months of 1995 of $2,736,000, or an effective tax rate of
40%. The Company expects to continue to provide for its taxes at the higher
effective tax rate for the remainder of the year.
LOSS ON RETIREMENT OF DEBT
The Company used the net proceeds ($36,507,000) from the Company's initial
public offering on May 10, 1995, supplemented by borrowings under the Credit
Facility ($5,000,000) to repay fully the Term Loan ($16,250,000) and the Former
Revolving Credit Facility ($4,226,000) under the former loan agreement with
First Union Bank and the Senior Subordinated Notes ($21,000,000) issued to
Whitney and First Union. The early repayment of this debt resulted in the
Company recording a loss on the retirement of debt of $2,460,000 comprised of
the write-off of associated deferred finance costs ($1,772,000), debt discount
on the Senior Subordinated Notes ($2,140,000) and fees associated with the
termination of the interest rate swaps previously required by the former loan
agreement ($158,000), offset by a tax benefit of $1,610,000.
YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUES
Revenues increased 20.4% in 1995 to $146,055,000 from $121,295,000 in 1994.
Field case management revenue increased 15.4% in 1995 to $106,462,000 from
$92,232,000 in 1994, while specialized cost containment revenue grew by 36.2% in
1995 to $39,593,000 from $29,063,000 in 1994. This growth is attributable to the
opening of 23 new field case management and 15 new specialized cost containment
service locations throughout 1994 and 1995 as well as growth in revenues from
existing service locations. The Company continued to experience significant
revenue growth from its specialized cost containment offerings in 1995, as
revenues from the Company's bill review, telephonic case management and
precertification services increased by over 60% from the prior year.
COST OF SERVICES
Cost of services increased 18.1% in 1995 to $122,615,000 from $103,796,000
in 1994. The Company's cost of services consists primarily of salaries and
related benefits, rent, travel, marketing, telephone expenses and other
office-related costs. Cost of services increased in 1995 primarily due to
expenses associated with the opening of additional service locations and
compensation of related personnel. Cost of services as a percentage of revenue
for 1995 decreased to 84.0% versus 85.6% in 1994. This improvement is the result
of productivity gains in field case management services coupled with a further
shift in the Company's revenue mix towards specialized cost containment
services, especially bill review, which historically have higher gross profit
margins than field case management services.
16
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 25.9% in 1995 to $11,021,000
from $8,753,000 in 1994, or 7.5% and 7.2% as a percentage of revenue for 1995
and 1994, respectively. This increase was due primarily to increased expenses
for additional senior corporate management and to significant investments in
management information systems and personnel, national marketing, preferred
provider network development and other administrative functions. These additions
and investments occurred primarily in the second half of 1994.
OTHER EXPENSES
Other expenses for 1995 consist entirely of interest expense. Interest
expense for 1995 decreased $1,603,000 to $2,484,000 in 1995 from $4,087,000 in
1994 due to the repayment of debt in connection with the Company's initial
public offering on May 10, 1995.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 40.3% for 1995 and resulted in a tax
provision of $3,974,000. In connection with the Recapitalization during 1994,
the Company converted from S to C corporation status and was required to report
income on an accrual basis for tax purposes rather than on a cash basis.
LOSS ON RETIREMENT OF DEBT
The Company used the net proceeds ($36,507,000) from the Company's initial
public offering, supplemented by borrowings under the Credit Facility
($5,000,000) to repay fully the Term Loan ($16,250,000) and the former revolving
credit facility ($4,226,000) with First Union Bank and the Senior Subordinated
Notes ($21,000,000) issued to Whitney and First Union. The early repayment of
this debt resulted in the Company recording a loss on the retirement of debt of
$2,460,000 comprised of the write-off of associated deferred finance costs
($1,772,000), debt discount on the Senior Subordinated Notes ($2,140,000) and
fees associated with the termination of the interest rate swaps previously
required by the former loan agreement ($158,000), offset by a tax benefit of
$1,610,000.
YEARS ENDED DECEMBER 31, 1994 AND 1993
REVENUES
Revenues increased 20.6% in 1994 to $121,295,000 from $100,546,000 in 1993.
Field case management revenue increased 13.9% in 1994 to $92,232,000 from
$80,948,000 in 1993, while specialized cost containment revenue grew by 48.3% in
1994 to $29,063,000 from $19,598,000 in 1993. This growth is attributable to the
opening of 15 new field case management and 13 new specialized cost containment
service locations as well as growth in revenues from existing service locations.
The Company experienced significant revenue growth from its specialized cost
containment offerings in 1994, as revenues from the Company's bill review,
telephonic case management and precertification services more than doubled from
the prior year.
COST OF SERVICES
Cost of services increased 20.6% in 1994 to $103,796,000 from $86,082,000 in
1993. Cost of services as a percentage of revenue remained constant at 85.6% in
1994 and 1993. The Company's cost of services consists primarily of salaries and
related benefits, rent, travel, marketing, telephone expenses and other
office-related costs. Cost of services increased in 1994 primarily due to
expenses associated with the opening of additional service locations and
compensation of related personnel.
17
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased 11.9% in 1994 to $8,753,000
from $9,931,000 in 1993, or 7.2% and 9.9% as a percentage of revenue for 1994
and 1993, respectively. These amounts include discretionary expenses of $163,000
and $6,089,000 for 1994 and 1993, respectively, paid to the Company's
stockholders in the form of bonuses and real estate and equipment rental
payments while the Company was an S corporation. Excluding these amounts,
general and administrative expenses increased 123.6% in 1994 to $8,590,000 from
$3,842,000 in 1993, and were 7.1% and 3.8% as a percentage of revenue for 1994
and 1993, respectively. This increase was due primarily to increased expenses
for additional senior corporate management and to significant investments in
management information systems and personnel, national marketing, preferred
provider network development and other administrative functions to support
future growth. The increase in such expenses occurred primarily in the second
half of 1994.
OTHER EXPENSES
Other expenses consist almost entirely of interest expense. Interest expense
for 1994 increased $4,071,000 to $4,087,000 from $16,000 in 1993 due to the debt
issued in connection with the Recapitalization.
PROVISION FOR INCOME TAXES
In connection with the Recapitalization, the Company converted from S to C
corporation status and was required to report income on an accrual basis for tax
purposes rather than on a cash basis. The conversion to C corporation status
resulted in a total tax liability of approximately $5,100,000. The company will
discharge this liability through annual payments of approximately $1,275,000
through 1997. This conversion resulted in an incremental provision for taxes of
$3,772,000 for 1994. Excluding the effect of being an S corporation prior to the
Recapitalization, the Company's effective tax rate was approximately 41.0%.
18
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters ended September 30, 1996. In
management's opinion, this unaudited information has been prepared on the same
basis as the annual financial statements and includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the quarters presented, when read in
conjunction with the financial statements and notes thereto included elsewhere
in this Prospectus. The operating results for any quarter are not necessarily
indicative of results for any subsequent quarter.
QUARTERS ENDED
----------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1994 1995 1995 1995 1995 1996 1996 1996
--------- --------- --------- ----------- --------- --------- --------- ---------
(IN THOUSANDS)
Revenues................. $ 31,742 $ 34,930 $ 36,125 $ 36,826 $ 38,174 $ 40,225 $ 44,759 $ 46,048
Cost of services......... 26,914 29,545 30,212 30,843 32,015 33,422 36,747 37,812
--------- --------- --------- ----------- --------- --------- --------- ---------
Gross profit........... 4,828 5,385 5,913 5,983 6,159 6,803 8,012 8,236
General and
administrative
expenses................ 2,498 2,677 2,744 2,759 2,841 3,109 3,636 3,746
--------- --------- --------- ----------- --------- --------- --------- ---------
Operating income....... 2,330 2,708 3,169 3,224 3,318 3,694 4,376 4,490
Other (income)
expenses................ 1,300 1,354 655 251 224 194 331 (313)
Provision for income
taxes................... 444 542 1,005 1,189 1,238 1,453 1,678 1,993
--------- --------- --------- ----------- --------- --------- --------- ---------
Net income before
extraordinary items..... 586 812 1,509 1,784 1,856 2,047 2,367 2,810
Loss on retirement of
debt, net taxes......... -- -- (2,460) -- -- -- -- --
--------- --------- --------- ----------- --------- --------- --------- ---------
Net income (loss)........ $ 586 $ 812 $ (951) $ 1,784 $ 1,856 $ 2,047 $ 2,367 $ 2,810
--------- --------- --------- ----------- --------- --------- --------- ---------
--------- --------- --------- ----------- --------- --------- --------- ---------
The Company's quarterly and annual results have varied and may vary
significantly in the future due to a number of factors, including the impact of
current or proposed governmental regulations related to the Company's
businesses, expenses associated with the Company's growth strategy, the
Company's ability to integrate strategic acquisitions with existing operations,
competitive pressures, the loss of key management personnel and customer
acceptance of current and new products and services.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its working capital requirements and
capital expenditures primarily from cash flow generated from operations
supplemented by short-term borrowings under revolving credit facilities and the
proceeds of its public offerings of Common Stock. Cash flows generated from
operations were $2,961,000, $5,594,000, $4,114,000 and $9,034,000 for the years
ended December 31, 1993, 1994, 1995 and for the first nine months of 1996,
respectively. During the first nine months of 1996, working capital used
$454,000 of cash primarily due to an increase in accounts receivable of
$4,266,000 and an increase in prepaid expenses of $722,000 offset by an increase
in accounts payable and accrued expenses of $4,534,000. Accounts receivable
increased due to continued revenue growth while prepaid income taxes increased
due to the Company recording a tax benefit of approximately $1,082,000 due to
the exercise of options. Accounts payable and accrued expenses increased due to
the timing of payments.
19
The Company used net cash of $21,080,000 in connection with the acquisition
of Focus and QMC3. The Company also used $1,960,000 of cash to purchase property
and equipment during the first nine months of 1996, the majority of which was
spent on new computers and software packages.
In 1994, the Company completed the Recapitalization, pursuant to which the
Company redeemed an aggregate of 49.0% of the then outstanding shares of the
Company's Common Stock from its founders with the proceeds of securities sold to
third parties and borrowings under the Company's bank credit facility. On May
10, 1995, the Company completed its initial public offering of Common Stock,
generating net proceeds to the Company of $36,507,000. These proceeds,
supplemented by borrowings of $5,000,000 under the Credit Facility with First
Union Bank, were used to repay fully the indebtedness incurred in connection
with the Recapitalization.
On January 16, 1996, the Company retired the $5,000,000 10% junior
subordinated notes issued in connection with the Recapitalization utilizing
borrowings under the Credit Facility.
On April 28, 1995, the Company entered into a $25,000,000 Credit Facility
with First Union Bank. On March 29, 1996, the Company and First Union Bank
signed an amendment to expand the Company's borrowing capacity under the Credit
Facility to $40,000,000 under similar terms and conditions in order to finance
the acquisition of Focus. The Company borrowed $21,000,000 under the Credit
Facility to finance the purchase price of Focus. The Company's obligations under
the Credit Facility are secured by a first priority security interest in
substantially all of the Company's properties and assets.
In June of 1996, the Company sold an aggregate of 1,200,000 shares of its
Common Stock, including the exercise of the underwriters' over-allotment option,
at a price of $46.00 per share generating net proceeds to the Company of
approximately $51,840,000. The Company used approximately $29,000,000 of the net
proceeds to repay all of the outstanding borrowings under the Credit Facility
with First Union Bank.
On October 29, 1996, the Company purchased Prompt for $30,000,000 in cash.
In order to finance this acquisition, the Company utilized approximately
$25,000,000 of its existing cash supplemented by borrowings of approximately
$5,000,000 under the Company's existing $40,000,000 Credit Facility.
The Company's long-term liquidity needs consist of working capital and
capital expenditure requirements, repayment of borrowings under the Credit
Facility and the funding of any future acquisitions. The Company intends to fund
these long-term liquidity needs from cash generated from operations, net
proceeds to the Company from this offering, available borrowings under the
Credit Facility and, if necessary, future debt or equity financings. There can
be no assurance that any future debt or equity financing will be available on
terms favorable to the Company.
20
BUSINESS
CRA provides field case management and specialized cost containment services
designed to reduce workers' compensation costs. The Company operates one of the
largest field case management organizations in the United States, consisting of
115 field case management offices with approximately 1,070 field case managers
who provide medical management and return to work services in 49 states and the
District of Columbia. CRA also provides a broad range of higher margin
specialized cost containment services, including utilization management,
specialized PPO network management, telephonic case management and retrospective
medical bill review services, that are designed to reduce costs associated with
work-related injuries and automobile accident-related injuries. Revenues from
specialized cost containment services comprised approximately 32.2% of revenues
for the first nine months of 1996, up from approximately 27.1% for the
corresponding period of the prior year. The Company markets its services to
workers' compensation insurers, TPAs, self-insured employers, and payors of
automobile accident medical claims through a direct sales and marketing
organization consisting of over 125 dedicated personnel. CRA currently has over
1,250 customers nationwide.
INDUSTRY OVERVIEW
WORKERS' COMPENSATION
Workers' compensation is a state-mandated, comprehensive insurance program
that requires employers to fund medical expenses, lost wages and other costs
resulting from work-related injuries and illnesses. Since their introduction in
the early 1900s, these programs have been expanded to all fifty states and the
District of Columbia. Each state is responsible for implementing and regulating
its own program. Consequently, workers' compensation benefits and arrangements
vary on a state-by-state basis and are often highly complex.
Workers' compensation plans generally require employers to fund all of an
employee's costs of medical treatment and a significant portion of lost wages,
legal fees and other associated costs. Typically, work-related injuries are
broadly defined, and injured or ill employees are entitled to extensive
benefits. Employers are required to provide first-dollar coverage with no
co-payment or deductible due from the injured or ill employee for medical
treatment and, in many states, there is no lifetime limit on expenses. However,
in exchange for providing this coverage for employees, employers are not subject
to litigation by employees for benefits in excess of those provided by the
relevant state statute. In most states, the extensive benefits coverage (for
both medical costs and lost wages) is provided through the purchase of
commercial insurance from private insurance companies, participation in
state-run insurance funds or employer self-insurance.
Provider reimbursement methods vary on a state-by-state basis. A majority of
states have adopted fee schedules pursuant to which all health care providers
are uniformly reimbursed. The fee schedules are set by each state and generally
prescribe the maximum amounts that may be reimbursed for a designated procedure.
In states without fee schedules, health care providers are reimbursed based on
usual, customary and reasonable ("UCR") fees charged in the particular state in
which the services are provided.
According to statistics published in the 1994 WORKERS' COMPENSATION YEAR
BOOK, employers in the United States incurred approximately $60 billion in total
costs of workers' compensation in 1992 (excluding costs associated with
productivity losses) and approximately $22.8 billion in 1982. Based upon a
combination of statistics published in the 1994 WORKERS' COMPENSATION YEAR BOOK
AND THE FACT BOOK 1994--PROPERTY/ CASUALTY INSURANCE FACTS, the Company
estimates that 1992 total workers' compensation costs to employers was comprised
of approximately $22 billion related to medical costs, approximately $24 billion
related to indemnity costs, including temporary wage replacement and permanent
disability payments, and the balance related to other costs, such as legal
services and claims administration. Despite various state reforms and employers'
increasing attention to workers' compensation costs, total workers' compensation
costs have increased substantially from 1982 to 1992.
21
The medical cost component of workers' compensation costs has increased at a
faster rate than the average annual increase in total workers' compensation
costs. Based upon statistics published in the sources named above, the Company
estimates that workers' compensation medical costs increased at a compound
annual rate of 15.9%, and that the medical cost component represented
approximately $5 billion in 1982 and accounted for an estimated 34% of total
workers' compensation medical and indemnity costs. Based upon statistics
published in the sources named above and statistics published in HEALTH CARE
FINANCING REVIEW (Fall 1994), the Company estimates that by 1992, the estimated
$22 billion medical cost component of workers' compensation costs accounted for
approximately 47.8% of total workers' compensation medical and indemnity costs,
or 2.7% of total U.S. health care expenditures.
The Company believes that workers' compensation costs will continue to rise
primarily because of: (i) broader definitions of work-related injuries and
illnesses covered by workers' compensation laws; (ii) the shifting of medical
costs from health insurance plans to the workers' compensation system; (iii) an
aging work force; (iv) the continued requirement that employers pay all of an
employee's cost of medical treatment, without any employee co-payment or
deductible, and a significant portion of lost wages and non-medical costs; (v)
the overall inflation of medical costs; and (vi) the relatively low utilization
to date of comprehensive cost containment programs in the workers' compensation
system. As workers' compensation costs escalate, the Company expects that
employers will continue to seek and implement strategies and programs to reduce
workers' compensation costs.
WORKERS' COMPENSATION MANAGED CARE SERVICES
The Company estimates that the workers' compensation managed care services
industry generated approximately $2.6 billion in revenues during 1993, comprised
of field case management and specialized cost containment services. The workers'
compensation managed care services market is served by the Company and a small
number of other competitors that offer a comprehensive line of workers'
compensation managed care services on a nationwide basis. A large number of
additional companies offer some managed care services on a limited geographic
basis. The result is a fragmented market with what the Company believes is only
a small number of companies offering a fully integrated and comprehensive
approach to managing workers' compensation costs on a nationwide basis.
Workers' compensation managed care services broadly fall into two
categories: field case management services and specialized cost containment
services. Field case management services involve working on a one-on-one basis
with injured employees and their various health care professionals, employers
and insurance company adjusters. Field case management services are designed
both to assist in maximizing medical improvement and, where appropriate, to
expedite return to work. Specialized cost containment services are designed to
reduce the cost of workers' compensation claims through a variety of techniques
such as first report of injury services, utilization management
(precertification, concurrent review and retrospective bill review), telephonic
case management, PPO network access, independent medical examinations ("IMEs"),
peer reviews and hospital bill auditing.
Managed care techniques are intended to control the cost of health care
services and to measure the performance of providers through intervention and
on-going review of services proposed and actually provided. Managed care
techniques were originally developed to stem the rising costs of group health
medical care. Historically, employers were slow to apply managed care techniques
to workers' compensation costs primarily because the aggregate costs are
relatively small compared to costs associated with group health benefits and
because state-by-state regulations related to workers' compensation are far more
complex than those related to group health. However, in recent years, employers
and insurance carriers have been increasing their focus on applying managed care
techniques to control their workers' compensation costs.
Since workers' compensation benefits are mandated by law and are subject to
extensive regulation, payors and employers do not have the same flexibility to
alter benefits as they have with other health benefit
22
programs. In addition, workers' compensation programs vary from state to state,
making it difficult for payors and multi-state employers to adopt uniform
policies to administer, manage and control the costs of benefits. As a result,
managing the cost of workers' compensation requires approaches that are tailored
to the specific state regulatory environment in which the employer operates.
Many states do not permit employers to restrict a claimant's choice of provider,
making it difficult for employers to utilize managed care approaches
characteristic of the group health insurance market. However, employers in
nineteen states currently have the right to direct employees to a specific
primary health care provider during the onset of a workers' compensation case,
subject to the right of the employee to change physicians after a specific
period. Recently, an increasing number of states have adopted legislation
encouraging the use of workers' compensation managed care organizations ("MCOs")
in an effort to allow employers to control their workers' compensation costs.
MCO laws generally provide employers an opportunity to channel injured employees
into provider networks. In certain states, MCO laws require licensed MCOs to
offer certain specified services, such as utilization management, case
management, peer review and provider bill review. Most of the MCO laws adopted
to date establish a framework within which a company such as CRA can provide its
customers a full range of managed care services for greater cost control.
CRA'S BUSINESS STRATEGY
The Company's objective is to expand and capitalize on its presence as a
national provider of comprehensive managed care services to workers'
compensation payors. The Company's strategy for achieving this objective is as
follows:
FOCUS ON WORKERS' COMPENSATION MANAGED CARE. The Company intends to
continue its primary focus on providing workers' compensation managed care
services to workers' compensation insurers, TPAs and self-insured employers. The
Company believes that to serve this complex market, a core understanding of
medical-related issues, a thorough understanding of return to work issues and
techniques, and an in-depth understanding of the state-by-state regulatory
environment is required. CRA has developed such expertise through its years of
serving this market. CRA believes it can leverage its expertise as a highly
skilled provider of workers' compensation managed care services to further
expand its national market presence and increase its market share.
INCREASE NATIONAL ACCOUNTS PENETRATION. The Company intends to increase its
penetration of large, national payors by leveraging its broad-based workers'
compensation expertise and its experience with its existing base of national
accounts. Many large, national insurance carriers and self-insured employers are
seeking workers' compensation managed care service providers that have the
ability to provide services on a nationwide basis. These large payors want a
comprehensive solution to their workers' compensation needs from a service
provider that is adept at understanding and working with many different and
complex state legislative environments. The Company's national organization of
local service locations enables the Company to meet the needs of these large,
national payors while maintaining the local market presence necessary to monitor
changes in state-specific regulations and to facilitate case resolution through
locally provided managed care services.
CROSS-SELL COMPREHENSIVE PRODUCT OFFERING. The Company intends to
capitalize on the relationships developed through its 115-office field case
management network by aggressively cross-selling its specialized cost
containment services to its existing customer base. CRA believes that it is one
of a small number of companies with a comprehensive offering of workers'
compensation managed care services. The Company complements its extensive field
case management network with 60 service locations nationwide that provide one or
more specialized cost containment services. Of the Company's approximately 1,250
case management customers, only a small percentage are also utilizing the
Company's specialized cost containment services. The Company believes that this
low utilization rate among CRA's existing customers provides a significant
opportunity to expand CRA's specialized cost containment business.
