-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QKVr2izw4R+uUkNnMaNSPChU5FZmz5nfhPdZwqN/plK1K79bh+Fxj0lRpEzFkOpd 8b/C82BctGh6AxW+v63MLw== 0000912057-96-024933.txt : 19961108 0000912057-96-024933.hdr.sgml : 19961108 ACCESSION NUMBER: 0000912057-96-024933 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19961107 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRA MANAGED CARE INC CENTRAL INDEX KEY: 0000942136 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 042658593 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-15715 FILM NUMBER: 96655747 BUSINESS ADDRESS: STREET 1: 312 UNION WHARF CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6173672163 MAIL ADDRESS: STREET 1: 312 UNION WHARF CITY: BOSTON STATE: MA ZIP: 02109 S-3 1 S-3 As Filed with the Securities and Exchange Commission on November 7, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------- CRA MANAGED CARE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------ MASSACHUSETTS 8099 04-2658593 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. OF CLASSIFICATION CODE NUMBER) EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
-------------- 312 UNION WHARF BOSTON, MASSACHUSETTS 02109 (617) 367-2163 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------ DONALD J. LARSON PRESIDENT AND CHIEF EXECUTIVE OFFICER CRA MANAGED CARE, INC. 312 UNION WHARF BOSTON, MASSACHUSETTS 02109 (617) 367-2163 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------ COPIES TO: JAMES WESTRA, ESQUIRE LESLIE E. DAVIS, ESQUIRE HUTCHINS, WHEELER & DITTMAR TESTA, HURWITZ & THIBEAULT, LLP A PROFESSIONAL CORPORATION 125 HIGH STREET 101 FEDERAL STREET BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02110 (617) 248-7000 (617) 951-6600 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in correlation with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. /X/ -------------- CALCULATION OF REGISTRATION FEE
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. -------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 --------- Of the 2,000,000 shares of Common Stock offered hereby, 500,000 are being sold by CRA Managed Care, Inc. ("CRA" or the "Company") and 1,500,000 are being sold by certain stockholders of the Company (the "Selling Stockholders"). The Company will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Stockholders. The Company's Common Stock is quoted on the Nasdaq National Market (the "Nasdaq National Market") under the symbol "CRAA." On November 6, 1996, the last reported sale price of the Company's Common Stock was $55.13 per share. -------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" APPEARING ON PAGES 6 THROUGH 9. ------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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." -------------- 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
- --------- (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, ----------------------------------------------------------- 1991 1992 1993 1994 1995 PRO FORMA ------- ------- -------- -------- -------- 1995(1) ----------- (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, ----------------------------- PRO FORMA 1995 1996 1996(1) ------- ------- ----------- (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 ----------------------------------------- ACTUAL PRO FORMA(1) AS ADJUSTED(6) --------- ------------- --------------- (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
- --------- (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
EX-1.1 2 EXHIBIT 1.1 Exhibit 1.1 2,000,000 CRA Managed Care, Inc. Common Stock ($.01 Par Value) UNDERWRITING AGREEMENT November __, 1996 Alex. Brown & Sons Incorporated Dean Witter Reynolds Inc. Montgomery Securities J.P. Morgan Securities Inc. As Representatives of the Several Underwriters c/o Alex. Brown & Sons Incorporated 135 East Baltimore Street Baltimore, Maryland 21202 Gentlemen: CRA Managed Care, Inc., a Massachusetts corporation (the "COMPANY"), and certain shareholders of the Company (the "SELLING SHAREHOLDERS") propose to sell to the several underwriters (the "UNDERWRITERS") named in SCHEDULE I hereto for whom you are acting as representatives (the "REPRESENTATIVES") an aggregate of 2,000,000 shares of the Company's Common Stock, $.01 par value (the "FIRM SHARES"), of which 500,000 shares will be sold by the Company and 1,500,000 shares will be sold by the Selling Shareholders. The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in SCHEDULE I hereto, and the respective amounts to be sold by the Selling Shareholders are set forth opposite their names in SCHEDULE II hereto. The Company and the Selling Shareholders are sometimes referred to herein collectively as the "SELLERS." The Company also proposes to sell at the Underwriters' option an aggregate of up to 300,000 additional shares of the Company's Common Stock (the "OPTION SHARES") as set forth below. As the Representatives, you have advised the Company and the Selling Shareholders (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in SCHEDULE I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the -2- several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "SHARES." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING SHAREHOLDERS. (a) The Company represents and warrants as of the date hereof, the Closing Date and the Option Closing Date, as the case may be (as such dates are hereinafter defined), to each of the Underwriters as follows: (i) A registration statement on Form S-3 (File No. 333-[_________]) with respect to the Shares has been carefully prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "ACT"), and the Rules and Regulations (the "RULES AND REGULATIONS") of the Securities and Exchange Commission (the "COMMISSION") thereunder and has been filed with the Commissions. The Company has complied with the conditions for the use of Form S-3. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you and, to the extent applicable, were identical to the electronically transmitted copies thereof filed with the Commission pursuant to the Commission's Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"), except to the extent permitted by Regulation S-T. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462(b) of the Act, herein referred to as the "REGISTRATION STATEMENT," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has been declared effective by the Commission under the Act and no post- effective amendment to the Registration Statement has been filed as of the date of this Agreement. "PROSPECTUS" means (a) the form of prospectus first filed by the Company with the Commission pursuant to Rule 424(b) and 430A or (b) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Shares, together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "PRELIMINARY PROSPECTUS." Any reference herein to the Registration Statement, any Preliminary Prospectus or to the Prospectus shall be deemed to refer to and include any documents incorporated by reference therein, and, in the case of any reference herein to any Prospectus, also shall be deemed to include any documents incorporated by reference therein, any supplements or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rule 424(b) or Rule 430A, and prior to the termination of the offering of the Shares by the Underwriters. For purposes of this Agreement, all references to the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement to any of the foregoing, shall be deemed to include the respective copies thereof filed with the Commission pursuant to EDGAR. (ii) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the Commonwealth of Massachusetts, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. Each of the subsidiaries of the Company as listed in EXHIBIT A hereto (collectively, -3- the "SUBSIDIARIES") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Subsidiaries are the only subsidiaries, direct or indirect, of the Company. The Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification and where the failure to be so qualified would have a material adverse effect on the business or results of operations of the Company or the Subsidiaries. The outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and are owned by the Company free and clear of all liens, encumbrances and equities and claims; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding. (iii) The outstanding shares of Common Stock of the Company, including all shares to be sold by the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non-assessable; the portion of the Shares and the Option Shares, if any, to be issued and sold by the Company have been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and non- assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock. (iv) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. All of the Shares conform to the description thereof contained in the Registration Statement. The form of certificates for the Shares conforms to the corporate law of the jurisdiction of the Company's incorporation. (v) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform to, the requirements of the Act and the Rules and Regulations. The documents incorporated by reference in the Prospectus, at the time filed with the Commission conformed, in all respects to the requirements of the Securities Exchange Act of 1934 or the Act, as applicable, and the rules and regulations of the Commission thereunder. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. -4- (vi) The consolidated financial statements of the Company and the Subsidiaries, together with related notes and schedules as set forth or incorporated by reference in the Registration Statement, present fairly the financial position and the results of operations and cash flows of the Company and the consolidated Subsidiaries, at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, except as disclosed herein, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data included or incorporated by reference in the Registration Statement presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. The pro forma financial statements and other pro forma financial information included in the Registration Statement and the Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (vii) Arthur Andersen LLP, who have certified certain of the financial statements filed with the Commission as part, or incorporated by reference in, of the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (viii) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of the Subsidiaries before any court or administrative agency or otherwise which if determined adversely to the Company or any of its Subsidiaries might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and of the Subsidiaries or to prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. (ix) The Company and the Subsidiaries have good and marketable title to all of the properties and assets reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The Company and the Subsidiaries occupy their leased properties under valid and binding leases conforming in all material respects to the description thereof set forth in the Registration Statement. (x) The Company and the Subsidiaries have filed all Federal, State, local and foreign income tax returns which have been required to be filed and have paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due. All tax liabilities have been adequately provided for in the financial statements of the Company. (xi) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise), or prospects of the Company and its Subsidiaries, whether or not occurring in the -5- ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company or the Subsidiaries, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented. The Company and the Subsidiaries have no material contingent obligations which are not disclosed in the Company's financial statements which are included in the Registration Statement. (xii) Neither the Company nor any of the Subsidiaries is or with the giving of notice or lapse of time or both, will be, in violation of or in default under its Charter or By-laws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default is of material significance in respect of the condition, financial or otherwise of the Company and its Subsidiaries or the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party, or of the Charter or By-laws of the Company or any order, rule or regulation applicable to the Company or any Subsidiary of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (xiii) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (xiv) The Company and each of the Subsidiaries owns or possesses adequate licenses or other rights to use all patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, copyrights, manufacturing processes, formulae, trade secrets and know-how or other information (collectively, "INTELLECTUAL PROPERTY") described in the Prospectus as owned by or used by the Company or the Subsidiaries or which is necessary to the conduct of its business as now conducted by the Company or the Subsidiaries as described in the Prospectus. The Company is not aware of any infringement of or conflict with the rights of claims or others with respect to any of the products or Intellectual Property of the Company or the Subsidiaries which could have a material adverse effect on the business or financial condition of the Company or the Subsidiaries. The Company is not aware of any infringement of any of the Intellectual Property rights of the Company or the Subsidiaries by any third party which could have a material adverse effect on the business or financial condition of the Company or the Subsidiaries. (xv) The Company and each the Subsidiaries is conducting its business in compliance with all the laws, rules and regulations of the jurisdictions in which it is they are conducting business, except where the failure to so comply would not have, singly or in the aggregate, a material adverse effect on the business or financial condition of the Company or the Subsidiaries. -6- Without limiting the foregoing, the Company and each of the Subsidiaries holds and is operating in compliance with all licenses, authorizations, consents, approvals, certificates and permits (individually, a "PERMIT") from any regulatory body or administrative agency or other governmental body having jurisdiction including, without limitation, those Federal and state workers' compensation laws that are applicable to the operations of the Company or the Subsidiaries as now conducted or proposed to be conducted as described in the Prospectus, all of which Permits are current, except where the failure to so hold or comply with any Permit would not have, singly or in the aggregate, a material adverse effect on the business or financial condition of the Company or the Subsidiaries. The Company is not aware, nor has it received any notice of, any pending or threatened proceedings, or any circumstances which could lead them to believe that any such proceedings are imminent, relating to the revocation or modification of any such Permit or Approval which, singly or in the aggregate if the subject of an unfavorable decision, ruling or finding, could have a material adverse effect on the business or financial condition of the Company or the Subsidiaries. (xvi) Neither the Company, nor to the Company's knowledge, any of its affiliates, has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. The Company acknowledges that the Underwriters may engage in passive market making transactions in the Shares on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act. (xvii) Neither the Company nor any Subsidiary is an "investment company" within the meaning of such term under the Investment Company Act of 1940 (the "1940 ACT") and the rules and regulations of the Commission thereunder. (xviii) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xix) The Company and each of its Subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. (xx) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "CODE"); and -7- each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (xxi) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198, AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and the Company further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Finance (the "DEPARTMENT"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. (b) Each of the Selling Shareholders severally represents and warrants as follows: (i) Such Selling Shareholder now has and at the Closing Date (as such date is hereinafter defined), will have good and marketable title to the Firm Shares to be sold by such Selling Shareholder, free and clear of any liens, encumbrances, equities and claims, and full right, power and authority to effect the sale and delivery of such Firm Shares; and upon the delivery of, against payment for, such Firm Shares pursuant to this Agreement, the Underwriters will acquire good and marketable title thereto, free and clear of any liens, encumbrances, equities and claims. (ii) Such Selling Shareholder has full right, power and authority to execute and deliver this Agreement, the Power of Attorney and Custody Agreement referred to below and to perform its obligations under such Agreements. The execution and delivery of this Agreement and the consummation by such Selling Shareholder of the transactions herein contemplated and the fulfillment by such Selling Shareholder of the terms hereof will not require any consent, approval, authorization, or other order of any court, regulatory body, administrative agency or other governmental body (except as may be required under the Act, state securities laws or Blue Sky laws) and will not result in a breach of any of the terms and provisions of, or constitute a default under, organizational documents of such Selling Shareholder, if not an individual, or any indenture, mortgage, deed of trust or other agreement or instrument to which such Selling Shareholder is a party, or of any order, rule or regulation applicable to such Selling Shareholder of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (iii) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to, or which has constituted, or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of the Common Stock of the Company and, other than as permitted by the Act, the Selling Shareholder will not distribute any prospectus or other offering material in connection with the offering of the Shares. (iv) Without having undertaken to determine independently the accuracy or completeness of either the representations and warranties of the Company contained herein or the information contained in the Registration Statement, such Selling Shareholder has no reason -8- to believe that the representations and warranties of the Company contained in this Section 1 are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement which has adversely affected or may adversely affect the business of the Company or any of the Subsidiaries; and the sale of the Firm Shares by such Selling Shareholder pursuant hereto is not prompted by any information concerning the Company or any of the Subsidiaries which is not set forth in the Registration Statement or the documents incorporated by reference therein. The information pertaining to such Selling Shareholder under the caption "Selling Shareholders" in the Prospectus is complete and accurate in all material respects. 2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Sellers agree to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of [NET PRICE] per share, the number of Firm Shares set forth opposite the name of each Underwriter in SCHEDULE I hereof, subject to adjustments in accordance with Section 9 hereof. The number of Firm Shares to be purchased by each Underwriter from each Seller shall be as nearly as practicable in the same proportion to the total number of Firm Shares being sold by each Seller as the number of Firm Shares being purchased by each Underwriter bears to the total number of Firm Shares to be sold hereunder. The obligations of the Company and of each of the Selling Shareholders shall be several and not joint. (b) Certificates in negotiable form for the total number of the Shares to be sold hereunder by the Selling Shareholders have been placed in custody with CRA Managed Care, Inc. as custodian (the "CUSTODIAN") pursuant to the Power of Attorney and Custody Agreement (the "Power of Attorney and Custody Agreement") executed by each Selling Shareholder for delivery of all Firm Shares to be sold hereunder by the Selling Shareholders. Each of the Selling Shareholders specifically agrees that the Firm Shares represented by the certificates held in custody for the Selling Shareholders under the Power of Attorney and Custody Agreement are subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Shareholders for such custody are to that extent irrevocable, and that the obligations of the Selling Shareholders hereunder shall not be terminable by any act or deed of the Selling Shareholders (or by any other person, firm or corporation including the Company, the Custodian or the Underwriters) or by operation of law (including the death of an individual Selling Shareholder or the dissolution of a corporate Selling Shareholder) or by the occurrence of any other event or events, except as set forth in the Power of Attorney and Custody Agreement. If any such event should occur prior to the delivery to the Underwriters of the Firm Shares hereunder, certificates for the Firm Shares shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such event has not occurred. The Custodian is authorized to receive and acknowledge receipt of the proceeds of sale of the Shares held by it against delivery of such Shares. (c) Payment for the Firm Shares to be sold hereunder is to be made by wire transfer in same-day funds, payable to the order of the Company for the shares to be sold by it and to the order of "CRA Managed Care, Inc., as Custodian" for the shares to be sold by the Selling Shareholders, in each case against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made at the offices of -9- Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "CLOSING DATE." (As used herein, "BUSINESS DAY" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.) The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representatives request in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representatives at least one business day prior to the Closing Date. (d) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Company setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "OPTION CLOSING DATE"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to the total number of Firm Shares, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds by certified or bank cashier's check drawn to the order of the Company for the Option Shares to be sold by it against delivery of certificates therefor at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland. -10- 3. OFFERING BY THE UNDERWRITERS. It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deem it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. 4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS. (a) The Company covenants and agrees with the several Underwriters that: (i) The Company will (A) prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, and (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations. To the extent applicable, the copies of the Registration Statement and each amendment thereto (including all exhibits filed therewith), any Preliminary Prospectus or Prospectus (in each case, as amended or supplemented) furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) The Company will advise the Representatives promptly (A) when the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (iii) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may -11- reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (iv) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement, but without exhibits, and of all amendments thereto, as the Representatives may reasonably request. (v) The Company will comply with the Act and the Rules and Regulations, and the Securities Exchange Act of 1934 (the "EXCHANGE ACT"), and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly either (i) will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus or (ii) prepare and file with the Commission an appropriate filing under the Exchange Act which shall be incorporated by reference in the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (vi) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (vii) The Company will, for a period of five years from the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Representatives similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not -12- consolidated in the Company's financial statements. To the extent applicable, such reports or documents shall be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (viii) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivative of Common Stock (or agreement for such) will be made for a period of 90 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of Alex. Brown & Sons Incorporated, except that the Company may, without such consent, issue shares upon the exercise of options outstanding on the date of this Agreement issued pursuant to the Company's stock option plans. (ix) The Company will use its best efforts to list, subject to notice of issuance, the Shares on the National Association of Securities Dealers Automated Quotations ("NASDAQ") National Market. (x) The Company has caused each director and certain specified shareholders of the Company to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters, pursuant to which each such person shall agree not to: (A) offer to sell, contract to sell, transfer or otherwise dispose of, directly or indirectly, any shares of Common Stock, any options, rights or warrants to purchase any shares of Common Stock (including any stock appreciation right, or similar right with an exercise or conversion privilege at a price related to, or derived from, the market price of the Common Stock) or any securities convertible into or exchangeable for shares of Common Stock owned directly by such person or with respect to which such person has the power of disposition (including, without limitation, shares of Common Stock which such person may be deemed to beneficially own in accordance with the rules and regulations promulgated under the Exchange Act); or (B) engage in any hedging transactions with respect to the Common Stock that may have an impact on the market price of the Common Stock for a period beginning on the date of such letters and expiring 90 days following the date the Registration Statement is declared effective by the Commission (the "LOCKUP PERIOD"), directly or indirectly ("LOCKUP AGREEMENTS"); PROVIDED, HOWEVER, such officers, directors and specified shareholders shall be permitted to make the following transfers: (i) transfers of up to an aggregate of 50,000 shares of Common Stock made by gift, PROVIDED the donee thereof agrees in writing to be bound by the terms hereof; (ii) transfers to the transferor's affiliates, as such term is defined in Rule 405 promulgated under the Securities Act, PROVIDED that each transferee agrees in writing to be bound by the terms hereof; (iii) transfers made with the prior written consent of Alex. Brown & Sons Incorporated; and (iv) transfers pursuant to the Registration Statement. (xi) The Company shall apply the net proceeds of its sale of the Shares as set forth in the Prospectus and shall file such reports with the Commission with respect to the sale of the Shares and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Act. (xii) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Shares in such a manner as would require the Company or any of the Subsidiaries to register as an investment company under the 1940 Act. -13- (xiii) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock. (xiv) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. (b) Each