23
EMPHASIZE EARLY INTERVENTION. The Company intends to increase its marketing
of early intervention services, such as first report of injury,
precertification, telephonic case management and access to PPO networks. Early
intervention enables the Company to promptly identify cases that have the
potential to result in significant expenses and to take appropriate measures to
control these expenses before they are incurred. In addition, the Company
believes that providing early intervention services generally results in the
Company obtaining earlier access to claims files, thereby improving the
Company's opportunity to provide the full range of its managed care services.
LEVERAGE MANAGED CARE EXPERTISE TO AUTOMOBILE INSURANCE MARKET. The Company
intends to capitalize on the recent introduction of managed care techniques to
the automobile insurance market through the recent acquisition of QMC3, a
leading provider of managed care services to the automobile insurance market.
CRA intends to leverage its existing presence in the automobile insurance market
and its existing office infrastructure to efficiently expand the geographic
coverage of automobile managed care services.
EXECUTE STRATEGIC ACQUISITIONS. The Company will continue to seek
complementary strategic acquisitions, such as Prompt and QMC3, to further expand
its product offerings and enhance its opportunities for growth. While the
Company currently maintains a broad offering of services, the evolution of the
marketplace may give rise to opportunities in the workers' compensation and
related industries.
SERVICES
CRA's services include both field case management services and specialized
cost containment services.
FIELD CASE MANAGEMENT SERVICES
CRA provides field case management services to the workers' compensation
insurance industry through case managers working at the local level on a
one-on-one basis with injured employees and their various health care
professionals, employers and insurance company adjusters. The Company's services
are designed to assist in maximizing medical improvement and, where appropriate,
to expedite the employees' return to work through medical management and
vocational rehabilitation services.
CRA's field case management services consist of one-on-one management of a
work-related injury by the Company's approximately 1,070 field case managers
serving 49 states and the District of Columbia from CRA's 115 local field case
management offices. This service typically involves a case with a significant
potential or actual amount of lost work time or a catastrophic injury that
requires detailed management and therefore is referred out by the local adjuster
to the local CRA marketer calling on that office. CRA field case managers
specialize in expediting the injured employee's return to work through both
medical management and vocational rehabilitation by working with all the
interested parties in a work-related injury. Medical management services
provided by CRA's field case managers include coordinating the efforts of all
the health care professionals involved and increasing the effectiveness of the
care being provided by encouraging compliance and active participation on the
part of the injured worker. Vocational rehabilitation services include job
analysis, work capacity assessments, labor market assessments, job placement
assistance and return to work coordination. Field case management services
represented approximately 80.5%, 76.0%, 72.9% and 67.8% of the Company's
revenues for the years ended December 31, 1993, 1994, 1995, and the first nine
months of 1996, respectively.
The Company believes that the following factors will contribute to the
continued growth of its field case management services: (i) increased employer
acceptance of field case management techniques due to greater exposure to the
workers' compensation managed care market; (ii) earlier identification of
individuals in need of field case management services due to increased
utilization of the Company's specialized cost containment services, particularly
early intervention services; and (iii) increased market share at the expense of
smaller, undercapitalized competitors.
24
SPECIALIZED COST CONTAINMENT SERVICES
In 1990, as part of the Company's strategy of providing a comprehensive
range of services, CRA began broadening its business by providing a number of
additional services focused directly on helping to reduce the medical costs
associated with workers' compensation for its clients. Today, these specialized
cost containment services include first report of injury service, utilization
management (precertification, concurrent review and retrospective bill review),
telephonic case management, PPO network access, IMEs, peer reviews and hospital
bill auditing. By adding these services to CRA's traditional strength and
national breadth in field case management, the Company now offers its clients an
integrated workers' compensation managed care program. CRA is able to offer its
services on a combined basis as a full service managed care program, beginning
with the first report of injury and including all managed care services needed
to manage aggressively the medical costs, temporary wage replacement payments
and permanent disability payments associated with a work-related injury. CRA
also offers each of its services on an unbundled basis. CRA's comprehensive
approach to managing workers' compensation costs serves the needs of a broad
range of clients, from local adjusters to national accounts. In addition to
providing specialized cost containment services for work-related injuries and
illnesses, the Company also provides similar services to payors of automobile
accident medical claims and social security disability advocacy services to
payors of long term disability. Specialized cost containment services
collectively represented approximately 19.5%, 24.0%, 27.1% and 32.2% of the
Company's revenues for the fiscal years ending December 31, 1993, 1994, 1995 and
the first nine months of 1996, respectively.
The Company believes that the demand for specialized cost containment
services will continue to increase due to a number of factors, including: (i)
the increasing payor awareness of the availability of these techniques for
managing workers' compensation costs; (ii) the perceived effectiveness of
managed care techniques at reducing costs for group health insurance plans;
(iii) the verifiable nature of the savings that can be obtained by application
of specialized cost containment techniques applicable to workers' compensation;
and (iv) the broad applicability of these techniques to all injured employees,
not just severely injured employees likely to be absent from work.
FIRST REPORT OF INJURY SERVICE. The Company provides a computerized first
report of injury reporting service in which an employer or claims adjuster
phones in all injuries as soon as they occur to the Company's centralized
service center. Each report is electronically transferred or mailed to the state
agency, the employer and the insurance company. This service assists in the
timely preparation and distribution of state-mandated injury reports and also
provides CRA and its customers with an early intervention tool to maximize
control over workers' compensation claims.
UTILIZATION MANAGEMENT: PRECERTIFICATION AND CONCURRENT REVIEW. CRA's
precertification and concurrent review services are used by clients to ensure
that certain medical procedures are precertified by a CRA registered nurse
and/or physician for medical necessity and appropriateness of treatment before
the medical procedure can be performed. CRA's determinations represent only
recommendations to the customer, the ultimate decision to approve or disapprove
the request is made by the claims adjuster. Precertification calls are made by
either the claimant or the provider to one of CRA's national utilization
management reporting units. Once a treatment plan has been precertified, a CRA
employee performs a follow-up call (concurrent review) at the end of an approved
time period to evaluate compliance and/or discuss alternative plans.
UTILIZATION MANAGEMENT: RETROSPECTIVE BILL REVIEW. Through a sophisticated
software program, CRA reviews and reduces its customers' medical bills
(including hospital bills) to either the various state-mandated fee schedules
for workers' compensation claims or a percentage of the UCR rates that exist in
non-fee schedule states. Additionally, this automated retrospective bill review
service enables clients to access certain PPO pricing schedules that represent
additional savings below the fee schedules or UCR rates. The savings that accrue
to CRA's clients for this service can be significant. Retrospective bill review
also creates an
25
important historical database for provider practice patterns and managed care
provider compliance requirements. CRA provides retrospective bill review service
from 33 service locations throughout the country, 11 of which are operated at a
client location using CRA employees. The Company also establishes arrangements
that enable customers to run the retrospective bill review service in-house by
their own employees.
ACCESS TO PREFERRED PROVIDER NETWORKS. CRA provides its clients with access
to PPO networks within all the markets CRA serves through one of its own PPOs,
including its recently acquired Focus subsidiary, or by contracting with
existing national or regional PPOs. These PPOs provide injured workers with
access to quality medical care and pre-negotiated volume discounts, thereby
offering CRA's clients the ability to influence, or in certain states to direct,
their employees into the PPO network as a means of managing their work-related
claims. In addition to providing a vehicle for managing the workers'
compensation process, the discounts associated with these PPO arrangements
generate additional savings through the retrospective bill review program
described above. Focus' national network includes over 101,000 individual
providers and 2,300 hospitals covering 32 states and the District of Columbia.
TELEPHONIC CASE MANAGEMENT. This service provides for short-duration (30 to
60 days) telephonic management of workers' compensation claims. The telephonic
case management units accept first reports of injury, negotiate discounts with
hospitals and other providers, identify care alternatives and work with injured
employees to minimize lost time on the job. Each of the telephonic case
management units is staffed with nurses who are experienced in medical case
management. The telephonic case management units represent an important
component of early intervention and act as a referral source of appropriate
cases to CRA's local field case management offices. This service is offered from
four locations across the country.
INDEPENDENT MEDICAL EXAMS. IMEs are provided to assess independently the
extent and nature of an employee's injury or illness. CRA provides its clients
with access to independent physicians who perform the IMEs from 15 of the
Company's service locations and, upon completion, prepare reports describing
their findings.
PEER REVIEWS. This service is provided by a physician, therapist,
chiropractor or other provider who reviews medical files to confirm that the
care being provided appears to be necessary and appropriate. The reviewer does
not meet with the patient, but merely reviews the file as presented.
HOSPITAL BILL AUDITS. This service is provided by the Company's registered
nurses who review hospital bills for appropriateness, relatedness and medical
necessity. The nurse may subsequently negotiate fees and obtain discounts for
prompt payment or inappropriate charges. Through its recently announced
acquisition of Prompt, the Company has expanded its client base for hospital
bill audits to include the group health payor community. Prompt is a leading
provider of out-of-network bill review services to the group health payor
community. These services reduce clients' costs by utilizing the Company's team
of negotiators and proprietary data base systems to reprice inpatient hospital
and outpatient facility bills on a line-by-line basis. Such bills are repriced
to either a usual and customary rate, a PPO contract rate, or a combination
thereof. Prompt operates offices in Frederick, Maryland and Salt Lake City,
Utah, with 107 full time employees. Prompt has created a data base over the past
seven years from the details of inpatient hospital and outpatient facility bills
from across the country which has allowed it to standardize a high percentage of
hospital charge codes for a significant number of such institutions.
AUTOMOBILE INSURANCE MANAGED CARE. The Company, through the acquisition of
QMC3, has expanded its product line to offer an integrated service to the
automobile insurance market that permits insurers to direct automobile accident
victims into networks of medical providers. QMC3 currently provides this
integrated service in Colorado and has produced significant savings for its
insurance company clients since the initiation of its services. QMC3, in
cooperation with a third party PPO, has been in discussions for more than a year
with the State of New York Insurance Department regarding approval of this PPO
as a certified provider of fully integrated managed care services to the New
York automobile insurance market using QMC3 as its exclusive utilization review
agent. The State of New York Insurance Department has
26
approved this arrangement for the New York City metropolitan area and Long
Island, effective as of June 1, 1996. Such an arrangement is the first to offer
automobile insurance managed care services in New York. The Company and QMC3, in
cooperation with the third party PPO, are continuing their discussions with the
State of New York Insurance Department regarding further approvals for offerings
of managed care services to automobile insurers in the balance of the State of
New York. Services offered to the automobile insurance market include
precertification, telephonic case management, direction of injured persons into
specialized PPO networks, medical bill review and field case management. See
"Risk Factors--Potential Adverse Impact of Governmental Regulation."
CUSTOMERS
CRA has over 1,250 customers across the country, including most of the major
underwriters of workers' compensation insurance, large TPAs and self-insured
employers. During fiscal year 1995 and the first nine months of 1996, no
customer represented more than 8% of total revenues. The Company is compensated
primarily on a fee-for-service basis. Although the Company has entered into
written agreements with certain of its customers from time to time, it has not
been the Company's historical practice to enter into written agreements with its
customers. Accordingly, the Company's customers generally can elect to terminate
their relationships with the Company on short notice.
SALES AND MARKETING
The Company actively markets its services primarily to workers' compensation
insurance companies, TPAs and self-insured employers and groups. The Company
also markets to the automobile insurance market, group health and long-term
disability marketplaces, but to a significantly lesser degree. The Company's
marketing organization includes over 125 full-time sales and marketing
personnel. While the majority of CRA's current business is generated from
workers' compensation insurance companies, self-insured employers (often in
connection with a TPA) also have been an important source of business and will
likely become more important in the future as larger corporations continue to
evaluate self-insuring their workers' compensation programs.
Marketing of CRA's services occurs at both the local insurance company
adjuster level for much of the field case management business as well as the
corporate level for national managed care accounts and self-insured corporations
where a more sophisticated sales presentation is required. The local marketing
to insurance company adjusters for field case management referrals has been a
critically important component of the Company's marketing strategy because of
the decision-making authority that resides at the adjuster level and the
relationship-driven nature of that portion of the business. However, with the
advent of comprehensive managed care legislation, a more proactive environment
for workers' compensation change and a more sophisticated product offered by
CRA, the Company's marketing of national headquarters offices of insurance
companies and self-insured companies likely will increase. CRA has a dedicated
staff of national accounts salespeople responsible for marketing and
coordinating a full selection of services to corporate offices.
QUALITY ASSURANCE
The Company regularly evaluates its quality of service delivery by means of
audits of compliance with special instructions, completion of activities in a
timely fashion, quality of reporting, identification of savings, accuracy of
billing and professionalism in contacts with health care providers and the
effectiveness of the Company's services. Audits are conducted on a nationwide
basis for a particular customer or on a local office basis by selecting random
files for review. A detailed report is generated outlining the audit findings
and providing specific recommendations for service delivery improvements. When
appropriate, follow-up audits are conducted to ensure that recommendations from
the initial audit have been implemented.
27
COMPETITION
The workers' compensation managed care services market is fragmented, with a
large number of competitors. CRA competes with numerous companies, including
national managed care providers, insurance companies and HMOs. CRA's primary
competitors are companies that offer one more workers' compensation managed care
services on a national basis. The Company also competes with numerous smaller
companies which generally provide unbundled services on a local level where such
companies often have a relationship with a local adjuster. Several large
workers' compensation insurance carriers offer managed care services for their
insurance customers either through the insurance carrier's own personnel or by
outsourcing various services to providers such as CRA. The Company also competes
to some degree with large HMOs, which, CRA believes, have historically focused
their networks primarily on controlling health care costs rather than managing
the process of returning an injured employee to work.
The Company believes that, as managed care techniques continue to gain
acceptance in the workers' compensation marketplace, CRA's competitors will
increasingly consist of nationally focused workers' compensation managed care
service companies, insurance companies, HMOs and other significant providers of
managed care products. Many of the Company's current and potential competitors
are significantly larger and have greater financial and marketing resources than
those of the Company.
Within the past few years, several states have experienced decreases in
workers' compensation insurance premium rates. To date, the Company's business
has continued to grow in those states which have experienced declines in
workers' compensation premium rates. The Company believes that managed care and
return to work services will continue to be necessary in the future to sustain
and increase workers' compensation cost savings.
The Company competes on the basis of its specialized knowledge and expertise
in the workers' compensation managed care services industry, effectiveness of
services, ability to offer a range of services in multiple markets, information
systems and price.
DATA PROCESSING
The Company uses computer systems to provide certain of its services and to
provide accounting statements and financial reports. The Company uses licensed
software from national vendors to maintain its financial records and perform
other general business. The software used by the Company within its
retrospective bill review operation is licensed from an independent third party
software company pursuant to a non-exclusive license with a three-year term
expiring February 1998, that may be terminated by either party upon six months'
prior written notice.
GOVERNMENT REGULATION
GENERAL
The Company's business is conducted within a regulated environment. The
Company's activities are regulated principally at the state level, which means
that the Company must comply with regulatory requirements which differ from
state to state. Although the laws affecting the Company's operations vary widely
from state to state, these laws fall into four principal categories: (i)
workers' compensation laws that restrict the methods and procedures that the
Company may employ in its workers' compensation managed care programs; (ii) laws
that require licensing of businesses, such as the Company, that provide medical
review services; (iii) laws regulating the operation of managed care provider
networks; and (iv) proposed laws which, if adopted, would have as their
objective the reform of the health care system as a whole, such as proposals to
implement 24-hour health coverage using a single insurance plan for work-related
and non-work-related health problems. Laws and regulations affecting the
Company's operations change frequently. The Company believes that it is in
material compliance with regulatory requirements applicable to its business.
28
WORKERS' COMPENSATION LEGISLATION
In performing workers' compensation managed care services, the Company must
comply with state workers' compensation laws. Workers' compensation laws require
employers to assume financial responsibility for medical costs, a portion of
lost wages and related legal costs of work-related illnesses and injuries. These
laws establish the rights of workers to receive benefits and to appeal benefit
denials. The workers' compensation laws also regulate the methods and procedures
which the Company may employ in its workers' compensation managed care programs.
For example, workers' compensation laws prohibit medical copayments and
deductibles by employees. In addition, certain states restrict employers' rights
to select health care providers and establish maximum fee levels for treatment
of injured workers. See "--Industry Overview."
In several states, recent workers' compensation reform legislation has eased
to some degree these regulatory restraints on managed care for injured workers.
Legislative reforms in some states permit employers to designate health plans
such as HMOs and PPOs to cover workers' compensation claimants. Because many
health plans have the capacity to manage health care for workers' compensation
claimants, such legislation may intensify competition in the market served by
the Company.
Within the past few years, several states have experienced decreases in the
number of workers' compensation claims and the cost per claim, which have been
reflected in workers' compensation insurance premium rate reductions in those
states. The Company believes that these declines in workers' compensation costs
are due principally to intensified efforts by payors to manage and control
claims costs, to improve risk management by employers and to legislative
reforms. If declines in workers' compensation costs occur in many states and
persist over the long-term, such declines may have an adverse impact upon the
Company's business and results of operations.
SPECIALIZED COST CONTAINMENT SERVICES
Many of the Company's specialized cost containment services include review
of requests for medical care or therapy. Approximately half of the states have
enacted laws that require licensing of businesses, such as the Company, that
provide medical review services. Some of these laws apply to medical review of
care covered by workers' compensation. These laws typically establish minimum
standards for qualifications of personnel, confidentiality, internal quality
control, and dispute resolution procedures. These regulatory programs may result
in increased costs of operation for the Company, which may have an adverse
impact upon the Company's ability to compete with other available alternatives
for health care cost control.
USE OF PROVIDER NETWORKS
The Company's ability to provide comprehensive workers' compensation managed
care services depends in part on its ability to contract with or create networks
of health care providers which share the Company's objectives. For some of its
clients, the Company offers injured workers access to networks of providers who
are selected by the Company for quality of care and pricing. New laws regulating
the operation of managed care provider networks have been adopted by a number of
states. These laws may apply to managed care provider networks having contracts
with the Company or to provider networks which the Company may organize or
acquire. To the extent the Company is governed by these regulations, it may be
subject to additional licensing requirements, financial oversight and procedural
standards for beneficiaries and providers.
AUTOMOBILE INSURANCE LEGISLATION
The automobile insurance industry, like the workers' compensation industry,
is regulated on a state-by-state basis. While regulatory approval is not
required for the Company to offer most of its services to the automobile
insurance market, state regulatory approval is required in order to offer
automobile insurers products that permit them to direct claimants into a network
of medical providers. To date, only Colorado
29
and New York have legislation that permits such direction of care and QMC3
offers this managed care service to automobile insurers in Colorado. QMC3, in
cooperation with a third party PPO, has been in discussions for more than a year
with the State of New York Insurance Department regarding approval of this PPO
as a certified provider of fully integrated managed care services to the New
York automobile insurance market using QMC3 as its exclusive utilization review
agent. The State of New York Insurance Department has approved this arrangement
for the New York City metropolitan area and Long Island, effective as of June 1,
1996. Such an arrangement is the first to offer automobile insurance managed
care services in New York. The Company and QMC3, in cooperation with the third
party PPO, are continuing their discussions with the State of New York Insurance
Department regarding further approvals for offerings of managed care services to
automobile insurers in the balance of the State of New York. While the Company
believes that approval from the State of New York Insurance Department will be
forthcoming with respect to the remaining portions of the state, there can be no
assurance that New York will issue such approval. In addition, no assurance can
be given that other states will adopt legislation permitting such direction of
care for automobile accident victims or, if such legislation is adopted, that
the Company will be able to obtain regulatory approval to provide such services.
HEALTH CARE REFORM
Increasing health care costs have caused the federal government and many
states to advance health care reform proposals. One of the proposals being
considered is 24-hour health coverage, in which the coverage of traditional
employer-sponsored health plans is combined with workers' compensation coverage
to provide a single insurance plan for work-related and non-work-related health
problems. Incorporating workers' compensation coverage into conventional health
plans may adversely affect the market for the Company's services.
EMPLOYEES
As of September 30, 1996, the Company had approximately 2,450 employees.
None of CRA's employees is represented by a labor union. The Company has
experienced no work stoppages and believes that its employee relations are good.
PROPERTIES
The Company's principal corporate office is located in Boston,
Massachusetts. The Company leases the 11,000 square feet of space in this site
pursuant to a lease agreement expiring in 2003. The Company also leases all of
its offices located in 43 states and three Canadian provinces. Thirteen of the
Company's offices are leased from Colonial Realty Trust, of which Ms. Silverman
and Mr. Larson are the trustees and beneficiaries. The Company believes that its
facilities are adequate for its current needs and that suitable additional space
will be available as required.
LEGAL MATTERS
The Company is party to certain claims and litigation in the ordinary course
of business. The Company is not involved in any legal proceeding that it
believes will result, individually or in the aggregate, in a material adverse
effect upon its financial condition or results of operations.
30
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
EXECUTIVE OFFICERS
Donald J. Larson(1).................................. 46 President, Chief Executive Officer and Director
Joseph F. Pesce...................................... 47 Senior Vice President--Finance and Administration,
Chief Financial Officer and Treasurer
John A. McCarthy, Jr................................. 37 Senior Vice President--Cost Containment Services and
Corporate Development
Peter R. Gates....................................... 45 Senior Vice President--Marketing and Sales
Anne E. Kirby........................................ 43 Vice President--Marketing and Product Development
DIRECTORS
Lois E. Silverman.................................... 56 Chairman of the Board
George H. Conrades(2)................................ 57 Director
Jeffrey R. Jay, M.D.(1).............................. 38 Director
William Laverack, Jr.(1)(2).......................... 39 Director
Mitchell T. Rabkin, M.D.............................. 65 Director
- ---------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
EXECUTIVE OFFICERS
Mr. Larson, a founder of the Company, has served as President and Chief
Executive Officer of the Company since January 1, 1996 and as President and
Chief Operating Officer of the Company since 1988. Prior to founding the
Company, Mr. Larson held the position of New England Regional Manager at
IntraCorp. Inc., a division of Cigna Corporation. Mr. Larson is a graduate of
Boston College and Boston University.