of the Selling Shareholders covenants and agrees with the several Underwriters that: (i) Such Selling Shareholder will not: (A) offer to sell, contract to sell, transfer or otherwise dispose of, directly or indirectly, any shares of Common Stock, any options, rights or warrants to purchase any shares of Common Stock (including any stock appreciation right, or similar right with an exercise or conversion privilege at a price related to, or derived from, the market price of the Common Stock) or any securities convertible into or exchangeable for shares of Common Stock owned directly by such Selling Shareholder or with respect to which such Selling Shareholder has the power of disposition (including, without limitation, shares of Common Stock which such Selling Shareholder may be deemed to beneficially own in accordance with the rules and regulations promulgated under the Exchange Act; or (B) engage in any hedging transactions with respect to the Common Stock that may have an impact on the market price of the Common Stock during the Lockup Period, directly or indirectly, by such Selling Shareholder otherwise than hereunder or with the prior written consent of Alex. Brown & Sons Incorporated; PROVIDED, HOWEVER, such Selling Shareholder shall be permitted to make the following transfers: (i) transfers of up to an aggregate of 50,000 shares of Common Stock made by gift, PROVIDED the donee thereof agrees in writing to be bound by the terms hereof; (ii) transfers to the transferor's affiliates, as such term is defined in Rule 405 promulgated under the Securities Act, PROVIDED that each transferee agrees in writing to be bound by the terms hereof; (iii) transfers made with the prior written consent of Alex. Brown & Sons Incorporated; and (iv) transfers pursuant to the Registration Statement. (ii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with respect to the transactions herein contemplated, each of the Selling Shareholders agrees to deliver to you prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). (iii) Such Selling Shareholder will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. -14- 5. COSTS AND EXPENSES. The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company and the Selling Shareholders under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company and the Selling Shareholders; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Agreement among Underwriters, the Underwriters' Selling Memorandum, the Underwriters' Questionnaire, the Underwriters' Invitation Letter, the Power of Attorney, the Additional Listing Application, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses (including fees and disbursements of counsel to the Underwriters) incident to securing any required review by the NASD of the terms of the sale of the Shares; the Additional Listing Fee of the Nasdaq National Market; and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws. The Selling Shareholders have agreed with the Company to reimburse the Company for a portion of such expenses. To the extent, if at all, that any of the Selling Shareholders engage special legal counsel to represent them in connection with this offering, the fees and expenses of such counsel shall be borne by such Selling Shareholder. Any transfer taxes imposed on the sale of the Shares to the several Underwriters will be paid by the Sellers pro rata. The Company agrees to pay all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, incident to the offer and sale of directed shares of the Common Stock by the Underwriters to employees and persons having business relationships with the Company and its Subsidiaries. The Company shall not, however, be required to pay for any of the Underwriters' expenses (other than those related to qualification under NASD regulation and State securities or Blue Sky laws) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied, or because this Agreement is terminated by the Representatives pursuant to Section 11 hereof, or by reason of any failure, refusal or inability on the part of the Company or the Selling Shareholders to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on their part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company and the Selling Shareholders shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. CONDITIONS TO OBLIGATIONS OF THE UNDERWRITERS. The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company and the Selling Shareholders contained herein, and to the performance by the Company and the Selling Shareholders of their covenants and obligations hereunder and to the following additional conditions: -15- (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company or the Selling Shareholders, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or State court of competent jurisdiction shall have been issued as of the Closing Date or Option Closing Date, as the case may be, which would prevent the issuance of the Shares. (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation, counsel for the Company and the Selling Shareholders, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the Commonwealth of Massachusetts, with corporate power and authority to own or lease its properties and conduct its business as now conducted and described in the Registration Statement; each of the Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business now conducted and as described in the Registration Statement; the Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification, or in which the failure to qualify would have a materially adverse effect upon the business of the Company and the Subsidiaries; and the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable and are owned by the Company or a Subsidiary; and, to the best of such counsel's knowledge, the outstanding shares of capital stock of each of the Subsidiaries is owned free and clear of all liens, encumbrances and equities and claims, and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or of ownership interests in the Subsidiaries are outstanding. (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's Common Stock have been duly authorized; the outstanding shares of the Company's Common Stock, including the Shares to be sold by the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non-assessable; all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares, assuming they are in the form of the specimen filed with the Commission, are in due and proper form; the shares of Common Stock, including the Option Shares, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and non-assessable when issued -16- and paid for as contemplated by this Agreement; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue or sale thereof. (iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any shares of Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (v) The Registration Statement, all Preliminary Prospectuses, the Prospectus and each amendment or supplement thereto and each