Mr. Pesce has served as Senior Vice President--Finance and Administration
since August, 1996 and Chief Financial Officer and Treasurer of the Company
since October 1994. Mr. Pesce served as Vice President-- Finance and
Administration of the Company from October 1994 to August 1996. From October
1981 to September 1994, Mr. Pesce held various financial positions with
Computervision Corporation and its predecessor Prime Computer, Inc., including
Director of Corporate Planning and Analysis, Director of Leasing, Corporate
Controller, Treasurer and, most recently, Vice President--Finance and Chief
Financial Officer. Prior to October 1981, Mr. Pesce held various financial
positions with Compugraphic Corporation and GCA Corporation. Mr. Pesce is a
graduate of Boston College and the Wharton School of Finance at the University
of Pennsylvania.
Mr. McCarthy has served as Senior Vice President--Cost Containment Services
and Corporate Development since August 1996. He previously served as Vice
President--Cost Containment Services and Corporate Development since August
1994. From June 1992 to July 1994, Mr. McCarthy was Senior Vice President and
Chief Financial Officer of MedChem Products, Inc., a manufacturer of specialty
medical products. From March 1989 to June 1992, Mr. McCarthy was a Partner at
Kaufman & Company, an investment banking firm. From August 1987 to February
1989, Mr. McCarthy was an Associate at Morgan Stanley & Co. Incorporated, an
investment banking firm. Mr. McCarthy is a graduate of Lehigh University and
Harvard Business School.
Mr. Gates has served as Senior Vice President--Marketing and Sales since
August 1996. From May 1995 to July 1996, Mr. Gates was Vice President of Mercer
Management Consulting. From January 1990 to January
31
1995, Mr. Gates was Manager of Business Development, and later General Manager
of the X-Ray business of GE Medical Systems. From April 1988 to December 1989,
Mr. Gates was an independent management consultant and from July 1978 to April
1988, Mr. Gates was a Consultant and Vice President with Bain & Company, a
management consulting firm. Mr. Gates is a graduate of Princeton University and
Harvard Business School.
Ms. Kirby joined the Company in July 1979 and has served as Vice
President--Marketing and Product Development since March 1990. From 1979 to
1990, Ms. Kirby served the Company in a variety of roles on a local and regional
level, including Regional Vice President for the New England area. Prior to
joining the Company, Ms. Kirby worked as a clinical nurse for Massachusetts
General Hospital and managed a group medical practice in two different specialty
areas. Ms. Kirby is a graduate of Boston College and the St. Louis University
Accelerated Curriculum in Nursing.
DIRECTORS
Ms. Silverman, a founder of the Company, has served as the Chairman of the
Board since March 1994 and served as its Chief Executive Officer from 1988
through January 1, 1996. Prior to founding the Company, Ms. Silverman held the
position of Northeast Regional Manager at IntraCorp., a division of Cigna
Corporation. Ms. Silverman also serves as Trustee and Officer of Beth Israel
Hospital and Overseer of Tufts Medical School. Ms. Silverman is a graduate of
Beth Israel School of Nursing. Ms. Silverman is also a director of Sun
Healthcare Group, Inc.
Mr. Conrades has served as a Director of the Company since June 1994. Mr.
Conrades has been President and Chief Executive Officer of BBN Corporation since
1994 and has been Chairman of the Board of BBN Corporation since November 1995.
From 1992 to 1994, Mr. Conrades was a partner in Conrades/Reilly Associates, a
business consulting company. From 1961 to 1992, Mr. Conrades held a number of
management positions with International Business Machines Corp., most recently
as Senior Vice President for Corporate Marketing and Services. Mr. Conrades is
also a director of BBN Corporation, Westinghouse Electric Corp. and Cubist
Pharmaceuticals.
Dr. Jay has served as a Director of the Company since March 1994. Dr. Jay
has been a General Partner of J. H. Whitney & Co., a private investment firm,
since September 1993. From 1988 to 1993, Dr. Jay worked for Canaan Partners, a
venture capital firm. Dr. Jay is a graduate of Harvard Business School and
received his M.D. from the Boston University School of Medicine. Dr. Jay also
serves as a director of Advance Paradigm, Inc., and Nitinol Medical
Technologies, Inc.
Mr. Laverack has served as a Director of the Company since March 1994. Mr.
Laverack has been a General Partner of J. H. Whitney & Co., a private investment
firm, since May 1993. From 1991 to 1993, Mr. Laverack served as a Managing
Director of Gleacher & Co., Inc., an investment banking firm. From 1985 to 1991,
Mr. Laverack served as a Principal in the merchant banking department of Morgan
Stanley & Co. Incorporated, an investment banking firm. Mr. Laverack is a
graduate of Harvard College and Harvard Business School.
Dr. Rabkin has served as a Director of the Company since February 1995. From
1966 to September 1996, Dr. Rabkin served as Chief Executive Officer of Boston's
Beth Israel Hospital, where he currently holds the
rank of Professor of Medicine. Dr. Rabkin is a graduate of Harvard College and
received his M.D. from Harvard Medical School.
Mr. Larson, Whitney, the Whitney Equity Fund and the Whitney Debt Fund have
agreed to vote their shares in favor of the reelection of Ms. Silverman as a
director of the Company for so long as Ms. Silverman continues to hold, directly
or indirectly, at least 407,490 shares.
It is expected that upon consummation of the sale of Common Stock offered
hereby, Mr. Laverack will resign as a director of the Company.
32
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1996 (except as
noted below) and as adjusted to reflect the sale by the Company of the shares of
Common Stock offered hereby (assuming no exercise of the Underwriters' over-
allotment option), (i) by each person (or group of affiliated persons) known by
the Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, (ii) each Director, (iii) the Company's Chief Executive Officer and the
Company's other named executive officers (as determined in accordance with the
rules of the Securities and Exchange Commission), (iv) all Selling Stockholders,
and (v) all of the Company's executive officers and Directors as a group. Except
as indicated in the footnotes to this table, the Company believes that the
persons named in this table have sole voting and investment power with respect
to all the shares of Common Stock indicated.
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED PRIOR BENEFICIALLY OWNED AFTER
TO THE OFFERING(1) THE OFFERING(1)
---------------------------- ----------------------------
NUMBER PERCENTAGE OF NUMBER PERCENTAGE OF
OF OUTSTANDING SHARES TO OF OUTSTANDING
NAME SHARES SHARES BE OFFERED SHARES SHARES
- ------------------------------------------- ----------- --------------- ----------- ----------- ---------------
Lois E. Silverman(2)....................... 272,470 3.1% -- 272,470 2.9%
Donald J. Larson(3)........................ 974,530 10.9% 158,634 815,896 8.7%
Joseph F. Pesce............................ 1,996 * -- 1,996 *
John A. McCarthy, Jr....................... 417 * -- 417 *
Anne E. Kirby.............................. 1,384 * -- 1,384 *
George H. Conrades(4)...................... 15,666 * -- 15,666 *
Jeffrey R. Jay, M.D.(5).................... 1,074,296 12.1% 1,074,296 -- --
William Laverack, Jr.(5)................... 1,074,296 12.1% 1,074,296 -- --
Mitchell T. Rabkin, M.D.(6)................ 15,866 * -- 15,866 *
J. H. Whitney & Co.(7)..................... 1,074,296 12.1% 1,074,296 -- --
Arlene Osoff, Trustee(8)................... 647,000 7.3% 175,000 472,000 5.0%
Morgan Stanley Group, Inc.(9).............. 467,400 5.3% -- 467,400 5.0%
Morgan Stanley Asset Management,
Inc.(10).................................. 467,400 5.3% -- 467,400 5.0%
Henry J. Roth, M.D......................... 70,717 * 35,000 35,717 *
Kimberly A. Sutphin(11).................... 73,647 * 25,000 48,647 *
Howard J. Entin, M.D....................... 35,588 * 10,000 25,588 *
Ryan J. Conlon............................. 15,318 * 7,000 8,318 *
Paul M. Baker.............................. 11,459 * 5,729 5,730 *
John Eric Griffiths, D.C................... 15,318 * 5,000 10,318 *
John Sbarbaro, M.D......................... 7,659 * 2,500 5,159 *
Nick Hilger................................ 3,682 * 1,841 1,841 *
All executive officers and directors as a
group (9 persons)(12)..................... 2,356,625 26.4% 1,232,930 1,123,695 11.9%
- ---------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes general voting power and/or
investment power with respect to securities. Shares of Common Stock subject
to options and warrants currently exercisable or exercisable within 60 days
of September 30, 1996 are deemed outstanding for computing the percentage of
any other person. Except as otherwise specified below, the persons named in
the table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them.
(2) The address of this stockholder is c/o CRA Managed Care, Inc., 312 Union
Wharf, Boston, Massachusetts 02109. Includes 23,500 shares held of record by
The Michael E. Silverman 1995 Irrevocable Trust dated March 13, 1995 and
23,500 shares held of record by The Susan E. Bender 1995 Irrevocable Trust
dated March 13, 1995. Does not include 600,000 shares held by the Silverman
1996 Grantor Retained Annuity Trust. Ms. Silverman disclaims beneficial
ownership of such shares.
33
(3) The address of this stockholder is c/o CRA Managed Care, Inc., 312 Union
Wharf, Boston, Massachusetts 02109. Includes 18,750 shares held of record by
trusts created for the benefit of Mr. Larson's children.
(4) Includes 15,666 shares of Common Stock issuable pursuant to stock options
that are exercisable currently or within 60 days.
(5) The address of these directors is c/o J. H. Whitney & Co., 177 Broad Street,
Stamford, Connecticut 06901. Consists of 1,074,296 shares held of record by
J. H. Whitney & Co. ("Whitney"), Whitney Subordinated Debt Fund, L.P. (the
"Whitney Debt Fund") and Whitney 1990 Equity Fund, L.P. (the "Whitney Equity
Fund") that Dr. Jay and Mr. Laverack may be deemed to beneficially own due
to their relationship with such entities. Such beneficial ownership is
disclaimed by both Dr. Jay and Mr. Laverack.
(6) Includes 15,666 shares of Common Stock issuable pursuant to currently
exercisable stock options.
(7) The address of this stockholder is 177 Broad Street, Stamford, Connecticut
06901, Attention: Jeffrey R. Jay, M.D. These shares are held of record by
Whitney and its affiliates as follows: (i) Whitney--158,537 shares of Common
Stock; (ii) the Whitney Equity Fund--633,136 shares of Common Stock; and
(iii) the Whitney Debt Fund--282,623 shares of Common Stock.
(8) The address of this stockholder is c/o Jansson, 411 Waverly Oak Drive,
Waltham, Massachusetts 02154. Consists of 600,000 shares held of record by
the Silverman 1996 Grantor Retained Annuity Trust, 23,500 shares held of
record by The Michael E. Silverman 1996 Irrevocable Trust dated March 13,
1995 and 23,500 shares held of record by The Susan E. Bender 1995
Irrevocable Trust dated March 13, 1995.
(9) The address of this stockholder is 1585 Broadway, New York, New York 10036.
Ownership based upon Schedule 13G filed on or before February 14, 1996.
(10) The address of this stockholder is 1221 Avenue of the Americas, New York,
New York 10020. Ownership based upon Schedule 13G filed on or before
February 14, 1996.
(11) Includes 2,946 shares of Common Stock issuable pursuant to currently
exercisable stock options.
(12) Includes 34,278 shares of Common Stock issuable pursuant to currently
exercisable stock options. Includes 1,074,296 shares held of record by
Whitney, the Whitney Equity Fund and the Whitney Debt Fund that Dr. Jay and
Mr. Laverack may be deemed to beneficially own due to their relationship
with such entities. Such beneficial ownership is disclaimed by both Dr. Jay
and Mr. Laverack.
Each of Ms. Sutphin and Messrs. Baker, Conlon, Entin, Griffiths, Hilger,
Roth and Sbarbaro acquired their shares of Common Stock of the Company on May 6,
1996, pursuant to an Agreement and Plan of Merger, dated as of May 6, 1996,
entered into by and among the Company, QMC3 Acquisition Corp., QMC3 and the
shareholders of QMC3 in connection with the acquisition of QMC3 by the Company.
In addition, Ms. Sutphin entered into an Employment and Non-Competition
Agreement with QMC3 in connection with the QMC3 acquisition.
34
DESCRIPTION OF CAPITAL STOCK
The description of the capital stock below is qualified in its entirety by
reference to the Company's Articles of Organization, as amended (the
"Articles"), and the By-Laws of the Company, as amended (the "By-Laws"), copies
of which are on file with the Securities and Exchange Commission.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The Company is authorized to issue up to 40,000,000 shares of Common Stock,
$.01 par value per share and 1,000,000 shares of Preferred Stock, $.01 par value
per share. Immediately prior to this Offering, the Company had 8,907,532 shares
of Common Stock, and no shares of Preferred Stock, issued and outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share of Common
Stock held of record by such holder on all matters on which stockholders
generally are entitled to vote under Massachusetts law. Voting rights are not
cumulative, so that the holders of a majority of the voting power of the Company
could elect all the directors standing for election at any annual or special
meeting of the stockholders, and the holders of the remaining shares may not be
able to elect any director.
The holders of the Common Stock are entitled to receive ratably dividends
only when and if declared by the Board of Directors of the Company out of funds
legally available for payment thereof. The ability of the Board of Directors to
declare or pay dividends on Common Stock or to cause the Company to repurchase
shares of its capital stock may be subject to restrictions or limitations
contained in the provisions of any series of Preferred Stock which may hereafter
be issued by the Company.
Upon the liquidation, dissolution or winding up of the Company, or any
distribution of its assets, the holders of the Common Stock will be entitled to
receive ratably the assets of the Company available after the payment of all
debts and other liabilities and after the holders of any series of Preferred
Stock which may be issued have received the preferential amount fixed by the
Board of Directors for such shares.
The holders of Common Stock will have no preemptive rights to purchase
shares of capital stock of the Company. Shares of Common Stock will not be
subject to any redemption provisions and will not be convertible into any other
securities or property. The rights, preferences and privileges of the holder of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of the shares of any series of Preferred Stock which the Company may
designate and issue in the future. All outstanding shares of Common Stock are
fully-paid and non-assessable and the shares of Common Stock offered by the
Company in the offering, when issued, will be fully-paid and non-assessable.
PREFERRED STOCK
Pursuant to the Articles, the Board of Directors is authorized, subject to
any limitations prescribed by law, without further stockholder approval, to
issue shares of Preferred Stock in one or more classes or one or more series
within each class. Each such series of Preferred Stock shall have such rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights and redemption privileges and liquidation preferences,
as shall be determined by the Board of Directors.
The Company has granted the Board of Directors authority to designate and
issue Preferred Stock and to determine its rights and preferences to eliminate
delays associated with a stockholder vote on specific issues. The issuances of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of the outstanding voting stock of the
Company.
35
MASSACHUSETTS LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER
EFFECTS
The Company is subject to Chapter 110F of the Massachusetts General Laws, an
anti-takeover law. Under Chapter 110F, a Massachusetts corporation with more
than 200 stockholders may not engage in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless (i)
the interested stockholder obtains the approval of the Board of Directors prior
to becoming an interested stockholder, (ii) the interested stockholder acquires
90.0% of the outstanding voting stock of the corporation (excluding shares held
by certain affiliates of the corporation) at the time it becomes an interested
stockholder or (iii) the business combination is approved by both the Board of
Directors and the holders of two-thirds of the outstanding voting stock of the
corporation (excluding shares held by the interested stockholder). An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or, in certain cases, at any time within the prior three years
did own) 5.0% or more of the outstanding voting stock of the corporation. A
"business combination" includes a merger, certain stock or asset sales, and
certain other specified transactions resulting in a financial benefit to the
interested stockholder.
The By-Laws include a provision excluding the Company from the applicability
of Chapter 110D of the Massachusetts General Laws, which regulates the
acquisition of so-called "control shares." A control share acquisition is the
acquisition of shares which, when added to shares already owned, would (but for
the statute) entitle the acquiring person to vote at least 20% of a
corporation's stock. Shares acquired in such a transaction would, under the
statute, have no voting rights unless a majority of non-interested stockholders
voted to grant such voting rights. In general, the person acquiring such shares,
officers of the Company and those directors of the Company who are also
employees, are not permitted to vote on whether such voting rights shall be
granted. The Board of Directors may amend the By-Laws at any time to subject the
Company to this statute prospectively.
Massachusetts General Laws Chapter 156B, Section 50A requires that a
publicly held Massachusetts corporation have a classified board of directors
consisting of three classes as nearly equal in size as possible, unless the
corporation elects not to be covered by Section 50A. The Company's By-Laws
contain provisions which give effect to Section 50A. See "Management--Executive
Officers and Directors."
The By-Laws provide that the directors and officers of the Company generally
shall be indemnified by the Company to the fullest extent authorized by
Massachusetts law, as it now exists or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with service for or
on behalf of the Company. In addition, the Articles provide that the directors
of the Company will not be personally liable to the Company or its stockholders
for monetary damages for certain breaches of their fiduciary duty as directors,
unless they violated their duty of loyalty to the Company or its stockholders,
acted in bad faith, knowingly or intentionally violated the law, authorized
illegal dividends or redemptions, approved certain loans to insiders or derived
an improper benefit from their action as directors.
The Company's By-Laws provide that special meetings of stockholders may be
called only by the Chief Executive Officer or President, by a majority of the
Board of Directors or by the Clerk upon the written request of the holders of at
least 40% of the Company's outstanding Common Stock.
In addition, the Articles provide that shares of the Company's Preferred
Stock may be issued in the future without stockholder approval and upon such
terms and conditions, and having such rights, privileges and preferences, as the
Board of Directors may determine. See "--Preferred Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Union
National Bank of North Carolina.
36
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Dean Witter Reynolds Inc., Montgomery
Securities and J.P. Morgan Securities Inc. have severally agreed to purchase
from the Company the following respective numbers of shares of Common Stock at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus.
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------- ---------
Alex. Brown & Sons Incorporated..................................
Dean Witter Reynolds Inc.........................................
Montgomery Securities............................................
J.P. Morgan Securities Inc.......................................
---------
Total............................................................ 2,000,000
---------
---------
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares are
purchased.
The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
other dealers. After the public offering, the offering price and other selling
terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 2,000,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,000,000 shares are being offered.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
The Company and holders of approximately 1,651,838 shares of Common Stock
have agreed not to offer, sell or otherwise dispose of any shares of such Common
Stock for a period of 90 days after the date of this Prospectus without the
prior written consent of Alex. Brown & Sons Incorporated on behalf of the
Representatives of the Underwriters.
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market making
on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange
Act during the two business day period before the commencement of the offers or
sales of the Common Stock. The passive market making transactions must comply
with applicable volume and price limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the highest
independent bid for such security; if all independent bids are lowered before
the passive market maker's bid, however, such bid must then be lowered when
certain purchase limits are exceeded.
37
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Hutchins, Wheeler &
Dittmar, A Professional Corporation, Boston, Massachusetts. James Westra, who is
a stockholder of Hutchins, Wheeler & Dittmar, is Assistant Clerk of the Company.
Attorneys at Hutchins, Wheeler & Dittmar, A Professional Corporation, own an
aggregate of 1,500 shares of the Company's Common Stock. Certain legal matters
in connection with this offering will be passed upon for the Underwriters by
Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The financial statements of the Company and Focus as of December 31, 1993,
1994 and 1995 and for the years then ended included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as set forth in
their report thereon appearing elsewhere herein, and have been so included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Prompt at December 31, 1994 and 1995, and for
each of the three years in the period ended December 31, 1995 appearing in this
Prospectus have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
Upon the recommendation of the Company's Board of Directors, effective
December 5, 1994, the Company engaged Arthur Andersen LLP to serve as the
Company's independent accountants, dismissing KPMG Peat Marwick LLP. KPMG Peat
Marwick LLP's report on the Company's financial statements for the years ended
December 31, 1992 and 1993 did not contain an adverse opinion or disclaimer of
opinion nor were any reports qualified or modified as to uncertainty, audit
scope or accounting principles. The change in independent accountants did not
result from any disagreement between the Company and KPMG Peat Marwick LLP on
any manner of accounting principles or practices, financial statement disclosure
or auditing scope or procedure.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C. 20549, and at
the Commission's Regional Offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, NW, Room 1024, Judiciary Plaza,
Washington, D.C. 20549, at prescribed rates. The Company's Common Stock is
listed on the Nasdaq National Market and such reports, proxy statements and
other information concerning the Company may be inspected at the offices of the
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006-1506. In
addition, the Company is required to file electronic versions of these documents
with the Commission through the Commission's Electronic Data Gathering,
Analysis, and Retrieval (EDGAR) system. The Commission maintains a World Wide
Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended, with respect to the Common
Stock offered hereby. This prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which have been
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and such Common Stock, reference
is hereby made to the Registration Statement
38
and the exhibits and schedules thereto. Statements contained in this Prospectus
as to the contents of any contract or any other document are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference to such exhibit.
Copies of the Registration Statement and the exhibits may be inspected, without
charge at the offices of the Commission, or obtained at prescribed rates from
the Public Reference Section of the Commission at the address set forth above.
INCORPORATION BY REFERENCE
The Company hereby incorporates by reference the documents listed in (a)
through (i) below. In addition, all documents subsequently filed by the Company
pursuant to Section 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the
termination of the offering shall be deemed to be incorporated by reference into
this Prospectus and to be a part hereof from the date of filing of such
documents.
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, as filed with the Commission (Commission File No.
0-25856).
(b) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1996 (Commission File No. 0-25856).
(c) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996 (Commission File No. 0-25856).
(d) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996 (Commission File No. 0-25856).
(e) The Company's Current Report on Form 8-K filed on April 18, 1996
(Commission File No. 0-25856).
(f) The Company's Current Report on Form 8-K/A filed on May 8, 1996
(Commission File No. 0-25856).
(g) The Company's Current Report on Form 8-K filed on June 27, 1996
(Commission File No. 0-25856).
(h) The Company's Proxy Statement filed with the Commission pursuant to
Section 14(a) of the Exchange Act of 1934, as amended, with respect to the
Company's Special Meeting of Stockholders in lieu of its 1996 Annual
Meeting.
(i) The description of the Company's Common Stock which is contained in
the Registration Statement filed by the Company under the Exchange Act,
including any amendment or report filed for the purpose of updating such
description.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or on any other subsequently filed document which is incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will furnish without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request, a copy of any and all of the information that has been incorporated by
reference in this Prospectus, other than exhibits to such information, unless
such exhibits are specifically incorporated by reference into the information
that this Prospectus incorporates. Requests should be submitted in writing to
CRA Managed Care, Inc., 312 Union Wharf, Boston, Massachusetts 02109, Attention:
Martha Kuppens, Telephone Number: (617) 367-2163.
39
CRA MANAGED CARE, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS......................... F-2
CONSOLIDATED FINANCIAL STATEMENTS OF CRA MANAGED CARE, INC.
Balance Sheets............................................... F-3
Statements of Operations..................................... F-4
Statements of Cash Flows..................................... F-5
Statements of Stockholders' Equity (Deficit)................. F-6
Notes to Financial Statements................................ F-7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS......................... F-20
FINANCIAL STATEMENTS OF FOCUS HEALTHCARE MANAGEMENT, INC.
Balance Sheets............................................... F-21
Statements of Operations..................................... F-22
Statements of Shareholder's Equity (Deficit)................. F-23
Statements of Cash Flows..................................... F-24
Notes to Financial Statements................................ F-25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS......................... F-29
FINANCIAL STATEMENTS OF PROMPT ASSOCIATES, INC.
Balance Sheets............................................... F-30
Statement of Operations...................................... F-31
Statement of Cash Flows...................................... F-32
Statement of Shareholder's Equity (Deficit).................. F-33
Notes to Financial Statements................................ F-34
CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS OF CRA MANAGED CARE,
INC.,
FOCUS HEALTHCARE MANAGEMENT, INC. AND PROMPT ASSOCIATES, INC.
(UNAUDITED):
Consolidated Pro Forma Balance Sheet......................... F-39
Consolidated Pro Forma Statement of Operations............... F-40
Notes to Pro Forma Financial Statements...................... F-41
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
CRA Managed Care, Inc.:
We have audited the accompanying balance sheets of CRA Managed Care, Inc. (a
Massachusetts corporation) as of December 31, 1994 and 1995, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CRA Managed Care, Inc. as of
December 31, 1994 and 1995 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 23, 1996
F-2
CRA MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1994 1995
------------ ------------ SEPTEMBER 30,
1996
-------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 2,197,000 $ 3,005,000 $ 33,585,000
Accounts receivable, less allowance for doubtful accounts of
$380,000, $430,000 and $1,119,000 respectively.................. 20,654,000 26,380,000 32,395,000
Prepaid expenses.................................................. 394,000 629,000 512,000
Prepaid taxes..................................................... 1,084,000 319,000 1,173,000
------------ ------------ -------------
Total current assets.......................................... 24,329,000 30,333,000 67,665,000
Property and equipment, at cost....................................... 8,890,000 11,732,000 17,714,000
Less: Accumulated depreciation and amortization....................... 4,071,000 5,864,000 10,639,000
------------ ------------ -------------
Net property and equipment.................................... 4,819,000 5,868,000 7,075,000
Other assets:
Deferred finance costs, net of accumulated amortization........... 1,890,000 -- --
Excess of cost over fair value of net assets acquired............. -- -- 19,568,000
Other assets...................................................... 307,000 355,000 386,000
------------ ------------ -------------
Total other assets............................................ 2,197,000 355,000 19,954,000
------------ ------------ -------------
$ 31,345,000 $ 36,556,000 $ 94,694,000
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving credit facilities....................................... $ 4,716,000 $ 4,300,000 $ --
Current portion of long-term debt................................. 2,500,000 5,000,000 71,000
Accrued interest expense.......................................... 627,000 18,000 --
Accounts payable and accrued expenses............................. 5,074,000 5,927,000 9,582,000
Accrued payroll and related expenses.............................. 5,803,000 7,595,000 9,403,000
Accrued income taxes.............................................. -- -- --
------------ ------------ -------------
Total current liabilities..................................... 18,720,000 22,840,000 19,056,000
Long-term debt........................................................ 37,500,000 -- 6,000
Long-term deferred tax liabilities.................................... 3,638,000 2,056,000 2,422,000
Commitments and contingencies (Notes 8 and 12)
Stockholders' equity (deficit):
Preferred Stock--$.01 par value, none, none and 1,000,000
authorized; none issued and outstanding......................... -- -- --
Convertible Preferred Stock--Series A, no par value; 1,698,463,
none and none authorized; 1,698,483, none and none issued and
outstanding, respectively....................................... 9,249,000 -- --
Common Stock--$.01 par value; none, 10,000,000 and 40,000,000
authorized; none, 7,372,424 and 8,907,532 shares issued and
outstanding, respectively....................................... -- 74,000 89,000
Common Stock--Class A, no par value; 10,000,000, none and none
authorized; 4,700,000; none and none shares issued and
outstanding, respectively....................................... 1,000 -- --
Paid-in capital................................................... -- 36,839,000 90,743,000
Retained earnings (deficit)....................................... 3,103,000 (25,253,000) (17,622,000 )
Less: Treasury stock, 1,698,463, none and none shares,
respectively.................................................... (40,866,000) -- --
------------ ------------ -------------
Total stockholders' equity (deficit).......................... (28,513,000) 11,660,000 73,210,000
------------ ------------ -------------
$ 31,345,000 $ 36,556,000 $ 94,694,000
------------ ------------ -------------
------------ ------------ -------------
The accompanying notes are an integral part of these financial statements.
F-3
CRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
Revenues............................... $ 100,546,000 $ 121,295,000 $ 146,055,000 $ 107,881,000 $ 131,032,000
Cost of services....................... 86,082,000 103,796,000 122,615,000 90,600,000 107,981,000
-------------- -------------- -------------- -------------- --------------
Gross profit................... 14,464,000 17,499,000 23,440,000 17,281,000 23,051,000
General and administrative expenses.... 9,931,000 8,753,000 11,021,000 8,180,000 10,491,000
-------------- -------------- -------------- -------------- --------------
Operating income............... 4,533,000 8,746,000 12,419,000 9,101,000 12,560,000
Other (income) expense:
Interest (income).................. (11,000) (62,000) -- -- (446,000)
Interest expense................... 16,000 4,087,000 2,484,000 2,260,000 658,000
Other (income) expense............. (5,000) 132,000 -- -- --
-------------- -------------- -------------- -------------- --------------
Total other (income) expense... -- 4,157,000 2,484,000 2,260,000 212,000
Income before income taxes..... 4,533,000 4,589,000 9,935,000 6,841,000 12,348,000
Provision for income taxes
Current year operations............ 355,000 1,530,000 3,974,000 2,736,000 5,124,000
Change in tax status............... -- 3,772,000 -- -- --
-------------- -------------- -------------- -------------- --------------
Total provision for income
taxes........................ 355,000 5,302,000 3,974,000 2,736,000 5,124,000
-------------- -------------- -------------- -------------- --------------
Net income (loss) before extraordinary
items 4,178,000 (713,000) 5,961,000 4,105,000 7,224,000
Loss on retirement of debt, net of
taxes of $1,610,000.................. -- -- (2,460,000) (2,460,000) --
-------------- -------------- -------------- -------------- --------------
Net income (loss)...................... $ 4,178,000 $ (713,000) $ 3,501,000 $ 1,645,000 $ 7,224,000
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Actual and pro forma earnings per
share:
Pro forma net income
(Note 2)......................... $ 2,753,000
--------------
--------------
Net income before extraordinary
items............................ $ 0.57 $ 0.91 $ 0.66 $ 0.87
Loss on retirement of debt, net of
tax.............................. -- (0.37) (0.40) --
-------------- -------------- -------------- --------------
Net income......................... $ 0.57 $ 0.54 $ 0.26 $ 0.87
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average shares
outstanding...................... 4,815,000 6,540,000 6,223,000 8,261,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
The accompanying notes are an integral part of these financial statements.
F-4
CRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------ ------------------------
1993 1994 1995 1995 1996
------------- ----------- -------------- ----------- -----------
(UNAUDITED)
Cash flows from operations:
Net income (loss).......................................... $ 4,178,000 $ (713,000) $ 3,501,000 $ 1,645,000 $ 7,224,000
Items not requiring cash:
Depreciation of property and equipment................... 847,000 1,274,000 1,601,000 1,224,000 2,081,000
Provision for doubtful accounts.......................... 15,000 353,000 186,000 50,000 183,000
Amortization of deferred finance costs and debt
discount............................................... -- 521,000 228,000 228,000 --
Loss on retirement of debt............................... -- -- 3,912,000 3,912,000 --
Loss on disposal of fixed assets......................... 1,000 134,000 -- -- --
Provision for deferred tax income taxes.................. 244,000 2,758,000 208,000 -- --
Change in assets and liabilities:
Accounts receivable...................................... (3,848,000) (4,730,000) (5,570,000) (3,650,000) (4,266,000)
Prepaid expenses and deposits............................ 311,000 (1,407,000) 344,000 131,000 (722,000)
Accounts payable, accrued expenses and income taxes...... 1,213,000 7,404,000 (296,000) (2,656,000) 4,534,000
------------- ----------- -------------- ----------- -----------
Cash flows from operations............................. 2,961,000 5,594,000 4,114,000 884,000 9,034,000
Cash flows from investing activities:
Purchase of property and equipment......................... (1,763,000) (2,788,000) (2,492,000) (1,628,000) (1,960,000)
Acquisitions of Focus and QMC3, net of cash acquired....... -- -- -- -- (21,080,000)
Proceeds from sale of property and equipment............... 24,000 13,000 -- -- --
Cash surrender value of life insurance..................... (22,000) (23,000) (12,000) -- --
------------- ----------- -------------- ----------- -----------
Cash flows used for investing activities............... (1,761,000) (2,798,000) (2,504,000) (1,628,000) (23,040,000)
Cash flows from financing activities:
Payments of note payable to bank and overdraft............. (337,000) -- -- -- --
Dividends paid............................................. (218,000) -- -- -- --
Borrowings (payments) under revolving credit facilities,
net...................................................... -- 4,716,000 (416,000) 84,000 (4,300,000)
Proceeds from the issuance of Term Loan.................... -- 17,000,000 -- -- --
Payments on Term Loan...................................... -- (750,000) (16,250,000) (16,250,000) --
Payments on capital leases................................. -- -- -- -- (31,000)
Proceeds from issuance of Senior Subordinated Notes........ -- 21,000,000 -- -- --
Payments on the Senior Subordinated Notes.................. -- -- (21,000,000) (21,000,000) --
Proceeds (payments) on issuance of Junior Subordinated
Notes.................................................... -- 5,000,000 -- -- (5,000,000)
Payment on Junior Subordinated Notes....................... -- -- -- -- --
Proceeds from the issuance of Preferred Stock.............. -- 10,000,000 -- -- --
Proceeds from the sale of Common Stock..................... -- -- 40,250,000 40,250,000 55,200,000
Proceeds for the sale of Common Stock under the employee
stock purchase plan and stock option plan................ -- -- 357,000 -- 2,077,000
Costs associated with the issuance of debt................. -- (2,154,000) -- -- --
Costs associated with the issuance of Preferred Stock...... -- (751,000) -- -- --
Costs associated with the sale of Common Stock............. -- -- (3,743,000) (3,743,000) (3,360,000)
Repurchase of Common Stock................................. -- (55,412,000) -- -- --
------------- ----------- -------------- ----------- -----------
Cash flows used for financing activities............... (555,000) (1,351,000) (802,000) (659,000) 44,586,000
------------- ----------- -------------- ----------- -----------
Net increase in cash and cash equivalents.................... 645,000 1,445,000 808,000 (1,403,000) 30,580,000
Cash and cash equivalents, beginning of year................. 107,000 752,000 2,197,000 2,197,000 3,005,000
------------- ----------- -------------- ----------- -----------
Cash and cash equivalents, end of period..................... $ 752,000 $ 2,197,000 $ 3,005,000 $ 794,000 $33,585,000
------------- ----------- -------------- ----------- -----------
------------- ----------- -------------- ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid.............................................. $ 16,000 $ 2,902,000 $ 2,865,000 $ 2,589,000 $ 676,000
Income taxes paid.......................................... $ 48,000 $ 3,690,000 $ 3,392,000 $ 2,940,000 $ 4,893,000
The accompanying notes are an integral part of these financial statements.
F-5
CRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
SERIES A
CONVERTIBLE CLASS A $0.01 PAR VALUE
PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------------ ---------------------- ---------------------
NUMBER NUMBER NUMBER PAID-IN
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE CAPITAL
----------- ----------- ----------- --------- ---------- --------- ------------
Balance December 31, 1992.................. -- $ -- 4,700,000 $ 1,000 -- $ -- $ --
Dividends on Common Stock................ -- -- -- -- -- -- --
Net income............................... -- -- -- -- -- -- --
----------- ----------- ----------- --------- ---------- --------- ------------
Balance December 31, 1993.................. -- -- 4,700,000 1,000 -- -- --
----------- ----------- ----------- --------- ---------- --------- ------------
----------- ----------- ----------- --------- ---------- --------- ------------
Treasury stock purchase.................. -- -- -- -- -- -- --
Treasury stock reissuance................ -- -- -- -- -- -- --
Issuance of Preferred Stock.............. 1,698,463 9,249,000 -- -- -- -- --
Net loss................................. -- -- -- -- -- -- --
----------- ----------- ----------- --------- ---------- --------- ------------
Balance December 31, 1994.................. 1,698,463 9,249,000 4,700,000 1,000 -- -- --
----------- ----------- ----------- --------- ---------- --------- ------------
----------- ----------- ----------- --------- ---------- --------- ------------
Conversion of Convertible Preferred Stock
into Class A Common Stock.............. (1,698,463) (9,249,000) -- -- -- -- --
Conversion of Class A Common Stock into
$0.01 par value Common Stock........... -- -- (4,700,000) (1,000) 4,700,000 47,000 --
Sale of Common Stock at initial public
offering............................... -- -- -- -- 2,515,625 25,000 36,482,000
Common Stock issued for the acquisition
of Alta Pacific Corporation............ -- -- -- -- 136,150 2,000 --
Common Stock issued under employee stock
purchase plan and stock option plan.... -- -- -- -- 20,649 -- 357,000
Net income................................. -- -- -- -- -- -- --
----------- ----------- ----------- --------- ---------- --------- ------------
Balance December 31, 1995.................. -- -- -- -- 7,372,424 74,000 36,839,000
----------- ----------- ----------- --------- ---------- --------- ------------
----------- ----------- ----------- --------- ---------- --------- ------------
Sale of Common Stock at initial public
offering............................... -- -- -- -- 1,200,000 12,000 51,828,000
Common Stock issued for the acquisition
of QMC3................................ -- -- -- -- 230,441 2,000 --
Common Stock issued under employee stock
purchase plan and stock option plan.... -- -- -- -- 104,667 1,000 2,076,000
Net income................................. -- -- -- -- -- -- --
----------- ----------- ----------- --------- ---------- --------- ------------
Balance September 30, 1996................. -- -- -- -- 8,907,532 $ 89,000 $ 90,743,000
----------- ----------- ----------- --------- ---------- --------- ------------
----------- ----------- ----------- --------- ---------- --------- ------------
SERIES A
TREASURY STOCK TOTAL
-------------------------- STOCKHOLDERS'
RETAINED NUMBER EQUITY
EARNINGS OF SHARES VALUE (DEFICIT)
------------- ----------- ------------- --------------
Balance December 31, 1992.................. $ 11,895,000 -- $ -- $ 11,896,000
Dividends on Common Stock................ (218,000) -- -- (218,000)
Net income............................... 4,178,000 -- -- 4,178,000
------------- ----------- ------------- --------------
Balance December 31, 1993.................. 15,855,000 -- -- 15,856,000
------------- ----------- ------------- --------------
------------- ----------- ------------- --------------
Treasury stock purchase.................. -- (2,303,000) (55,412,000) (55,412,000)
Treasury stock reissuance................ (12,039,000) 604,537 14,546,000 2,507,000
Issuance of Preferred Stock.............. -- -- -- 9,249,000
Net loss................................. (713,000) -- -- (713,000)
------------- ----------- ------------- --------------
Balance December 31, 1994.................. 3,103,000 (1,698,463) (40,866,000) (28,513,000)
------------- ----------- ------------- --------------
------------- ----------- ------------- --------------
Conversion of Convertible Preferred Stock
into Class A Common Stock.............. (31,617,000) 1,698,463 40,866,000 --
Conversion of Class A Common Stock into
$0.01 par value Common Stock........... (46,000) -- -- --
Sale of Common Stock at initial public
offering............................... -- -- -- 36,507,000
Common Stock issued for the acquisition
of Alta Pacific Corporation............ (194,000) -- -- (192,000)
Common Stock issued under employee stock
purchase plan and stock option plan.... -- -- -- 357,000
Net income................................. 3,501,000 -- -- 3,501,000
------------- ----------- ------------- --------------
Balance December 31, 1995.................. (25,253,000) -- -- 11,660,000
------------- ----------- ------------- --------------
------------- ----------- ------------- --------------
Sale of Common Stock at initial public
offering............................... -- -- -- 51,840,000
Common Stock issued for the acquisition
of QMC3................................ 407,000 -- -- 409,000
Common Stock issued under employee stock
purchase plan and stock option plan.... -- -- -- 2,077,000
Net income................................. 7,224,000 -- -- 7,224,000
------------- ----------- ------------- --------------
Balance September 30, 1996................. $ (17,622,000) -- -- $ 73,210,000
------------- ----------- ------------- --------------
------------- ----------- ------------- --------------
The accompanying notes are an integral part of these financial statements.
F-6
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND CAPITALIZATION
CRA Managed Care, Inc. (the "Company") was founded in 1978 and is a provider
of field case management and specialized cost containment services designed to
reduce workers' compensation costs. On March 8, 1994 the Company completed a
recapitalization (the "Recapitalization"), which included the repurchase of
2,303,000 shares of Common Stock from the two principal stockholders of the
Company for $55,412,000; and the sale of 1) 1,698,463 shares of Series A
Preferred Stock for $10,000,000 to J. H. Whitney & Co. and affiliated companies
("Whitney", $9,000,000) and the First Union Corporation ("First Union",
$1,000,0000), with each share being convertible into one share of Common Stock,
2) $17,000,000 principal amount of term loans (the "Term Loan") and a
$10,000,000 revolving credit facility (the "Former Revolving Credit Facility")
due March 31, 1999 at an interest rate of the Base Rate plus 1 1/3% or LIBOR
plus 3% to First Union Bank of North Carolina ("First Union Bank"), 3)
$21,000,000 principal amount of senior subordinated promissory notes (the
"Senior Subordinated Notes") due March 8, 2001 at an interest rate of the
10.101% to Whitney ($19,000,000) and First Union ($2,000,000), and 4) $5,000,000
principal amount of junior subordinated notes (the "Junior Subordinated Notes")
due March 9, 2002 at an interest rate of 10.0% to the Company's two principal
stockholders.
The Company incurred costs of $2,905,000 in connection with the
Recapitalization of which $751,000 was assigned to the issuance of the Preferred
Stock and $2,154,000 to the issuance of the debt. Furthermore, the Company
issued 604,537 shares of Common Stock from its treasury stock to Whitney
(546,962 shares) and First Union (57,575 shares) in connection with the issuance
of the Senior Subordinated Notes. The Company assigned a value of $2,507,000 to
these shares which was recorded as debt discount on the Senior Subordinated
Notes.
On March 15, 1995 the Board of Directors voted to restate the Company's
Amended and Restated Articles of Organization. The effect of the restatement was
(i) to increase to 10,000,000 the number of authorized shares of Common Stock,
to change the par value of the Common Stock to $.01 per share and to create a
new class of preferred stock, $.01 par value.
On May 10, 1995, the Company completed its initial public offering of
2,515,625 shares of its Common Stock, including the exercise of the underwriters
over-allotment option, at a price of $16.00 per share, generating net proceeds
to the Company of $36,507,000. These proceeds, supplemented by borrowings of
$5,000,000 under a new credit facility (the "Credit Facility") with First Union
Bank were used to repay fully the Term Loan ($16,250,000) and the Former
Revolving Credit Facility ($4,226,000) with First Union Bank and the Senior
Subordinated Notes ($21,000,000) issued to Whitney and First Union. The early
repayment of this debt resulted in the Company recording a net loss on the
retirement of debt of $2,460,000 comprised of the write-off of associated
deferred finance costs ($1,772,000), debt discount on the Senior Subordinated
Notes ($2,140,000) and fees associated with the termination of the interest rate
swaps previously required by the former loan agreement ($158,000), offset by a
tax benefit of $1,610,000.
On October 23, 1995, the Company acquired Alta Pacific Corporation, a
workers' compensation case management company with eight offices in the state of
Washington, with revenues of approximately $3,000,000, in a pooling transaction
for 136,150 shares of Common Stock, or approximately $2,900,000 in value, based
upon the market value of the stock on the acquisition date. This acquisition was
not material and the Company restated its opening retained earnings to reflect
the net assets of Alta Pacific Corporation. As such, the results for the year
ended December 31, 1995 include the operating results of Alta Pacific
Corporation subsequent to the acquisition date.