document incorporated by reference therein comply as to form in all material respects with the requirements of the Act or the Securities Exchange Act of 1934, as applicable and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules or incorporated by reference therein). The conditions for the use of Form S-3, set forth in the General Instructions thereto, have been satisfied. (vi) The statements under the captions "Risk Factors - Potential Adverse Impact of Government Regulation," "Business - Government Regulation," and "Description of Capital Stock" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, are accurate summaries and fairly and correctly present the information called for with respect to such documents and matters; and such counsel does not know of any Federal or state laws, rules or regulations relating to the provisions of workers' compensation managed care services by the Company in the jurisdictions in which the Company or any Subsidiaries conduct their business which are required to be described in the Registration Statement or the Prospectus that are not described as required. -17- (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to or incorporated by reference into the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed, incorporated by reference or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (viii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries except as set forth in the Prospectus. (ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Charter or By-laws of the Company, or any agreement or instrument known to such counsel to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries may be bound. (x) This Agreement has been duly authorized, executed and delivered by the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xii) The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act. (xiii) This Agreement has been duly authorized, executed and delivered on behalf of the Selling Shareholders. (xiv) Each Selling Shareholder has full legal right, power and authority, and any approval required by law (other than as required by State securities and Blue Sky laws as to which such counsel need express no opinion), to sell, assign, transfer and deliver the portion of the Shares to be sold by such Selling Shareholder. (xv) The Power of Attorney and Custody Agreement executed and delivered by each Selling Shareholder is valid and binding. (xvi) The Underwriters (assuming that they are bona fide purchasers within the meaning of the Uniform Commercial Code) have acquired good and marketable title to the Shares being sold by each Selling Shareholder on the Closing Date, and the Option Closing Date, as the case may be, free and clear of all liens, encumbrances, equities and claims. -18- (xvii) Such counsel has not been advised, and based on (i) a review of the Company's files which have been provided to us, (ii) inquiry of senior management of the Company and (iii) a review of the published workers' compensation rules and regulations of the states set forth on SCHEDULE III hereto, such counsel has no reason to believe that the Company or any of its Subsidiaries does not hold all Permits from any regulatory body or administrative agency or other governmental body having jurisdiction that are applicable to the operations of the Company or its Subsidiaries as now conducted or proposed to be conducted as described in the Prospectus, all of which Permits are current, except where the failure to so hold or comply with any Permit would not have, singly or in the aggregate, a material adverse effect on the business or financial condition of the Company or its Subsidiaries. To the knowledge of such counsel, there are no proceedings, pending or threatened, relating to the revocation or modification of any such Permit which, singly or in the aggregate if the subject of an unfavorable decision, ruling or finding, could have a material adverse effect on the business or financial condition of the Company or its Subsidiaries. In rendering such opinion Hutchins, Wheeler & Dittmar, A Professional Corporation, may rely as to matters governed by the laws of states other than Massachusetts or Federal laws on local counsel in such jurisdictions and as to the matters set forth in subparagraphs (xiii), (xiv) and (xv) on opinions of other counsel representing the respective Selling Shareholders, provided that in each case Hutchins, Wheeler & Dittmar, A Professional Corporation, shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Hutchins, Wheeler & Dittmar, A Professional Corporation, may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Representatives shall have received from Testa, Hurwitz & Thibeault, LLP, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (ii), (iii), and (iv) of Paragraph (b) of this Section 6, and that the Company is a duly organized and validly existing corporation under the laws of the Commonwealth of Massachusetts. In rendering such opinion Testa, Hurwitz & Thibeault, LLP may rely as to all matters governed other than by the laws of the Commonwealth of Massachusetts or Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, or any amendment thereto, as of the -19- time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact, necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement Testa, Hurwitz & Thibeault, LLP may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Representatives shall have received at or prior to the Closing Date from Testa, Hurwitz & Thibeault, LLP a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (e) You shall have received, on each of the date hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to you, of Arthur Andersen LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. (f) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission; (ii) He does not know of any litigation instituted or threatened against the Company of a character required to be disclosed in the Registration Statement which is not so disclosed; he does not know of any material contract required to be filed as an exhibit to the Registration Statement which is not so filed; and the representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be; -20- (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made; (iv) He has carefully examined the Registration Statement and the Prospectus and, in his opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and, in his opinion, since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries, whether or not arising in the ordinary course of business; (vi) All of the representations and warranties of the Company contained in this Underwriting Agreement are true and correct on and as of the date hereof and on and as of the Closing Date or the Option Closing Date, as the case may be, with the same force and effect as if made on and as of the Closing Date or the Option Closing Date, as the case may be, except for representations and warranties made as of a specific date, which were true and correct as of such date; (vii) Each of