On April 2, 1996, the Company purchased Focus HealthCare Management, Inc.
("Focus") from United HealthCare Corporation for $21,000,000 in cash. Focus,
based in Brentwood, Tennessee, has built and
F-7
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
maintains one of the nation's largest workers' compensation PPO networks, and
last year had annual revenues of approximately $9,900,000. In order to finance
this acquisition, the Company and First Union Bank signed an amendment to expand
the Company's borrowing capacity under the Credit Facility to $40,000,000 under
similar terms and conditions.
The acquisition of Focus has been accounted for by the Company as a purchase
whereby the basis for accounting for Focus' assets and liabilities are based
upon their fair values at the date of acquisition. The preliminary allocation of
the purchase price to the assets and liabilities of Focus is as follows:
Estimated purchase price including fees and expenses: $21,555,000
Purchase price allocated to:
Current assets 1,795,000
Property and equipment 929,000
Other long term assets 5,000
Current liabilities (711,000)
Long-term deferred tax liabilities (324,000)
Long-term capital leases (39,000)
-----------
Net assets acquired 1,655,000
-----------
Excess of cost over fair value of net assets acquired $19,900,000
-----------
The foregoing purchase price allocation is based upon preliminary
information. The final purchase price allocation is contingent upon the final
determination of the fair value of the net assets acquired on April 2, 1996, the
date of acquisition. Based upon presently available information, the Company
does not believe that the final purchase price allocation will materially differ
from the preliminary allocation. The Company is amortizing the excess of cost
over the fair value of net assets acquired (goodwill) over the thirty years on
the straight line method.
(2) ACTUAL, PRO FORMA AND SUPPLEMENTAL PRO FORMA EARNINGS PER SHARE
(A) EARNINGS PER SHARE
Earnings per share for the year ended December 31, 1995 and the nine months
ended September 30, 1995 and 1996 has been calculated based on the weighted
average number of shares of Common Stock and Common Stock equivalents
outstanding during the year. Earnings per share for the year ended December 31,
1993 has not been presented as it is not meaningful.
(B) PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share for the year ended December 31, 1994 has been
calculated as if the Company had been subject to federal and state income taxes
for the period based upon an effective tax rate indicative of the statutory
rates in effect during the period (prior to the Recapitalization on March 8,
1994, the Company elected to be taxed as an S corporation on a cash basis, and
accordingly, was not subject to federal income taxes and certain state income
tax jurisdictions).
(C) SUPPLEMENTAL PRO FORMA EARNINGS PER SHARE--1995 (UNAUDITED)
Supplemental pro forma earnings per share has been calculated as if the
Company repaid the Term Loan, Former Revolving Credit Facility and Senior
Subordinated Notes at the beginning of 1995 utilizing the net proceeds
($36,507,000) from its sale of Common Stock and borrowings under the Credit
Facility
F-8
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($5,000,000). The weighted average number of shares (7,376,000) is the actual
weighted average number of common shares and common share equivalents
outstanding plus the impact of the 2,515,625 shares of Common Stock that were
sold on May 10, 1995. Supplemental pro forma net income and earnings per share
for the year ended December 31, 1995 would have been $6,871,000 or $0.93 per
share.
(D) SUPPLEMENTAL PRO FORMA EARNINGS PER SHARE--1996 (UNAUDITED)
Supplemental pro forma earnings per share for the first nine months of 1996
has been calculated as if (i) the acquisition of Focus had been consummated at
January 1, 1996, (ii) the Company repaid all its outstanding debt at the
beginning of 1996 (including the additional borrowings of $21,000,000 to acquire
Focus) utilizing the net proceeds of $51,840,000 from the sale of 1,200,000
shares of Common Stock in June, 1996 and (iii) the excess proceeds from the sale
of Common Stock, after the repayment of debt, were invested in financial
instruments generating a return of 6.0%. Supplemental pro forma revenue, net
income and earnings per share for the nine months ended September 30, 1996 would
have been $133,090,000 and $7,866,000 and $0.88, respectively. The supplemental
pro forma weighted average number of shares of 8,928,000 is the actual weighted
average number of shares of Common Stock and Common Stock equivalents
outstanding plus the impact of the 1,200,000 shares of Common Stock that were
sold.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
(B) REVENUE RECOGNITION
The Company recognizes revenue primarily as services have been rendered
based upon time and expenses incurred. A certain portion of the Company's
revenues are derived from fee schedule auditing which is based on the number of
charges reviewed, and to a limited extent, based on a percentage of savings
achieved for the Company's customers. Accounts receivable at December 31, 1994,
December 31, 1995 and March 31, 1996 include $3,734,000, $4,350,000 and
$4,350,000, respectively, of unbilled accounts receivable relating to services
rendered prior to the period-end but not invoiced until after the period-end.
(C) DEPRECIATION
The Company provides for depreciation on property and equipment using
straight-line and accelerated methods by charges to operations in amounts that
allocate the cost of depreciable assets over their estimated lives as follows:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- ------------------------------------------------------------------ --------------------------
Furniture and fixtures 7 Years
Office equipment 3-5 Years
Automobiles 5 Years
Leasehold improvements The shorter of the
life of lease or asset
life
(D) DEFERRED FINANCE COSTS
Costs of $2,154,000 associated with the debt issued in connection with the
Recapitalization was allocated to each debt instrument and was being amortized
as interest expense over the life of the debt instruments
F-9
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
with lives ranging from five to six years. All deferred finance costs were
written off as a result of the early retirement of debt in connection with the
sale of Common Stock on May 10, 1995.
(E) INCOME TAXES
Prior to the Recapitalization, the Company had elected "S" corporation
status under Section 1362 of the Internal Revenue Code. Accordingly, the Company
was not liable for federal income taxes as income was taxed directly to the
Company's stockholders. However, certain states in which the Company conducts
its operations did not recognize "S" corporation status. As a result, the
Company had provided for state income tax for these states.
In connection with the Recapitalization, the Company was required to change
from an "S" corporation to a "C" corporation and to report income on an accrual
basis for tax purposes as opposed to a cash basis. This change resulted in the
Company recording an incremental tax provision of $3,772,000.
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FASB 109"), for the year ended December 31, 1993
which required a change from the deferred method to the asset and liability
method of accounting for income taxes. Under the asset and liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory rates applicable to future years to
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. Under FASB 109, the effect on deferred taxes
of a change in tax rates is recognized as income in the period that includes the
enactment date.
The adoption of FASB 109 did not impact the Company's statement of
operations for the year ended December 31, 1993 and there was no cumulative
effect as of the date of adoption.
(F) FOREIGN CURRENCY TRANSLATION
All assets and liabilities of the Company's Canadian office are translated
at the year-end exchange rate while revenues and expenses are translated at the
average exchange rate for the year.
(G) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(4) REVOLVING CREDIT FACILITIES
(A) CREDIT FACILITY
On April 28, 1995, the Company entered into the $25,000,000 Credit Facility
with First Union Bank. On March 29, 1996, the Company and First Union Bank
signed an amendment to expand the Company's borrowing capacity under the Credit
Facility to $40,000,000 under similar terms and conditions in order to finance
the acquisition of Focus. Interest on borrowings under the Credit Facility will
be payable, at the Company's option, at the First Union Bank's prime rate plus
an additional percentage of up to 0.375%, or LIBOR plus an additional percentage
of up to 1.875%, depending on certain financial criteria. At December 31, 1995,
the Company had borrowings under the Credit Facility of $4,300,000 at an average
rate of interest of 7.361%.
F-10
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Credit Facility contains customary covenants, including, without
limitation, restrictions on the incurrence of indebtedness, the sale of assets,
certain mergers and acquisitions, the payment of dividends on the Company's
capital stock, the repurchase or redemption of capital stock, transactions with
affiliates, investments, capital expenditures and changes in control of the
Company. Under the Credit Facility, the Company is also required to satisfy
certain financial covenants, such as cash flow, capital expenditures and other
financial ratio tests including current ratios and interest expense coverage
ratios. The Company was in compliance with all such covenants during 1995. The
ability of the Company to meet its debt service requirements and to comply with
such covenants is dependent upon the Company's future performance, which is
subject to financial, economic, competitive and other factors affecting the
Company, some of which are beyond its control. The entire $40,000,000 of
revolving credit is available for borrowing by the Company provided that the
Company is prohibited from borrowing under the Credit Facility in order to
finance the acquisition of other businesses unless the Company will have,
immediately following any such acquisition, at least $5,000,000 available for
additional working capital borrowings under the Credit Facility. The Company's
obligations under the Credit Facility are secured by a first priority security
interest in substantially all of the Company's properties and assets.
The Company is required to pay First Union Bank a facility fee of 0.25% to
0.375% per annum, depending on certain financial criteria, on the unused portion
of the Credit Facility as well as a quarterly agent fee of $3,750, payable in
advance.
(B) FORMER REVOLVING CREDIT FACILITY
As part of the Recapitalization, the Company obtained the Former Revolving
Credit Facility of $10,000,000 and the Term Loan of $17,000,000 (see below)
through First Union Bank pursuant to a loan agreement (the "Former Loan
Agreement"). The Former Revolving Credit Facility permitted borrowings by the
Company of up to a maximum of $10,000,000, subject to certain borrowing base
requirements, until maturity on March 31, 1999 at an interest a rate of the Base
Rate plus 1 1/2% or LIBOR plus 3% (9.375% at December 31, 1994). At December 31,
1994, the Company had borrowings of $4,716,000.
Under the former Loan Agreement, the Company was required to satisfy certain
financial covenants, such as cash flow, capital expenditures and other financial
ratio tests including current ratios and interest expense coverage ratios. The
Company complied with or obtained waivers relative to the financial covenants
through March 31, 1995.
The Company was required to pay First Union Bank a facility fee of 0.5% per
annum on the unused portion of the Former Revolving Credit Facility, quarterly
in arrears, as well as a yearly agent fee of $25,000.
For the years ended December 31, 1993, 1994 and 1995, the weighted average
borrowings under these revolving credit facilities were $250,000, $3,404,000 and
$4,903,000, respectively and the weighted average interest rates were 6.43%,
7.39% and 8.55%, respectively.
F-11
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- --------------
Term Loan, less current portion of $2,500,000.............................. $ 13,750 $ -- $ --
Senior Subordinated Notes, net of unamortized debt discount of
$2,250,000................................................................ 18,750 -- --
Junior Subordinated Notes, less current portion of $5,000,000.............. 5,000 -- --
Capital Lease Obligations, less current portion of $71,000................. -- -- 6
--------- --------- -------
$ 37,500 $ -- $ 6
--------- --------- -------
--------- --------- -------
(A) TERM LOAN
Pursuant to the Former Loan Agreement with First Union Bank, the Company
obtained a $17,000,000 Term Loan due March 31, 1999 at an interest rate of the
Base Rate plus 1 1/2% or LIBOR plus 3% (9.375% at December 31, 1994). The Term
Loan required quarterly principal payments of $250,000 beginning June 30, 1994
through March 31, 1995, $750,000 beginning June 30, 1995 through March 31, 1997,
$1,000,000 beginning June 30, 1997 through December 31, 1998 and a final payment
of $3,000,000 on March 31, 1999. The Term Loan was repaid in full on May 10,
1995.
As required by the Former Loan Agreement, the Company entered into an
interest rate swap that limited LIBOR to 8% on $8,500,000 of Term Loan
borrowings through June 14, 1997. In order to mitigate the up front cost of this
interest rate swap, the Company entered into another interest rate swap, which
also matured on June 14, 1997. This swap set the LIBOR floor on $3,250,000 of
these borrowings at 8%. These agreements resulted in the Company recording
additional interest expense of approximately $53,000 and $13,000 for the years
ended December 31, 1994 and 1995, respectively. These financial instruments were
terminated at a cost of $158,000 during the second quarter of 1995 due to the
repayment of the debt and this cost is included in Loss on Retirement of Debt.
(B) SENIOR SUBORDINATED NOTES
The Company issued $21,000,000, principal amount, of Senior Subordinated
Notes due March 8, 2001 at an interest rate of the 10.101% to Whitney
($19,000,000) and First Union ($2,000,000). Furthermore, the Company issued
604,538 shares of its treasury stock to Whitney (546,963 shares) and First Union
(57,575 shares) in connection with the issuance of the Senior Subordinated
Notes, to which the Company assigned a value of $2,507,000 at the date of
issuance, which was reflected as debt discount on the Senior Subordinated Notes
and was being amortized as interest expense over the life of the debt.The Senior
Subordinated Notes were repaid in full on May 10, 1995 and the associated debt
discount was written off and was included in Loss on Retirement of Debt.
Similar to the Former Loan Agreement, the Senior Subordinated Notes
agreement also required the Company to satisfy certain financial covenants. The
Company complied with or obtained waivers relative to such financial covenants.
(C) JUNIOR SUBORDINATED NOTES
In connection with the repurchase of 2,303,000 shares of Common Stock from
the two principal stockholders of the Company as part of the Recapitalization,
the Company issued $5,000,000, principal
F-12
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
amount, of Junior Subordinated Notes due March 9, 2002 at an interest rate of
10.0%. On January 16, 1996 the Company retired the 10% Junior Subordinated Notes
utilizing borrowings under the Credit Facility.
(6) INCOME TAXES
The provision for income taxes consisted of the following for the years
ended December 31, 1993, 1994 and 1995:
1993 1994 1995
---------- ------------ ------------
Current:
Federal............................................ $ -- $ 1,777,000 $ 1,658,000
State.............................................. 111,000 767,000 498,000
---------- ------------ ------------
111,000 2,544,000 2,156,000
Deferred:
Federal............................................ -- 2,822,000 166,000
State.............................................. 244,000 (64,000) 42,000
---------- ------------ ------------
244,000 2,758,000 208,000
---------- ------------ ------------
Total............................................ $ 355,000 $ 5,302,000 $ 2,364,000
---------- ------------ ------------
---------- ------------ ------------
Significant items making up deferred tax liabilities and deferred tax assets
were as follows at December 31:
1994 1995
------------ ------------
Deferred Tax Assets:
Allowance for doubtful accounts................................. $ 152,000 $ 169,000
Accrued expenses................................................ 564,000 452,000
------------ ------------
$ 716,000 $ 621,000
------------ ------------
------------ ------------
Deferred Tax liabilities:
Book to tax depreciation........................................ $ 52,000 $ 180,000
Change in tax status............................................ 4,302,000 2,497,000
------------ ------------
$ 4,354,000 $ 2,677,000
------------ ------------
------------ ------------
A reconciliation of the federal statutory rate to the Company's effective
tax rate for the years ended December 31, 1994 and 1995 is as follows:
1994 % 1995 %
------------ --------- ------------ ---------
Tax provision at federal statutory rate................................ $ 1,560,000 34.0% $ 1,994,000 34.0%
Income prior to Recapitalization, taxes as an S corporation............ (352,000) (7.7) -- --
State taxes, net of federal income tax benefit......................... 228,000 5.0 356,000 6.1
Items not deductible for tax purposes and other items.................. 94,000 2.0 14,000 0.2
------------ --- ------------ ---
$ 1,530,000 33.3% $ 2,364,000 40.3%
------------ --- ------------ ---
------------ --- ------------ ---
Prior to the Recapitalization, the Company was an S corporation under
Section 1362 of the Internal Revenue Code. The tax provision in prior years
resulted from certain states that do not recognize S corporation status.
F-13
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In connection with the Recapitalization, the Company was required to change
from an S corporation to a C corporation and to report income on an accrual
basis for tax purposes as opposed to a cash basis. This change resulted in the
Company recording an incremental tax provision of $3,772,000.
(7) STOCKHOLDERS' EQUITY
(A) PREFERRED STOCK
Pursuant to the Articles of Organization, the Board of Directors is
authorized, subject to any limitations prescribed by law, without further
stockholder approval, to issue shares of Preferred Stock in one or more classes
or one or more series within each class. Each such series of Preferred Stock
shall have such rights, preferences, privileges and restrictions, including
voting rights, dividends rights, conversion rights and redemption privileges and
liquidation preferences, as shall be determined by the Board of Directors.
The Company has granted the Board of Directors authority to designate and
issue Preferred Stock and to determine its rights and preferences to eliminate
delays associated with a stockholder vote on specific issues. The issuances of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of the outstanding voting stock of the
Company.
(B) CONVERTIBLE PREFERRED STOCK
Each share of the Series A Convertible Preferred Stock could have been
converted by the holder into a share of Class A Common Stock subject to certain
antidilution adjustments. The holders of the Series A Convertible Preferred
Stock were entitled to receive dividends or distributions on an as-converted
basis equal to amounts declared by the Company on its Common Stock. The holders
of Series A Convertible Preferred Stock were entitled to vote with the holders
of Class A Common Stock on an as converted basis.
The Company could require the conversion of all outstanding Series A
Convertible Preferred Stock in connection with a qualified initial public
offering. The Company exercised this option in connection with the sale of
Common Stock on May 10, 1995 and subsequently canceled, retired and eliminated
all shares of Series A Convertible Preferred Stock from the Company's authorized
shares.
(C) CLASS A COMMON STOCK
All shares of Class A Common Stock were converted into $.01 par value Common
Stock in connection with the sale of Common Stock on May 10, 1995 and the
Company subsequently canceled, retired and eliminated all shares of Class A
Common Stock from the Company's authorized shares.
(8) COMMITMENTS
The Company leases certain office facilities and office equipment from
related parties under leases that expire on various dates through December 31,
2003. Certain leases require the Company to pay increases in operating costs and
real estate taxes. In addition, the Company leases certain office facilities
from unrelated parties under operating lease agreements that expire on various
dates to July 31, 2000.
Certain motor vehicles are leased from unrelated parties under
noncancellable operating leases that expire on various dates through December
31, 1997. During 1993, the Company purchased from a related party, office
equipment that had been leased. The purchase price was the estimated fair value
of the equipment.
F-14
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule of rent expense by major category for the years
ended December 31:
1993 1994 1995
------------ ------------ ------------
Facilities--related parties......................... $ 1,310,000 $ 714,000 $ 726,000
Facilities--unrelated parties....................... 2,121,000 2,673,000 3,199,000
------------ ------------ ------------
3,431,000 3,387,000 3,925,000
Office equipment--unrelated parties................. 121,000 150,000 190,000
Computer equipment--related parties................. 369,000 -- --
Automobiles--unrelated parties...................... 1,798,000 2,181,000 2,638,000
------------ ------------ ------------
Total rent expense................................ $ 5,719,000 $ 5,718,000 $ 6,753,000
------------ ------------ ------------
------------ ------------ ------------
The following is a schedule of future minimum lease payments under
noncancellable operating leases for the years ending December 31:
RELATED UNRELATED
YEAR PARTIES PARTIES TOTAL
- ------------------------------------------------- ------------ ------------- -------------
1996........................................... $ 726,000 $ 4,872,000 $ 5,598,000
1997........................................... 726,000 3,559,000 4,285,000
1998........................................... 726,000 1,877,000 2,603,000
1999........................................... 726,000 1,022,000 1,748,000
2000........................................... 726,000 537,000 1,263,000
Thereafter....................................... 2,179,000 227,000 2,406,000
------------ ------------- -------------
$ 5,809,000 $ 12,094,000 $ 17,903,000
------------ ------------- -------------
------------ ------------- -------------
(9) EMPLOYEE RETIREMENT PLANS AND SALARY CONTINUATION PROGRAMS
(A) PROFIT SHARING PLAN
All employees who were at least 21 years of age and had completed 12 months
of service in which they worked at least 1,000 hours were eligible to
participate in the Profit Sharing Plan. The Company made discretionary
contributions to this plan each year out of its profits. Qualified employees
were entitled to receive 100% of the contributions upon retirement, death or
disability. The amount contributed to the plan was determined by the Company's
Board of Directors, and the participants could not contribute directly to the
plan.
The Company elected not to contribute to the Profit Sharing Plan for the
year ended December 31, 1994 and made contributions of $144,000 for the year
ended December 31, 1993. This plan was terminated and contributions made to the
plan were consolidated and combined with the 401(k) Plan.
(B) 401(K) PLAN
The Company has a defined contribution plan (the "401(k) Plan") pursuant to
which employees who are at least 21 years of age and who have completed at least
six months of service are eligible to participate. Participants in the 401(k)
Plan may not contribute more than the lesser of a specified statutory amount or
15% of his or her pre-tax total compensation. The 401(k) Plan permits, but does
not require, additional contributions to the 401(k) Plan by the Company.
Employees are 100% vested in their own contributions while Company contributions
vest 20% after three years and vest an additional 20% each year thereafter.
F-15
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Under the 401(k) Plan, the Company has the option of matching up to 50% of
participants' pretax contributions up to a maximum of 6% of compensation. For
the years ended December 31, 1993, 1994 and 1995, respectively, the Board of
Directors has elected to match 50% of 4% of compensation.
The company made net contributions to this plan of $439,000, $518,000 and
$581,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
(C) ALTA PACIFIC 401(K) PROFIT SHARING PLAN
The Company's subsidiary, Alta Pacific Corporation has a defined
contribution plan (the "Alta Pacific 401(k) Profit Sharing Plan") pursuant to
which employees of Alta Pacific Corporation who are at least 21 years of age and
who have completed at least six months of service are eligible to participate.
Participants in the Alta Pacific 401(k) Plan may not contribute more than the
specific statutory amount. The Alta Pacific Profit Sharing 401(k) Plan permits,
but does not require, additional contributions to the Alta Pacific 401(k) Profit
Sharing Plan by Alta Pacific Corporation. Alta Pacific Corporation does not make
contributions for any employees unless they have worked at least 1,000 hours.
Employees are 100% vested in their own contributions while contributions by Alta
Pacific Corporation vest 20% after two years and 20% each year thereafter.
Alta Pacific Corporation made contributions to this plan of $93,000, $64,000
and $73,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
It is expected that this plan will be terminated and contributions made to the
plan will be consolidated and combined with the 401(k) Plan.
(D) EMPLOYMENT AGREEMENTS
Lois E. Silverman and Donald J. Larson are each party to separate employment
agreements with the Company, dated as of March 8, 1994 (the "Employment
Agreements"). The Employment Agreements have initial terms of five years unless
earlier terminated as provided therein; Ms. Silverman may terminate her
Employment Agreement as of March 8, 1997, if notice is provided one year prior
to such date. The terms of the Employment Agreements may be automatically
renewed for additional one year terms, subject to limitations contained therein.
The Company may terminate Ms. Silverman and/or Mr. Larson for cause, as defined
therein, and Ms. Silverman and Mr. Larson may terminate their respective
Employment Agreements for Good Reason, as defined therein. The Employment
Agreements contain provisions pursuant to which Ms. Silverman and Mr. Larson
agree not to disclose any proprietary information of the Company and also agree
not to compete with the Company (in the U.S., Canada or any other country in
which the Company does business, or take steps to do business before termination
of their employment), or solicit its employees, for the term of the Employment
Agreements and up to two years after termination of employment, for any reason.
Three other executive officers have been afforded continuation of salary
protection for one year if their employment with the Company is terminated
without cause.
(10) STOCK PLANS
(A) 1994 NON-QUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The Non-Employee Director Plan (the "Director Plan") provides for the grant
of options to acquire up to 94,000 shares of Common Stock, in such amounts, on
such terms and to such non-employee Directors as the administrators of the
Director Plan may select, in accordance with the terms of the Director Plan.
Options granted under the Director Plan are not intended to qualify as Incentive
Stock Options under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"). The Director Plan is administered by a committee of the Board of
Directors of the Company, consisting of two or more members appointed by the
F-16
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Board of Directors of the Company, which selects the optionees and determines
the number of shares, vesting schedule and duration of each option (not to
exceed 10 years). Options granted under the Director Plan must have an exercise
price equal to the fair value of the Common Stock of the Company, as determined
by such committee, on the date of grant. As of December 31, 1995, options to
purchase 47,000 shares of Common Stock at an exercise price of $5.89 per share
had been granted under the Director Plan, all of which were outstanding and
7,833 of which were exercisable.
Options granted under the Director Plan automatically vest no later than 10
years from the date of grant; however, pursuant to separate option agreements
between the Company and its optionees under the Director Plan, the options
granted to date become vested ratably over a three year period on the
anniversary of the grant date. Upon the sale of all stock or assets of the
Company, the options fully vest and become exercisable immediately.
(B) 1994 TIME ACCELERATED RESTRICTED STOCK OPTION PLAN
The Company's 1994 Time Accelerated Restricted Stock Option Plan (the "1994
Stock Option Plan") provides for the grant of options to acquire up to 376,000
shares of Common Stock, in such amounts, on such terms and to such officers and
other key employees as the administrators of the 1994 Stock Option Plan may
select. Options granted under the 1994 Stock Option Plan are not intended to
qualify as Incentive Stock Options under the Code. The 1994 Stock Option Plan is
administered by the Board of Directors of the Company and provides that all of
the options shall have a per share exercise price equal to the fair market value
of the Common Stock on the date of such grant, as determined by the Board of
Directors. At December 31, 1995, options to purchase 338,200 shares of Common
Stock at an average exercise price of $10.57 per share were outstanding, of
which 109,940 were exercisable.
Options granted under the 1994 Stock Option Plan become fully exercisable no
later than the tenth anniversary of the date of grant, and no option may have a
term in excess of ten years and six months from the date of grant. The stock
option agreements pursuant to which options have been granted under the 1994
Stock Option Plan provide for accelerated vesting each year of 10% to 20% of the
shares subject to the option in the event certain financial tests are met,
commencing with respect to the fiscal year ended December 31, 1994. The Board of
Directors may accelerate all options upon a sale or conveyance of all or
substantially all of the assets, or a change in control of the Company, which
includes, among other events, the acquisition by any person who owned less than
10% of the outstanding Common Stock becoming the beneficial owner of at least
51% of the Common Stock. All recipients of options under the 1994 Stock Option
Plan to date were required to execute a Non-Competition and Non-Disclosure
Agreement as a condition to any such option grant.
F-17
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SUMMARY OF STOCK OPTION PLAN ACTIVITY
OUTSTANDING OPTIONS
-------------------------
PRICE PER
RESERVED SHARES NUMBER SHARE
---------------- --------- --------------
Balance December 31, 1993................................. -- -- $ --
Reserved................................................ 470,000 -- --
Granted................................................. -- 251,450 $ 5.89
Exercised............................................... -- -- --
Canceled................................................ -- -- --
------- --------- --------------
Balance December 31, 1994................................. 470,000 251,450 $ 5.89
Reserved................................................ -- -- --
Granted................................................. -- 145,500 $ 5.89-$22.75
Exercised............................................... -- (2,350) $ 5.89
Canceled................................................ -- (9,400) $ 5.89
------- --------- --------------
Balance December 31, 1995................................. 470,000 385,200 $ 5.89-$22.75
------- --------- --------------
------- --------- --------------
(C) 1995 EMPLOYEE STOCK PURCHASE PLAN
The 1995 Employee Stock Purchase Plan (the "1995 Purchase Plan") for
employees of the Company authorizes the issuance of a maximum of 235,000 shares
of Common Stock pursuant to the exercise of nontransferable options granted to
participating employees.
The 1995 Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees of the Company whose customary employment is
20 hours or more per week and have been employed by the Company for at least six
months are eligible to participate in the 1995 Purchase Plan. Employees who own
5% or more of the Company's stock and directors who are not employees of the
Company may not participate in the 1995 Purchase Plan. To participate in the
1995 Purchase Plan, an employee must authorize the Company in writing to deduct
an amount (not less than 1% nor more than 10% of a participant's base
compensation and in any event not more than $12,500) from his or her pay during
six month periods commencing on January 1 and July 1 of each year (each a
"Purchase Period"). On the first day of each Purchase Period, the Company grants
to each participating employee an option to purchase up to 500 shares of Common
Stock. The exercise price for shares purchased under the 1995 Purchase Plan for
each Purchase Period is the lesser of 85% of the fair market value of the Common
Stock on the first or last business day of the Purchase Period. The fair market
value will be the closing selling price of the Common Stock as quoted. If an
employee is not a participant on the last day of the Purchase Period, such
employee is not entitled to purchase any shares during such Purchase Period, and
the amount of his or her accumulated payroll deduction will be refunded to the
employee. An employee's rights under the 1995 Purchase Plan terminate upon his
or her voluntary withdrawal from the plan at any time or upon termination of
employment.
Common Stock for the 1995 Purchase Plan will be made available either from
authorized but unissued shares of Common Stock or from shares of Common Stock
reacquired by the Company, including shares repurchased in the open market. The
Company issued 18,299 shares of Common Stock at a price of $18.73 per share for
the first Purchase Period ended December 31, 1995.
The Financial Accounting Standards Board ("FASB") issued a new standard on
"Accounting for Stock-Based Compensation". The Company will adopt the disclosure
requirements of the new standard effective
F-18
CRA MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
for the fiscal year ended December 31, 1996. This standard establishes the
financial accounting and disclosure requirements for stock-based employee
compensation plans. These plans include all arrangements by which an employee
receives shares of stock or other equity instruments of the employer or the
employer incurs liabilities to employees in amounts based upon the price of the
employer's stock such as the stock option and stock purchase plans described
above. At a minimum, the new standard requires the Company to disclose the pro
forma effect, if any, that would have been recognized in the income statement if
the fair value based method of accounting for the stock-based employee
compensation plans had been used. The Company is completing its analysis of the
impact of this new accounting standard and has not yet fully quantified the
impact of this standard.
(11) RELATED PARTY TRANSACTIONS
The Company had the following related party transactions during the years
ended December 31, 1993, 1994 and 1995 (also see Note 4, "Revolving Credit
Facilities," Note 5, "Long-term Debt" and Note 8, "Commitments"):
(A) COLONIAL REALTY TRUST
The Company made rental payments to Colonial Realty Trust of $1,310,000,
$714,000 and $726,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. Colonial Realty Trust is a real estate company owned by two
principal stockholders of the Company.
(B) COMPUTER EQUIPMENT SYSTEMS
The Company made computer rental payments to Computer Equipment Systems of
$369,000 for the year ended December 31, 1993 while the Company made no payments
in 1994 and 1995. Computer Equipment Systems was a computer rental company,
which has since been liquidated, owned by two principal stockholders of the
Company.
(C) WHITNEY
Whitney was paid an equity placement fee of $500,000 in connection with the
issuance of the Series A Convertible Preferred Stock, a debt placement fee of
$630,000 in connection with the issuance of the Senior Subordinated Notes and
management fees of $100,000 for the year ended December 31, 1994. The Company
also reimburses Whitney for reasonable out-of-pocket expenses incurred in
connection with attending to the Company's business.
(D) FIRST UNION BANK
The Company paid First Union Bank a commitment fee of $405,000 which was
capitalized as Deferred Finance Costs and was being amortized over the life of
the debt and an up front agent fee of $50,000 at the closing of the loans on
March 7, 1994. The Company also paid First Union Bank a commitment fee of
$63,000 in connection with the establishment of the Credit Facility and an
amendment fee of $88,5000 associated with the expansion of the Credit Facility's
borrowing capacity to $40,000,000.
(12) LEGAL MATTERS
The Company is party to certain claims and litigation initiated in the
ordinary course of business. The Company is not involved in any legal proceeding
that it believes will result, individually or in the aggregate, in a material
adverse effect upon its financial condition or results of operations.
F-19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Focus Healthcare Management, Inc.:
We have audited the accompanying balance sheets of Focus Healthcare
Management, Inc. ("Focus") as of December 31, 1994 and 1995, and the related
statements of operations, shareholder's equity (deficit) and cash flows for each
of the two years in the period ended December 31, 1995. We have also audited the
statements of operations, shareholder's equity (deficit) and cash flows of Focus
Healthcare Management, Inc. (the Predecessor) for the year ended December 31,
1993. These financial statements are the responsibility of the Focus'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Focus as of December 31,
1994 and 1995, and the results of the operations of Focus and the Predecessor
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 27, 1996
F-20
FOCUS HEALTHCARE MANAGEMENT, INC.
BALANCE SHEETS
DECEMBER 31,
----------------------------
1994 1995
------------- ------------- MARCH 31,
1996
-------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 58,000 $ 62,000 $ 16,000
Accounts receivable, net of allowance for doubtful accounts of
$493,000, $388,000 and $388,000 in December 31, 1994 and 1995,
and March 31, 1996, respectively................................ 2,465,000 1,464,000 1,745,000
Prepaid expenses and other current assets......................... 134,000 66,000 34,000
------------- ------------- -------------
Total current assets........................................ 2,657,000 1,592,000 1,795,000
PROPERTY AND EQUIPMENT, NET......................................... 2,139,000 1,067,000 929,000
OTHER ASSETS........................................................ 6,000 5,000 5,000
GOODWILL, NET....................................................... 29,275,000 28,526,000 28,339,000
------------- ------------- -------------
Total assets................................................ $ 34,077,000 $ 31,190,000 $ 31,068,000
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations...................... $ 84,000 $ 70,000 $ 69,000
Accounts payable.................................................. 375,000 240,000 310,000
Accrued expenses.................................................. 1,206,000 137,000 176,000
Accrued taxes..................................................... 30,000 18,000 2,000
Other current liabilities......................................... 267,000 139,000 154,000
Intercompany payable, net......................................... 3,165,000 1,488,000 1,479,000
------------- ------------- -------------
Total current liabilities....................................... 5,127,000 2,092,000 2,190,000
------------- ------------- -------------
CAPITAL LEASE OBLIGATIONS........................................... 126,000 55,000 39,000
DEFERRED TAXES...................................................... -- 324,000 324,000
COMMITMENTS AND CONTINGENCIES (Notes 3 and 5).......................
SHAREHOLDER'S EQUITY:
Parent Company investment......................................... 30,965,000 30,965,000 30,965,000
Accumulated deficit............................................... (2,141,000) (2,246,000) (2,450,000)
------------- ------------- -------------
Total shareholder's equity.................................. 28,824,000 28,719,000 28,515,000
------------- ------------- -------------
Total liabilities and shareholder's equity.................. $ 34,077,000 $ 31,190,000 $ 31,068,000
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-21
FOCUS HEALTHCARE MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
(PREDECESSOR) (FOCUS)
-------------- -------------------------------------------
FOR THE THREE
FOR THE YEARS ENDED DECEMBER 31, MONTHS ENDED
-------------------------------------------
1993 1994 1995
-------------- ------------- ------------ MARCH 31,
1996
--------------
(UNAUDITED)
REVENUES:
Case management................................... $ 7,625,000 $ 4,740,000 $ -- $ --
Network access fees............................... 10,207,000 9,367,000 9,295,000 2,227,000
Fee schedule audit................................ 1,537,000 856,000 613,000 100,000
-------------- ------------- ------------ --------------
Total revenues.............................. 19,369,000 14,963,000 9,908,000 2,327,000
-------------- ------------- ------------ --------------
COSTS AND EXPENSES:
Cost of services.................................. 18,796,000 14,811,000 7,347,000 1,926,000
General and administrative........................ 2,271,000 3,124,000 2,269,000 605,000
-------------- ------------- ------------ --------------
Total costs and expenses.................... 21,067,000 17,935,000 9,616,000 2,531,000
-------------- ------------- ------------ --------------
(LOSS) INCOME FROM OPERATIONS....................... (1,698,000) (2,972,000) 292,000 (204,000)
INTEREST EXPENSE (INCOME) NET....................... 95,000 (112,000) 2,000 --
-------------- ------------- ------------ --------------
(LOSS) INCOME BEFORE PROVISION INCOME TAXES......... (1,793,000) (2,860,000) 290,000 (204,000)
PROVISION FOR INCOME TAXES.......................... 100,000 19,000 395,000 --
-------------- ------------- ------------ --------------
NET LOSS............................................ $ (1,893,000) $ (2,879,000) $ (105,000) $ (204,000)
-------------- ------------- ------------ --------------
-------------- ------------- ------------ --------------
The accompanying notes are an integral part of these financial statements.
F-22
FOCUS HEALTHCARE MANAGEMENT, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
REDEEMABLE COMMON STOCK ADDITIONAL
PREFERRED ----------------------- PAID-IN ACCUMULATED TREASURY
STOCK SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
------------- ---------- ----------- ------------ ------------- ---------- ------------
BALANCE, DECEMBER 31,
1992................... $ 10,722,000 3,667,000 $ 2,000 $ 617,000 $(10,285,000) $ (432,000) $ 624,000
Exercise of stock
options.............. -- 68,000 -- 8,000 -- -- 8,000
Accretion of preferred
stock to redemption
value................ 1,264,000 -- -- -- (1,264,000) -- --
Net loss............... -- -- -- -- (1,893,000) -- (1,893,000)
------------- ---------- ----------- ------------ ------------- ---------- ------------
BALANCE DECEMBER 31,
1993................... 11,986,000 3,735,000 2,000 625,000 (13,442,000) (432,000) (1,261,000)
Exercise of stock
options.............. -- 198,000 -- 34,000 -- -- 34,000
Elimination of
Predecessor
stockholder's
equity............... (11,986,000) (3,933,000) (2,000) (659,000) 14,180,000 432,000 1,965,000
Acquisition by United
and push-down of
purchase price....... -- -- -- 30,965,000 -- -- 30,965,000
Net loss............... -- -- -- -- (2,879,000) -- (2,879,000)
------------- ---------- ----------- ------------ ------------- ---------- ------------
BALANCE DECEMBER 31,
1994................... -- -- -- 30,965,000 (2,141,000) -- 28,824,000
Net Loss............... -- -- -- -- (105,000) -- (105,000)
------------- ---------- ----------- ------------ ------------- ---------- ------------
BALANCE DECEMBER 31,
1995................... -- -- -- 30,965,000 (2,246,000) -- 28,719,000
Net loss for the three
months ended March
31, 1996
(unaudited).......... -- -- -- -- (204,000) -- (204,000)
------------- ---------- ----------- ------------ ------------- ---------- ------------
BALANCE, MARCH 31, 1996.. $ -- -- $ -- $ 30,965,000 $(2,450,000) $ -- $ 28,515,000
------------- ---------- ----------- ------------ ------------- ---------- ------------
------------- ---------- ----------- ------------ ------------- ---------- ------------
The accompanying notes are an integral part of these financial statements.
F-23
FOCUS HEALTHCARE MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
(PREDECESSOR) (FOCUS)
-------------- ------------------------------------------
FOR THE THREE
FOR THE YEARS ENDED DECEMBER 31, MONTHS ENDED
------------------------------------------
1993 1994 1995
-------------- ------------ ------------ MARCH 31,
1996
--------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $ (1,893,000) $ (2,879,000) $ (105,000) $ (204,000)
Adjustment to reconcile net loss to net cash
provided by operating activities--
Deprecation and amortization...................... 1,038,000 2,211,000 1,778,000 397,000
Loss on sale of property and equipment............ (5,000) -- -- --
Transfers of property and equipment (to) from
United, net..................................... -- (211,000) 203,000 --
Deferred taxes.................................... -- -- 324,000 --
Changes in assets and liabilities--
Decrease (increase) in accounts receivable...... 457,000 (250,000) 1,001,000 (281,000)
(Increase) decrease in prepaid expenses and
other current assets.......................... (176,000) 152,000 68,000 34,000
Decrease in other assets........................ 486,000 5,000 1,000 --
Increase (decrease) in accounts payable......... 1,387,000 (1,563,000) (134,000) 70,000
Decrease in accrued expenses.................... (603,000) (617,000) (1,082,000) 21,000
Increase (decrease) in other current
liabilities................................... 168,000 99,000 (128,000) 15,000
Increase (decrease) in intercompany payable..... -- 3,165,000 (1,677,000) (9,000)
-------------- ------------ ------------ --------------
Net cash provided by operating activities..... 859,000 112,000 249,000 43,000
-------------- ------------ ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................. (2,174,000) (487,000) (161,000) (72,000)
-------------- ------------ ------------ --------------
Net cash used in investing activities......... (2,174,000) (487,000) (161,000) (72,000)
-------------- ------------ ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options........................... 8,000 34,000 -- --
Acquisition of Focus by United...................... -- 3,294,000 -- --
Proceeds (payment) of long-term debt, net........... 1,315,000 (2,867,000) -- --
Payment of capital lease obligations................ (248,000) (29,000) (84,000) (17,000)
-------------- ------------ ------------ --------------
Net cash provided by (used in) financing
activities.................................. 1,075,000 432,000 (84,000) (17,000)
-------------- ------------ ------------ --------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...... (240,000) 57,000 4,000 (46,000)
-------------- ------------ ------------ --------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 241,000 1,000 58,000 62,000
-------------- ------------ ------------ --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $ 1,000 $ 58,000 $ 62,000 $ 16,000
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest............ $ 195,000 $ 47,000 $ 16,000 $ --
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
Cash paid during the period for taxes............... $ 205,000 $ 747,000 $ 74,000 $ 16,000
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Accretion of redeemable preferred stock............. $ 1,264,000 $ -- $ -- $ --
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
Capital lease assets acquired and obligations
incurred.......................................... $ 13,000 $ -- $ -- $ --
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
The accompanying notes are an integral part of these financial statements.
F-24
FOCUS HEALTHCARE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Focus Healthcare Management, Inc. ("Focus") was incorporated in the State of
Tennessee in February 1986 to develop and operate managed care programs related
to workers' compensation and to provide administrative services for
self-insuring employers, insurance carriers and others.
On December 20, 1993, Focus was acquired pursuant to an Agreement and Plan
of Acquisition (the Agreement) with UHC Management, Inc., an affiliate of United
HealthCare Corporation (collectively, "United"). Under the terms of the
Agreement, United purchased all of the stock of Focus for $28,000,000 in cash
and the assumption of $2,578,000 in debt. For accounting purposes, the
transaction was assumed to be effective January 1, 1994. In connection
therewith, United implemented a restructuring that consolidated Focus'
operations and resulted in the exit from the case management services business.
The charge for restructuring has been reflected as an increase in goodwill
associated with the transaction.
(A) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of highly liquid investments with
original maturities of three months or less.
(B) REVENUES
Focus recognizes revenue primarily as services are rendered based on the
number of charges reviewed or the percentage of savings achieved for Focus'
customers. Accounts receivable at December 31, 1994 and 1995 include $1,321,000
and $536,000, respectively, of unbilled accounts receivable relating to services
rendered prior to the period but not invoiced until after year end.
(C) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets. Amortization
of capital leases is included in depreciation and amortization expense. The
estimated useful lives of the depreciable assets are as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- ------------------------------------------------------------------------ --------------------
Software................................................................ 3 years
Office equipment........................................................ 3-5 years
Furniture and fixtures.................................................. 5-7 years
Equipment under capital leases.......................................... The shorter of the
life of lease or
asset life
(D) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of income and expenses during the reporting
periods. Actual results could differ from these estimates.
F-25
FOCUS HEALTHCARE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(E) CONCENTRATION OF CREDIT RISK
Statement of Financial Accounting Standards (SFAS) No. 105, DISCLOSURE OF
INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT RISK, requires disclosure of
any significant off-balance-sheet and credit risk concentrations. Financial
instruments that subject Focus to credit risk consist primarily of trade
accounts receivable.
(F) GOODWILL
Goodwill is being amortized using the straight-line method over a period of
40 years. Accumulated amortization was $687,000 and $749,100 at December 31,
1994 and 1995, respectively. Focus periodically evaluates whether changes have
occurred which would require revision of the remaining estimated useful life of
the assigned goodwill or render the goodwill not recoverable based on the gross
cash flow method.
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1994 and
1995:
1994 1995
------------ ------------
Software.................................................................... $ 456,000 $ 481,000
Office equipment............................................................ 2,436,000 2,076,000
Furniture and fixtures...................................................... 1,198,000 866,000
Equipment under capital leases.............................................. 573,000 367,000
------------ ------------
4,663,000 3,790,000
Less--Accumulated depreciation and amortization............................. 2,524,000 2,723,000
------------ ------------
$ 2,139,000 $ 1,067,000
------------ ------------
------------ ------------
(3) LEASES
Focus leases office space under various operating leases. The corporate
office lease has an option to renew for an additional five years at prevailing
rates and is subject to increase based on increases in building maintenance and
operating expenses. Total rent expense for the years ended 1993, 1994 and 1995
was $573,000, $639,000 and $514,000, respectively.
Focus leases certain equipment under capital leases that extend to various
dates through 1997. Future minimum payments, by year and in the aggregate, under
the capital leases and noncancellable operating leases with terms of one year or
more consist of the following at December 31, 1995:
CAPITAL OPERATING
LEASES LEASES
---------- -----------
Year Ending December 31,
1996......................................................................... $ 85,000 $ 240,000
1997......................................................................... 62,000 132,000
---------- -----------
Total minimum lease payments............................................... 147,000 $ 372,000
-----------
-----------
Less--Amounts representing interest and taxes................................ 22,000
----------
$ 125,000
----------
----------
F-26
FOCUS HEALTHCARE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(4) INCOME TAXES
Focus accounts for income taxes in accordance with SFAS No. 109, ACCOUNTING
FOR INCOME TAXES, which requires the asset and liability method of accounting
for income taxes. Prior to its acquisition by United, Focus elected to be taxed
as an S corporation under Section 1362 of the Internal Revenue Code. The tax
provision in 1993 resulted from certain states that do not recognize S
corporation status.
Beginning in 1994, Focus' results were included in the consolidated tax
return of United. No federal tax benefit was recognized in 1994 due to the loss
for the year. In accordance with the tax allocation agreement with United,
Focus' net operating loss was utilized by United in the IRS Tax filing.
The tax provision for 1995 consisted of the following:
Current--
Federal................................................................. $ --
State................................................................... 18,000
---------
18,000
---------
Deferred--
Federal................................................................. 339,000
State................................................................... 38,000
---------
377,000
---------
$ 395,000
---------
---------
The deferred tax liabilities consist of the difference between book and tax
depreciation methods and certain differences in the book and tax deduction of
certain accrued and prepaid items.
The difference between the federal statutory rate and the Focus' effective
tax rate for 1995 consists of nondeductible amortization of goodwill and state
income taxes, net of federal benefits.
(5) LITIGATION
Focus, Genesys, and the other shareholder of Genesys are defendants in a
class action seeking damages resulting from alleged breach of contract and other
claims. Focus is pursuing discovery of the allegations; until such discovery is
completed, it is not possible to evaluate the outcome or estimate the amount or
range of potential loss. Accordingly, no provision for any loss that may result
upon resolution of this matter has been made in the accompanying financial
statements. In connection with the acquisition, Focus has been indemnified by
United and, as a result, does not expect any outcome to materially affect its
financial position.
Focus is also involved in various other legal matters arising in the
ordinary course of business. Focus is not involved in any legal proceeding that
it believes will result, individually or in the aggregate, in a material adverse
effect on financial position or results of operations.
(6) CORPORATE SERVICES
Focus and United have a corporate services agreement under which United's
corporate staff provides certain administrative services, including legal advice
and services, risk management, certain employee benefit administration, tax
advice and preparation of tax returns, centralized cash management , and certain
financial and other services, for which Focus pays United annually. For these
services, Focus was charged
F-27
FOCUS HEALTHCARE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(6) CORPORATE SERVICES (CONTINUED)
$887,000 and $1,725,000 in fiscal 1994 and 1995, respectively. For items such as
employee benefit plans, insurance coverage and other identifiable costs, United
charges Focus based on costs directly attributable to Focus.
(7) SUBSEQUENT EVENT
On March 19, 1996, CRA Managed Care, Inc. signed a definitive agreement to
acquire Focus from United for $21,000,000 in cash. The transaction was completed
on April 2, 1996.
F-28
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Prompt Associates, Inc.
We have audited the accompanying balance sheets of Prompt Associates, Inc.
as of December 31, 1995 and 1994, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. The financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Prompt Associates, Inc. at
December 31, 1995 and 1994 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Salt Lake City, Utah
April 19, 1996
F-29
PROMPT ASSOCIATES, INC.
BALANCE SHEETS
DECEMBER 31, (UNAUDITED)
---------------------- SEPTEMBER
ASSETS 1994 1995 30, 1996
- ----------------------------------------------------------------------- ---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 906,000 $1,616,000 $3,913,000
Short-term investments 246,000 449,000 --
Accounts receivable, less allowance for doubtful accounts of
$1,400,000, $1,052,000 and $1,475,000, respectively 744,000 982,000 1,568,000
Prepaid expenses 93,000 617,000 425,000
Current deferred tax assets -- 643,000 372,000
Receivable from related party 248,000 -- --
Current portion of loan to shareholders 1,040,000 685,000 685,000
---------- ---------- ----------
Total current assets 3,277,000 4,992,000 6,963,000
PROPERTY AND EQUIPMENT, AT COST 785,000 1,009,000 1,255,000
Less: Accumulated depreciation and amortization 432,000 674,000 817,000
---------- ---------- ----------
Net property and equipment 353,000 335,000 438,000
OTHER ASSETS:
Loan to shareholders 4,160,000 1,560,000 1,040,000
Non-current deferred tax assets -- 994,000 536,000
---------- ---------- ----------
Total other assets 4,160,000 2,554,000 1,576,000
---------- ---------- ----------
$7,790,000 $7,881,000 $8,977,000
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 906,000 $ 730,000 $ 962,000
Accrued payroll and related 396,000 362,000 423,000
Current portion of payable under long-term agreements to related
parties (net of discount of $377,000, $151,000 and $141,000,
respectively) 1,029,000 680,000 690,000
---------- ---------- ----------
Total current liabilities 2,331,000 1,772,000 2,075,000
Long-term portion of payable under long-term agreements to related
parties (net of discount of $754,000, $226,000 and $85,000,
respectively) 4,117,000 1,544,000 1,009,000
COMMITMENTS AND CONTINGENCIES (Note 3) -- -- --
STOCKHOLDERS' EQUITY :
Preferred Stock -- $.001 par value, 78,000 authorized and issued -- -- --
Common stock -- $.001 par value; 1,500,000 authorized; 500,000 shares
issued and outstanding 1,000 1,000 1,000
Paid-in-capital 700,000 2,457,000 2,457,000
Retained earnings 641,000 2,107,000 3,435,000
---------- ---------- ----------
Total stockholders' equity 1,342,000 4,565,000 5,893,000
---------- ---------- ----------
$7,790,000 $7,881,000 $8,977,000
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
F-30
PROMPT ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------- SEPTEMBER
1993 1994 1995 30, 1996
------------ ----------- ---------- ----------
NET REVENUES $ 3,939,000 $ 6,835,000 $10,385,000 $9,692,000
COST OF SERVICES 1,489,000 4,059,000 5,945,000 4,985,000
------------ ----------- ---------- ----------
GROSS PROFIT 2,450,000 2,776,000 4,440,000 4,707,000
MARKETING AND SALES EXPENSES 769,000 433,000 554,000 596,000
GENERAL AND ADMINISTRATIVE EXPENSES 1,799,000 2,325,000 2,361,000 2,048,000
------------ ----------- ---------- ----------
OPERATING INCOME (LOSS) (118,000) 18,000 1,525,000 2,063,000
OTHER (INCOME) EXPENSE, NET:
Interest (income) (428,000) (473,000) (76,000) (103,000 )
Interest expense 1,479,000 1,547,000 -- --
Other (income) expense, net (14,000) 42,000 14,000 --
------------ ----------- ---------- ----------
Total (income) expense, net 1,037,000 1,116,000 (62,000) (103,000 )
INCOME (LOSS) BEFORE INCOME TAXES (1,155,000) (1,098,000) 1,587,000 2,166,000
PROVISION FOR INCOME TAXES -- -- 121,000 838,000
------------ ----------- ---------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (1,155,000) (1,098,000) 1,466,000 1,328,000
GAIN ON RETIREMENT OF DEBT -- 3,254,000 -- --
------------ ----------- ---------- ----------
NET INCOME (LOSS) ($1,155,000) $ 2,156,000 $1,466,000 $1,328,000
------------ ----------- ---------- ----------
------------ ----------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
F-31
PROMPT ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
(UNUDITED)
NINE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------- SEPTEMBER
1993 1994 1995 30, 1996
------------ ---------- ---------- ----------
CASH FLOWS FROM OPERATIONS:
Net income (loss) ($1,155,000) $2,156,000 $1,466,000 $1,328,000
Items not requiring cash:
Depreciation of property and equipment 180,000 196,000 243,000 143,000
Amortization of debt discount 276,000 -- -- --
Gain on retirement of debt -- (1,974,000) -- --
Loss on forgiveness of shareholder debt -- -- 51,000 --
Loss on disposal of fixed assets -- -- 1,000 --
Provision for deferred tax income taxes -- -- 121,000 729,000
Change in assets and liabilities:
Accounts receivable (201,000) 174,000 (473,000) (586,000 )
Prepaid expenses and other assets (224,000) 298,000 (523,000) 192,000
Accounts payable, accrued expenses and income taxes 1,426,000 26,000 124,000 288,000
------------ ---------- ---------- ----------
Cash flows from operations 302,000 876,000 1,010,000 2,094,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (62,000) (182,000) (203,000) (246,000 )
Sale (purchase) of short-term investments 2,000 (246,000) (226,000) 449,000
------------ ---------- ---------- ----------
Cash flows used for investing activities (60,000) (428,000) (429,000) 203,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under long-term agreements with related
parties -- -- (703,000) --
Receipts on note from shareholders -- -- 708,000 --
Receipts on receivable from related party -- -- 124,000 --
------------ ---------- ---------- ----------
Cash flows used for financing activities -- -- 129,000 --
------------ ---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 242,000 448,000 710,000 2,297,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 216,000 458,000 906,000 1,616,000
------------ ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 458,000 $ 906,000 $1,616,000 $3,913,000
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ -- $ -- $ -- $ --
Income taxes paid $ -- $ -- $ 417,000 $ 263,000
The accompanying notes are an integral part of these financial statements.
F-32
PROMPT ASSOCIATES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996
PREFERRED COMMON PAID-IN- RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
---------- ------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1992 $ -- $1,000 $ 700,000 $ (360,000) $ 341,000
Net loss -- -- -- (1,155,000) (1,155,000)
---------- ------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1993 -- 1,000 700,000 (1,515,000) (814,000)
---------- ------- ---------- ---------- ----------
---------- ------- ---------- ---------- ----------
Net income -- -- -- 2,156,000 2,156,000
---------- ------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1994 -- 1,000 700,000 641,000 1,342,000
---------- ------- ---------- ---------- ----------
---------- ------- ---------- ---------- ----------
Tax benefits allocated to contributed capital -- -- 1,757,000 -- 1,757,000
Net income -- -- -- 1,466,000 1,466,000
---------- ------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1995 -- 1,000 2,457,000 2,107,000 4,565,000
---------- ------- ---------- ---------- ----------
---------- ------- ---------- ---------- ----------
Net income (unaudited) -- -- -- 1,328,000 1,328,000
---------- ------- ---------- ---------- ----------
BALANCE SEPTEMBER 30, 1996 $ -- $1,000 $2,457,000 $3,435,000 $5,893,000
---------- ------- ---------- ---------- ----------
---------- ------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
F-33
PROMPT ASSOCIATES, INC.
Notes to Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF THE COMPANY
Prompt Associates, Inc. ("Prompt") was established in 1989 to help identify
savings to insurance companies, self-insured companies, third party
administrators ("TPA") and health maintenance organizations ("HMO") nationwide
by providing statistical data regarding usual, reasonable and customary
outpatient facility charges.
In 1994, Prompt established an inpatient charge review service utilizing
databases and employee registered nurses who review claims on a line-by-line
basis for possible savings. Prompt earns revenue by charging insurance company
clients a fee based on the savings.
MultiPlan, an unrelated company, has preferred provider organizations
("PPO") contracts with various health care providers across the country. In
1994, Prompt entered into an agreement with MultiPlan whereby Prompt applies the
MultiPlan PPO contract rates to selected health insurance claims to identify
possible contractual savings. Prompt shares in the savings that are identified
and realized.
Four principal customers comprised approximately 40% of gross revenue in
1994 while three principal customers comprised approximately 37% of gross
revenue in 1995.
(B) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(C) CASH AND EQUIVALENTS
Cash and equivalents consist of cash and short-term investments in highly
liquid investments with maturities of less than three months from the date of
purchase.
(D) CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk include cash, short-term investments and trade
receivables. The Company places its temporary cash investments with
creditworthy, high quality financial institutions. The Company at times holds
notes and bonds issued by the United States government, its agencies and
financially strong corporations. The Company has not experienced significant
losses related to receivables from individual customers, groups of customers
within the health care industry or customers within certain geographic areas.
(E) SHORT-TERM INVESTMENTS
Short-term investments consist of commercial paper with maturities greater
than 90 days from the date of purchase. These securities are considered to be
held-to-maturity and are carried at amortized cost, which approximates fair
market value.
(F) ALLOWANCE
The allowance is based on historical experience of ineligible claims which
are either charged back or given a negotiated discount. Prompt utilizes several
methods to project unpresented discounts and chargebacks including a tracking of
the actual experience of contractual discounts. Other factors that affect
F-34
collectibility and bad debts for each service line are evaluated and additional
allowance amounts may be provided.
Insurance claims are modeled prior to the insurance company's review
procedures, which indicate if the claims are payable. During the insurance
company's review process, some claims have PPO or HMO arrangements, pre-existing
conditions, or other disqualifying situations. When these situations occur, a
refund (chargeback) is requested for the amounts paid (invoiced) on these
claims.
Prompt's policy is to record the allowance as an offset to sales and
accounts receivable based on the historical tracking of discounts and/or
chargebacks. Prompt recorded net provisions to the allowance for the years ended
December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1996 of
$4,941,000, $5,360,000, $5,089,000 and $4,121,000, respectively. It is
reasonably possible that management's analysis of the allowance will change in
the near term. Such a change could be material to the financial statements.
(G) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over estimated useful lives of 3 to 5 years.
Maintenance and repairs that do not improve or extend the life of the
equipment are charged to expenses as incurred. Major renewals and improvements
are treated as capital expenditures and depreciated over the extended remaining
lives of the assets.
(H) INCOME TAXES
Effective December 29, 1994, Prompt terminated its subchapter S corporation
status and became a C corporation. The liability method is used in accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when differences are expected to reverse.
(I) ADVERTISING COSTS
In accordance with SOP 93-7, the Company expenses the production costs of
non direct-response advertising as the costs are incurred during the period the
advertising first takes place.
(J) RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements to
conform with the 1995 presentation.
(2) INCOME TAXES
As of December 31, 1995, the Company had federal and state net operating
loss carryforwards of approximately $1,604,000. The net operating loss
carryforwards will expire at various dates beginning in 2009 through 2010, if
not utilized.
F-35
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
1994 1995
-------- ----------
Deferred Tax Assets:
Fixed assets $ 14,000 $ 14,000
Allowance for doubtful accounts -- 83,000
Accounting method differences 143,000 90,000
Accrued expenses -- 92,000
Net operating loss carryforwards 384,000 598,000
Restructuring differences -- 759,000
-------- ----------
541,000 1,636,000
Valuation allowance (541,000) --
-------- ----------
$ -- $1,636,000
-------- ----------
-------- ----------
The net valuations allowance decreased by $541,000 during the year ended
December 31, 1995.
Significant components of the provision for income taxes are as follows:
1993 1994 1995
-------- -------- ----------
Current:
Federal $ -- $ -- $ --
State -- -- --
-------- -------- ----------
Total current -- -- --
Deferred:
Federal -- -- (1,417,000)
State -- -- (219,000)
-------- -------- ----------
-- -- (1,636,000)
Tax benefits allocated to contributed capital -- -- 1,757,000
-------- -------- ----------
Total net deferred -- -- 121,000
-------- -------- ----------
Total $ -- $ -- $ 121,000
-------- -------- ----------
-------- -------- ----------
Differences between the reported amount of income tax expense for the year
and the amount of income tax expense that would result from applying domestic
federal statutory tax rates to pretax income, relate primarily to permanent
differences and changes in the valuation allowance for deferred tax assets.
Tax benefits allocated to contributed capital of $1 ,757,000, for the year
ended December 31, 1995 relates to differences in accounting for income tax
purposes for the stock purchased from original shareholders as described in Note
5.
(3) COMMITMENTS AND CONTINGENCIES
Prompt leases office space and has certain other operating leases. The
office lease contains an annual escalation clause of approximately 8%. Rental
expense was approximately $55,000, $76,000 and $118,000 for
F-36
1993, 1994 and 1995, respectively. The future payments at December 31, 1995
required under these obligations for each of the five succeeding years are
approximately as follows:
1996 $ 124,000
1997 122,000
1998 26,000
1999 6,000
2000 --
Prompt has entered into an exclusive agreement with MEDSTAT Systems, Inc.
("MEDSTAT"), a provider of researched data in the health care industry, to
provide outpatient surgical facility charge data. Amounts paid to MEDSTAT under
this agreement were $763,000, $438,000 and $581,000 in 1993, 1994 and 1995,
respectively. Recurring minimum payments associated with this agreement at
December 31, 1995 are approximately as follows:
1996 $ 706,000
1997 831,000
1998 956,000
1999 525,000
2000 --
(4) LOANS TO SHAREHOLDERS
Loans to shareholders and the related interest totaled $5,448,000 and
$2,245,000 for the years ended December 31, 1994 and 1995, respectively. These
shareholder loans are secured by promissory notes at a rate of 7.25% with
interest payable each June 30th and maturing on June 30, 1999. These notes are
further secured by a stock pledge agreement for 100% of the shareholders'
outstanding shares of Prompt. Prompt also paid consulting fees totaling $700,000
and $425,000 to certain shareholders during the years ended December 31, 1994
and 1995, respectively, which are included in general and administrative
expense. (See Note 5).
(5) DEBT AND SHAREHOLDERS' EQUITY
On June 30, 1992, Prompt entered into a debt agreement with Summit Partners
("Summit"), a venture capital group, in which Prompt signed an $8,000,000 note
due in three equal installments payable on June 30, 1996, 1997 and 1998, with an
interest rate of 15%, payable quarterly in arrears beginning September 30, 1992
in exchange for $6,000,000 in cash. As such, Prompt recorded a debt discount of
$2,000,000. The debt discount was to be amortized using the effective interest
rate method of approximately 24% over the life of the note. Prompt also issued
warrants to Summit to purchase 409,091 shares of common stock. As of December
29, 1994, no principal had been paid on the note to Summit and interest payable,
net of the unamortized discount, had accrued to approximately $1,188,000.
The net proceeds of the note payable of $6,000,000 from Summit was loaned by
Prompt to the original shareholders for promissory notes bearing interest at
approximately 7.25%. As of December 29, 1994, the principal balance of the loan
was $5,900,000 with accrued interest of approximately $250,000.
At December 29, 1994, Prompt entered into the Security Exchange Agreement
("Agreement") with Summit and the original shareholders, whereby, 90% of
Prompt's common stock was purchased by Prompt from the original shareholders.
Prompt then transferred 80% of the common stock to Summit and issued 78,000
shares of preferred stock to Summit in full settlement of the note, outstanding
interest and warrants. Additionally, 10% of Prompt's common stock was purchased
by Prompt's chief executive officer. The original shareholders held a combined
10% interest in Prompt at December 31, 1994 and 1995. The transaction was
reflected as a troubled debt restructuring in the 1994 financial statements and
resulted in an extraordinary gain of $3,254,000.
F-37
The preferred stock carries no voting rights. In the event of any
liquidation, dissolution or winding-up of Prompt, whether voluntary or
involuntarily, each share of preferred stock is entitled to be paid up to $100
per share.
The transaction also resulted in the terms of the loan to the original
shareholders being modified, and corresponding payables under long-term
agreements to these shareholders being recorded, in exchange for consulting
services and covenants not to compete for which no value was accrued. Therefore,
the receipt of payment on the loan to the original shareholders and payment of
the payables under long-term agreements to the original shareholders will
approximately offset over a five year period.
During 1995, one of the original shareholders declared bankruptcy and
effectively defaulted on his obligations to Prompt. No payments were made by
Prompt to this shareholder under the long-term consulting and non-compete
agreements. As of December 31, 1995, the Company had accepted a bankruptcy
settlement agreement, which forgave all existing loans and payable under the
above long-term agreement and reestablished a new promissory notes with an
offsetting payable valued at $165,000 each. This forgiveness resulted in a net
loss to the Company of approximately $50,000. The receipt of the $165,000 loan
and $165,000 payment of the payable to the shareholder will offset over the next
year.
Prompt also agreed to pay the original shareholders' tax liability
(approximately $100,000) related to Prompt's net income for the period ending
December 28, 1994.
Pursuant to the Agreement, the board of directors authorized options
totaling 55,556 shares. On February 7, 1995 options to purchase an additional
4,222 shares were authorized. Options to purchase 27,778 shares were granted to
the chief executive officer on December 29, 1994. These shares are exerciseable
at $.25 per share and vest in full on April 1, 2004. In July 1995, Prompt
granted 20,250 options to certain employees. These options have a four year
vesting period and an exercise price of $.25. Approximately 12.5 percent of
these options were vested on December 31, 1995.
F-38
CRA MANAGED CARE, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
The following sets forth the Company's Consolidated Pro Forma Balance Sheet
as of September 30, 1996 giving effect to the acquisition of Prompt Associates,
Inc. ("Prompt"). The Company's Consolidated Pro Forma Balance Sheet presents the
acquisition of Prompt as if it had been consummated on September 30, 1996. The
Consolidated Pro Forma Financial Statements of the Company do not purport to
present the financial position or results of operations of the Company had the
transaction assumed therein occurred on the dates indicated, nor are they
necessarily indicative of the results of operations which may be expected to
occur in the future.
The acquisition of Prompt has been accounted for by the Company as a
purchase whereby the basis for accounting for Prompt's assets and liabilities is
based upon their fair values at the date of acquisition. Pro forma adjustments
represent the Company's preliminary determination of these adjustments and are
based upon available information and certain assumptions the Company considers
reasonable under the circumstances. Final amounts could differ from those set
forth below.
SEPTEMBER 30, 1996
-------------------------------------------------------
PRO FORMA PRO FORMA
CRA PROMPT ADJUSTMENTS COMBINED
----------- ---------- --------------- ------------
ASSETS
Current assets:
Cash and cash equivalents.................... $33,585,000 $3,913,000 $(25,000,000)(1) $ 12,498,000
Accounts receivable, net..................... 32,395,000 1,568,000 33,963,000
Current portion of loan to shareholders -- 685,000 (685,000)(2) --
Prepaid expenses and tax assets.............. 1,685,000 797,000 2,482,000
----------- ---------- --------------- ------------
Total current assets..................... 67,665,000 6,963,000 (25,685,000) 48,943,000
Property and equipment, net.................. 7,075,000 438,000 7,513,000
Other assets................................. 386,000 536,000 922,000
Long-term portion of loan to shareholders.... -- 1,040,000 (1,040,000)(2) --
Excess of cost over fair value of assets
acquired................................... 19,568,000 -- 29,000,000(3) 48,568,000
----------- ---------- --------------- ------------
$94,694,000 $8,977,000 $ 2,275,000 $105,946,000
----------- ---------- --------------- ------------
----------- ---------- --------------- ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities.................. $ -- $ -- $ 5,000,000(1) $ 5,000,000
Current portion of long-term debt............ 71,000 -- 71,000
Accounts payable and accrued expenses 18,985,000 1,385,000 4,867,000(4) 25,237,000
Current portion of long-term payable to
related parties............................ -- 690,000 (690,000)(2) --
----------- ---------- --------------- ------------
Total current liabilities................ 19,056,000 2,075,000 9,177,000 30,308,000
Long-term debt................................. 6,000 -- 6,000
Long-term payable to related parties........... -- 1,009,000 (1,009,000)(2) --
Long-term deferred tax liabilities............. 2,422,000 -- 2,422,000
Stockholders' equity........................... 73,210,000 5,893,000 (5,893,000)(5) 73,210,000
----------- ---------- --------------- ------------
$94,694,000 $8,977,000 $ 2,275,000 $105,946,000
----------- ---------- --------------- ------------
----------- ---------- --------------- ------------
See accompanying Notes to Consolidated Pro Forma Financial Statements.
F-39
CRA MANAGED CARE, INC.
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
The following sets forth the Company's Consolidated Pro Forma Statement of
Operations for the fiscal year ended December 31, 1995 and the nine months ended
September 30, 1996 giving effect the purchases of Prompt and Focus Healthcare
Management, Inc. ("Focus") and the Company's sales of 2,515,625 and 1,200,000
shares of Common Stock in May of 1995 and June of 1996, respectively, and the
application of the net proceeds to repay the Company's existing indebtness and
additional borrowings to finance the Focus and Prompt acquisitions effective
January 1, 1995. Focus was acquired on April 2, 1996 and, as such, all pro forma
adjustments related to Focus are for the period prior to its acquisition. The
Consolidated Pro Forma Financial Statements of the Company do not purport to
present the financial position or results of operations of the Company had the
transaction assumed therein occurred on the dates indicated, nor are they
necessarily indicative of the results of operations which may be expected to
occur in the future. The Statement of Operations for Prompt for the year ended
December 31, 1995 and nine months ended September 30, 1996 have been
reclassified to conform with the Company's basis of presentation.
The acquisitions of Prompt and Focus have been accounted for by the Company
as purchases whereby the basis for accounting for Prompt's and Focus' assets and
liabilities are based upon their fair values at the date of acquisition. Pro
forma adjustments represent the Company's preliminary determination of these
adjustments and are based upon available information and certain assumptions the
Company considers reasonable under the circumstances. Final amounts could differ
from those set forth below.
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------
PRO FORMA PRO FORMA
CRA FOCUS PROMPT ADJUSTMENTS COMBINED
------------ ---------- ----------- ------------- -------------
Revenues $146,055,000 $9,089,000 $10,385,000 $ (407,000)(6) 1$65,122,000
Cost of services 122,615,000 7,347,000 6,499,000 474,000(7) 136,935,000
------------ ---------- ----------- ------------- -------------
Gross profit 23,440,000 1,742,000 3,886,000 (881,000) 28,187,000
General and administrative
expenses 11,021,000 2,269,000 2,361,000 (646,000)(8) 15,005,000
------------ ---------- ----------- ------------- -------------
Operating income 12,419,000 (527,000) 1,525,000 (235,000) 13,182,000
Interest (income) expense, net 2,484,000 2,000 (62,000) (1,988,000)(9) 436,000
Provision for income taxes 3,974,000 395,000 121,000 995,000(10) 5,485,000
------------ ---------- ----------- ------------- -------------
Net income (loss) $ 5,961,000 $ (924,000) $ 1,466,000 $ 758,000 $7,261,000
------------ ---------- ----------- ------------- -------------
------------ ---------- ----------- ------------- -------------
Earnings per share $ 0.91 $ 0.85
------------ -------------
------------ -------------
Weighted average shares
outstanding 6,540,000 8,579,000(11)
------------ -------------
------------ -------------
NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------------------------------
PRO FORMA PRO FORMA
CRA FOCUS PROMPT ADJUSTMENTS COMBINED
------------ ---------- ----------- ------------- -------------
Revenues $131,032,000 $2,327,000 $ 9,692,000 $ (269,000)(6) 1$42,782,000
Cost of services 107,981,000 1,926,000 5,581,000 435,000(7) 115,923,000
------------ ---------- ----------- ------------- -------------
Gross profit 23,051,000 401,000 4,111,000 (704,000) 26,859,000
General and administrative
expenses 10,491,000 605,000 2,048,000 (110,000)(8) 13,034,000
------------ ---------- ----------- ------------- -------------
Operating income 12,560,000 (204,000) 2,063,000 (594,000) 13,825,000
Interest (income) expense, net 212,000 0 (103,000) (99,000)(9) 10,000
Provision for income taxes 5,124,000 0 838,000 72,000(10) 6,034,000
------------ ---------- ----------- ------------- -------------
Net income (loss) $ 7,224,000 $ (204,000) $ 1,328,000 $ (567,000) $7,781,000
------------ ---------- ----------- ------------- -------------
------------ ---------- ----------- ------------- -------------
Earnings per share $ 0.87 $ 0.87
------------ -------------
------------ -------------
Weighted average shares
outstanding 8,261,000 8,928,000(11)
------------ -------------
------------ -------------
See accompanying Notes to Consolidated Pro Forma Financial Statements.
F-40
CRA MANAGED CARE, INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS--UNAUDITED)
(1) To record the use of $25,000,000 of existing cash and borrowings of
$5,000,000 under the Company's $40,000,000 Credit Facility to finance the
Prompt acquisition.
(2) To eliminate the loan to shareholder and long-term payable to related
parties which will be terminated immediately prior to the closing of the
transaction.
(3) To record the excess of cost over fair value of net assets acquired
resulting from the preliminary purchase price allocation as follows:
Pro forma purchase price including fees and expenses: $34,867,000
Purchase price allocated to:
Current assets 6,278,000
Property and equipment 438,000
Other long term assets 536,000
Current liabilities (1,385,000)
-----------
Net assets acquired 5,867,000
-----------
Excess of cost over fair value of net assets acquired $29,000,000
-----------
-----------
The foregoing purchase price allocation is based upon preliminary
information. The final purchase price allocation is contingent upon the
final determination of the fair value of the net assets acquired on October
28, 1996, the date of acquisition. Based upon presently available
information, the Company does not believe that the final purchase price
allocation will materially differ from the preliminary allocation.
(4) Record fees and expenses associated with the purchase of Prompt.
(5) To eliminate the historical stockholders' equity of Prompt.
(6) To eliminate sales between CRA and Focus of $407,000 and $269,000 for the
year ended December 31, 1995 and the nine months ended September 30, 1996,
respectively.
(7) The pro forma adjustment includes:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- --------------------
Elimination of sales between CRA and Focus $ (407,000) $ (269,000)
Elimination of historical Focus goodwill amortization (749,000) (187,000)
Record new Focus goodwill amortization under a thirty year life 663,000 166,000
Record Prompt goodwill amortization under a thirty year life 967,000 725,000
---------- ----------
$ 474,000 $ 435,000
---------- ----------
---------- ----------
(8) To eliminate general overhead expenses allocated to Focus by United
HealthCare Corporation of $646,000 and $110,000 for the year ended December
31, 1995 and the nine months ended September 30, 1996, respectively.
(9) To reduce interest expense by $1,988,000 and $99,000 for the year ended
December 31, 1995 and nine months ended September 30, 1996, respectively to
reflect the interest expense associated with the estimated outstanding
borrowings under the Company's existing Credit Facility after the
application of
F-41
CRA MANAGED CARE, INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS--UNAUDITED)
the net proceeds from the Company's two sales of Common Stock to repay all
existing indebtedness at January 1, 1995 and the additional borrowings of
$21,000,000 and $30,000,000 for the Focus and Prompt acquisitions,
respectively. The calculation of the January 1, 1995 estimated outstanding
borrowings under the Credit Facility is as follows:
Net proceeds from the sale of 2,515,625 shares of Common
Stock $36,507,000
Net proceeds from the sale of 1,200,000 shares of Common
Stock 51,840,000
-----------
Total proceeds 88,347,000
Total outstanding debt at January 1, 1995 44,716,000
Borrowings required for the Focus acquisition 21,000,000
Borrowings required for the Prompt acquisition 30,000,000
-----------
Total uses of funds 95,716,000
-----------
Estimated outstanding borrowings at January 1, 1995 $ 7,369,000
-----------
-----------
The Company further assumed that it would be able to repay all of the
outstanding January 1, 1995 borrowings in seven equal quarterly installments
beginning March 31, 1995. Interest expense was calculated assuming an
interest rate of 8.55% and 7.12% (weighted average interest rate on
borrowings during the period) for the year ended December 31, 1995 and nine
months ended September 30, 1996, respectively.
(10) To record a tax provision of $995,000 and $72,000 associated with the pro
forma adjustments and to adjust Focus's and Prompt's results of operation to
an effective tax rate of 40% and 41.5%, after adding back the Prompt
goodwill amortization which is non-deductible for tax purposes, for the year
ended December 31, 1995 and nine months ended September 30, 1996,
respectively.
(11) The weighted average shares outstanding has been increased to reflect the
issuance of additional shares from the Company's sale of 2,515,625 shares of
Common Stock in May 1995 and 1,200,000 shares of Common Stock in June 1996.
F-42
(THIS PAGE INTENTIONALLY LEFT BLANK)
(THIS PAGE INTENTIONALLY LEFT BLANK)
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNEC-
TION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTA-
TION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRE-
SENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY UN-
DERWRITER. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary............................. 3
Risk Factors................................... 6
Recent Developments............................ 10
Use of Proceeds................................ 11
Price Range of Common Stock.................... 11
Dividend Policy................................ 11
Capitalization................................. 12
Selected Historical Consolidated Financial
Data......................................... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 14
Business....................................... 21
Management..................................... 31
Principal and Selling Stockholders............. 33
Description of Capital Stock................... 35
Underwriting................................... 37
Legal Matters.................................. 38
Experts........................................ 38
Additional Information......................... 38
Incorporation by Reference..................... 39
Index to Financial Statements.................. F-1
--------------
2,000,000 SHARES
[LOGO]
COMMON STOCK
------------
PROSPECTUS
------------
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
MONTGOMERY SECURITIES
J.P. MORGAN & CO.
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the
securities being registered hereby, other than the underwriting discount, to be
paid by the Company, are estimated as follows:
Registration fee under Securities Act..................................... $ 35,023
NASD filing fee........................................................... 12,058
Nasdaq National Market fee................................................ 17,500
Legal fees and expenses................................................... 175,000
Accounting fees and expenses.............................................. 75,000
Blue Sky fees and expenses (including legal fees)......................... 15,000
Printing and engraving expenses........................................... 90,000
Transfer agent fees and expenses.......................................... 10,000
Miscellaneous............................................................. 170,419
---------
Total................................................................. $ 600,000
---------
---------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 67 of Chapter 156B of the Massachusetts Business Corporation Law,
which is applicable to the Company, provides as follows:
Indemnification of directors, officers, employees and other agents of a
corporation, and persons who serve at its request in any capacity with respect
to any employee benefit plan, may be provided by it to whatever extent shall be
specified in or authorized by (i) the articles of organization or (ii) a by-law
adopted by the stockholders or (iii) a vote adopted by the holders of a majority
of the shares of stock entitled to vote on the election of directors. Except as
the articles of organization or by-laws otherwise require, indemnification of
any persons referred to in the preceding sentence who are not directors of the
corporation may be provided by it to the extent authorized by the directors.
Such indemnification may include payment by the corporation of expenses incurred
in defending a civil or criminal action or proceeding in advance of the final
disposition of such action or proceeding, upon receipt of an undertaking by the
person indemnified to repay such payment if he shall be adjudicated to be not
entitled to indemnification under this section which undertaking may be accepted
without reference to the financial ability of such person to make repayment. Any
such indemnification may be provided although the person to be indemnified is no
longer an officer, director, employee or agent of the corporation or of such
other organization or no longer serves with respect to any such employee benefit
plan.
No indemnification shall be provided by any person with respect to any
matter as to which he shall have been adjudicated in any proceeding not to have
acted in good faith in the reasonable belief that his action was in the best
interest of the corporation or to the extent that such matter relates to service
with respect to an employee benefit plan, in the best interests of the
participants or beneficiaries of such employee benefit plan.
The absence of any express provision for indemnification shall not limit any
right of indemnification existing independently of this section.
A corporation shall have power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or other agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or other agent of another organization or with
respect to any employee benefit plan, against any liability incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability.
II-1
In addition, pursuant to its Articles and By-Laws, the Company shall
indemnify its directors and officers against expenses (including judgments or
amounts paid in settlement) incurred in any action, civil or criminal, to which
any such person is a party by reason of any alleged act or failure to act in his
capacity as such, except as to a matter as to which such director or officer
shall have been finally adjudged not to have acted in good faith in the
reasonable belief that his action was in the best interests of the corporation.
The underwriters also will agree to indemnify the directors and officers of
the Company against certain liabilities as set forth in Section 8 of the
Underwriting Agreement (see Exhibit 1.1).
The Company has purchased insurance with respect to, among other things, the
liabilities that may arise under the statutory provisions referred to above. The
directors and officers of the Company also are insured against certain
liabilities, including certain liabilities arising under the Securities Act of
1933, as amended, which might be incurred by them in such capacities and against
which they are not indemnified by the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS: The following is a list of exhibits filed as part of this
Registration Statement:
EXHIBIT
NO. TITLE
- --------- --------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement.
2.1 Stock Purchase Agreement, dated as of March 19, 1996, by and between the Company
and United Healthcare Services, Inc.
2.2 Agreement and Plan of Merger, dated as of October 28, 1996, by and among the
Company, PAI Acquisition Corp., Prompt Associates, Inc., and certain other
signatories thereto.
3.1 Restated Articles of Organization of the Company (incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement No. 333-03253).
3.2 Form of Articles of Amendment to the Articles of Organization of the Company
(incorporated by reference to Exhibit 3.2 of the Company's Registration
Statement No. 333-03253).
3.3 By-Laws of the Company, as amended and restated (incorporated by reference to
Exhibit 3.4 of the Company's Registration Statement No. 33-90426).
4.1 Specimen stock certificate representing the shares of Common Stock (incorporated
by reference to Exhibit 4.1 of the Company's Registration Statement No.
33-90426).
4.2 Registration Rights Agreement, dated as of March 8, 1994, among the Company, J.
H. Whitney & Co., Whitney 1990 Equity Fund, L.P., Whitney Subordinated Debt
Fund, L.P., First Union Corporation, Lois E. Silverman and Donald J. Larson
(incorporated by reference to Exhibit 10.7 of the Company's Registration
Statement No. 33-90426).
4.3 Registration Rights Agreement dated October 24, 1995, by and among the Company,
Michael J. Spilde and Laurence G. Ernst (incorporated by reference to Exhibit
4.3 of the Company's Registration Statement No. 333-03253).
4.4 Form of Registration Rights Agreement by and among the Company and the
shareholders of QMC3, Inc. (incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement No. 333-03253).
5.1 Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation, as to the
legality of the securities being registered.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP with respect to Prompt Associates, Inc.
23.3 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included in
Exhibit 5.1).
II-2
EXHIBIT
NO. TITLE
- --------- --------------------------------------------------------------------------------
24.1 Power of Attorney (included on the signature page hereto).
27.1 Financial Data Schedule.
Schedules not listed above have been omitted because they are not applicable
or the required information is included in the combined financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended,
shall be deemed to be part of this Registration Statement as of the time it
was declared effective.
2. For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE public offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boston, Commonwealth of Massachusetts, on the 7th day
of November, 1996.
CRA MANAGED CARE, INC.
By: /s/ Donald J. Larson
-----------------------------------------
DONALD J. LARSON
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Donald J. Larson and William Laverack, Jr., and
each of them, with the power to act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or in his name, place and stead, in any and all capacities to sign any
and all amendments or post-effective amendments to this Registration Statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents or either of them, or their or his substitutes, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ Donald J. Larson President, Chief Executive November 7, 1996
- ------------------------------ Officer and Director
DONALD J. LARSON (principal executive
officer)
/s/ Joseph F. Pesce Senior Vice President-- November 7, 1996
- ------------------------------ Finance and
JOSEPH F. PESCE Administration, Chief
Financial Officer and
Treasurer (principal
financial and accounting
officer)
/s/ Lois E. Silverman Chairman of the Board of November 7, 1996
- ------------------------------ Directors
LOIS E. SILVERMAN
II-4
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ Jeffrey R. Jay Director November 7, 1996
- ------------------------------
JEFFREY R. JAY
/s/ William Laverack, Jr. Director November 7, 1996
- ------------------------------
WILLIAM LAVERACK, JR.
/s/ George H. Conrades Director November 7, 1996
- ------------------------------
GEORGE H. CONRADES
/s/ Mitchell T. Rabkin Director November 7, 1996
- ------------------------------
MITCHELL T. RABKIN
II-5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To CRA Managed Care, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of CRA Managed Care, Inc. included in this registration
statement and have issued our report thereon dated January 23, 1996. Our audit
was made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in Item 16(b) is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 23, 1996
S-1
SCHEDULE II
CRA MANAGED CARE, INC.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
ADDITIONS
BALANCE CHARGED TO DEDUCTIONS BALANCE AT
AT BEGINNING COSTS AND FROM END
OF PERIOD EXPENSES RESERVES OF PERIOD
------------- ----------- ----------- ----------
Allowance for Doubtful Accounts:
1993................................................... $ 65,000 $ 15,000 $ -- $ 80,000
1994................................................... 80,000 353,000 53,000 380,000
1995................................................... 380,000 186,000 136,000 430,000
S-2
EXHIBIT INDEX
EXHIBIT
NO. TITLE PAGE
- --------- ------------------------------------------------------------------------------ ---------
1.1 Form of Underwriting Agreement.
2.1 Stock Purchase Agreement, dated as of March 19, 1996, by and between the
Company and United Healthcare Services, Inc.
2.2 Agreement and Plan of Merger, dated as of October 28, 1996, by and among the
Company, PAI Acquisition Corp., Prompt Associates, Inc., and certain other
signatories thereto.
3.1 Restated Articles of Organization of the Company (incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement No. 333-03253).
3.2 Form of Articles of Amendment to the Articles of Organization of the Company
(incorporated by reference to Exhibit 3.2 of the Company's Registration
Statement No. 333-03253).
3.3 By-Laws of the Company, as amended and restated (incorporated by reference to
Exhibit 3.4 of the Company's Registration Statement No. 33-90426).
4.1 Specimen stock certificate representing the shares of Common Stock
(incorporated by reference to Exhibit 4.1 of the Company's Registration
Statement No. 33-90426).
4.2 Registration Rights Agreement, dated as of March 8, 1994, among the Company,
J. H. Whitney & Co., Whitney 1990 Equity Fund, L.P., Whitney Subordinated Debt
Fund, L.P., First Union Corporation, Lois E. Silverman and Donald J. Larson
(incorporated by reference to Exhibit 10.7 of the Company's Registration
Statement on No. 33-90426).
4.3 Registration Rights Agreement dated October 24, 1995, by and among the
Company, Michael J. Spilde and Laurence G. Ernst (incorporated by reference to
Exhibit 4.3 of the Company's Registration Statement No. 333-03253).
4.4 Form of Registration Rights Agreement by and among the Company and the
shareholders of QMC3, Inc. (incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement No. 333-03253).
5.1 Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation, as to the
legality of the securities being registered.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP with respect to Prompt Associates, Incorporated.
23.3 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included
in Exhibit 5.1).
24.1 Power of Attorney (included on the signature page hereto).
27.1 Financial Data Schedule