the conditions specified in Section 6 of this Underwriting Agreement has been, as of the Closing Date or the Option Closing Date, as the case may be, satisfied in all respects; and (viii) The Company has performed and/or complied with all of its agreements and covenants required to be performed or complied with under this Underwriting Agreement as of or prior to the Closing Date or the Option Closing Date, as the case may be. (g) The Representatives shall have received on the Closing Date a certificate of each Selling Shareholder to the effect that, as of the Closing Date each such Selling Shareholder shall represent as follows: (i) All of the representations and warranties of such Selling Shareholder contained in this Underwriting Agreement are true and correct on and as of the date hereof and on and as of the Closing Date with the same force and effect as if made on and as of the Closing Date except for representations and warranties made as of a specific date, which were true and correct as of such date; and -21- (ii) Such Selling Shareholder has performed and/or complied with all of such Selling Shareholder's agreements and covenants required to be performed or complied with under this Underwriting Agreement as of or prior to the Closing Date. (h) The Company and the Selling Shareholders shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested. (i) The Firm Shares and Option Shares, if any, have been approved for designation upon notice of issuance on the Nasdaq National Market. (j) The Lockup Agreements described in Section 4 (a)(x) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to Testa, Hurwitz & Thibeault, LLP, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Selling Shareholders, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE SELLING SHAREHOLDERS. The obligations of the Company and the Selling Shareholders to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. (a) The Company and the Selling Shareholders, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person upon -22- demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding and expenses reasonably incurred in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding; PROVIDED, HOWEVER, that the Company and the Selling Shareholders will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. In no event, however, shall the liability of any Selling Shareholder for indemnification under this Section 8(a) exceed the lesser of (i) proportion of the total of such losses, claims, damages or liabilities indemnified or contributed against equal to the proportion of the total Shares sold hereunder which is being sold by such Selling Shareholder, or (ii) the proceeds received by such Selling Shareholder from the Underwriters in the offering. This indemnity agreement will be in addition to any liability which the Company or the Selling Shareholders may otherwise have. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, the Selling Shareholders, and each person, if any, who controls the Company or the Selling Shareholders within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, Selling Shareholder or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, Selling Shareholder or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; PROVIDED, HOWEVER, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "INDEMNIFIED PARTY") shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on -23- account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) and by the Company and the Selling Shareholders in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under Section 8(c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Shareholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The -24- relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation, and (iii) no Selling Shareholder shall be required to contribute any amount in excess of the lesser of (A) that proportion of the total of such losses, claims, damages or liabilities indemnified or contributed against equal to the proportion of the total Shares sold hereunder which is being sold by such Selling Shareholder, or (B) the proceeds received by such Selling Shareholder from the Underwriters in the offering. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. DEFAULT BY UNDERWRITERS. -25- If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company or a Selling Shareholder), you, as Representatives of the Underwriters, shall use your reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company and the Selling Shareholders such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of shares of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company and the Selling Shareholders or you as the Representatives of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company or of the Selling Shareholders except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "UNDERWRITER" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention: Steven R. Schuh; with a copy to Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention: General Counsel; if to the Company or the Selling Shareholders, to CRA Managed Care, Inc., 312 Union Wharf, Boston, Massachusetts 02109, Attention: Donald J. Larson, with a copy to James Westra, Hutchins, Wheeler & Dittmar, A Professional Corporation, 101 Federal Street, Boston, Massachusetts 02110. 11. TERMINATION. This Agreement may be terminated by you by notice to the Company as follows: -26- (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the first business day following the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and its Subsidiaries, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable to market the Shares or to enforce contracts for the sale of the Shares, or (iii) suspension of trading in securities generally on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or may materially and adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by United States or New York State authorities, (vi) the suspension of trading of the Company's common stock by the Commission on the Nasdaq National Market or (vii) the taking of any action by any Federal or state or local governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. This Agreement also may be terminated by you, by notice to the Company as to any obligation of the Underwriters to purchase the Option Shares, upon the occurrence at any time prior to the Option Closing Date of any of the events described in subparagraph (b) above or as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of the Underwriters, the Company and the Selling Shareholders and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase. 13. INFORMATION PROVIDED BY UNDERWRITERS. The Company, the Selling Shareholders and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the -27- Underwriters), information provided in connection with Item 502(d) of Regulation S-K under the Act and the information under the caption "Underwriting" in the Prospectus. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement; the other covenants of the Company and the Selling Shareholders in this Agreement shall remain in full force and effect regardless of (a) any investigation made by or on behalf of any underwriter or controlling person and (b) delivery of and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Selling Shareholders, the Company and the several Underwriters in accordance with its terms. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination, upon request, but without warranty on your part as to the authority of the signers thereof. Any person executing and delivering this Agreement as Attorney-in-Fact for a Selling Shareholder represents by so doing that he has been duly appointed as Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and binding Power of Attorney which authorizes such Attorney-in-Fact to take such action. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.] -28- Very truly yours, CRA MANAGED CARE, INC. By: ______________________________________ Donald J. Larson, President Selling Shareholders listed on SCHEDULE II By: ______________________________________ Donald J. Larson, Attorney-in-Fact The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. ALEX. BROWN & SONS INCORPORATED DEAN WITTER REYNOLDS INC. MONTGOMERY SECURITIES J. P. MORGAN & CO. As Representatives of the several Underwriters listed on Schedule I By: Alex. Brown & Sons Incorporated By: _________________________________________ Patrick A. O'Shea, Authorized Officer SCHEDULE I SCHEDULE OF UNDERWRITERS Number of Firm Shares Underwriter to be Purchased ----------- --------------------- Alex. Brown & Sons Incorporated Dean Witter Reynolds Inc. Montgomery Securities J.P. Morgan & Co. ------------ ------------ Total 2,000,000 SCHEDULE II SCHEDULE OF SELLING SHAREHOLDERS Number of Firm Shares Selling Shareholder to be Sold ------------------- --------------------- The Silverman 1996 Grantor Retained Annuity Trust 175,000 Donald J. Larson 158,634 J.H. Whitney & Co. and affiliates 1,074,296 Kimberly A. Sutphin 25,000 Henry J. Roth 35,000 Howard J. Entin 10,000 Ryan J. Conlon 7,000 John Eric Griffiths 5,000 Paul M. Baker 5,729 John Sbarbaro 2,500 Nick Hilger 1,841 --------- Total 1,500,000 --------- --------- SCHEDULE III STATES California Colorado Connecticut Florida Illinois Maine Massachusetts Michigan New Jersey New York North Carolina Ohio Pennsylvania Tennessee Texas Utah Virginia Washington EXHIBIT A SUBSIDIARIES CRA Managed Care of Washington, Inc. (formerly known as Alta Pacific Corporation) FOCUS Healthcare Management, Inc. 3 QMC , Inc. Prompt Associates, Inc. EX-2.1 3 EXHIBIT 2.1 EXHIBIT 2.1 STOCK PURCHASE AGREEMENT BY AND BETWEEN CRA Managed Care, Inc. AND United Healthcare Services, Inc. March 19, 1996 TABLE OF CONTENTS --------------------
PAGE ---- Article I -- List of Defined Terms.................................... 1 Article II -- Sale of Shares and Closing.............................. 2 2.1 -- Purchase and Sale.......................................... 2 2.2 -- Purchase Price............................................. 2 2.3 -- The Closing................................................ 2 Article III -- Representations and Warranties of Buyer................ 3 3.1 -- Organization............................................... 3 3.2 -- Authority Relative to this Agreement....................... 3 3.3 -- Brokers and Finders........................................ 4 3.4 -- Accuracy of Representations and Warranties................. 4 3.5 -- Funding of the Transaction................................. 4 Article IV -- Representations and Warranties of Seller................ 4 4.1 -- Organization............................................... 4 4.2 -- Subsidiaries............................................... 5 4.3 -- Capitalization of the Company.............................. 5 4.4 -- Governmental Authorization and Regulations................. 5 4.5 -- Authority Relative to this Agreement....................... 5 4.6 -- Financial Statements....................................... 6 4.7 -- Employment Understandings and Labor Relations.............. 7 4.8 -- Absence of Certain Changes or Events....................... 7 4.9 -- Employee Benefit Plans..................................... 9 4.10 -- Litigation and Liabilities................................ 10 4.11 -- Compliance with Laws and Orders........................... 10 4.12 -- Tax Returns and Reports................................... 11 4.13 -- Insurance................................................. 12 4.14 -- No Defaults............................................... 13 4.15 -- Brokers and Finders....................................... 13 4.16 -- Real Estate............................................... 13 4.17 -- Contracts................................................. 14 4.18 -- Bank Accounts, Guarantees and Powers...................... 15 4.19 -- Intellectual Property Rights.............................. 15 4.20 -- Insider Interests......................................... 16 4.21 -- Absence of Certain Business Practices..................... 16 4.22 -- No Interest in Competitors................................ 16 4.23 -- Disclosure................................................ 16 4.24 -- Genesys................................................... 17 4.25 -- Accuracy of Representations and Warranties................ 17
PAGE ---- Article V -- Covenants................................................ 18 5.1 -- Affirmative Covenants of the Seller........................ 18 5.2 -- Negative Covenants of the Seller........................... 18 5.3 -- Access and Information..................................... 21 5.4 -- Additional Arrangements.................................... 21 5.5 -- Continuing Nature of Representations and Warranties........ 22 5.6 -- Tax Matters................................................ 22 5.7 -- Appropriate Action; Consents; Filings...................... 24 5.8 -- Company Employees.......................................... 24 5.9 -- Employee Benefits.......................................... 25 5.10 -- Employment Agreements..................................... 26 5.11 -- Indemnification........................................... 26 5.12 -- Survival of Indemnifications, Representations and Warranties....................................................... 28 5.13 -- Funding of the Transaction................................ 28 5.14 -- Insurance................................................. 29 5.15 -- Network Access............................................ 29 5.16 -- Audited Financials........................................ 29 5.17 -- Trademarks................................................ 29 5.18 -- Cost Reimbursement Agreement.............................. 29 Article VI -- Closing Conditions...................................... 30 6.1 -- Conditions to Each Party's Obligation...................... 30 6.2 -- Conditions to Obligation of the Seller..................... 31 6.3 -- Conditions to Obligations of Buyer......................... 31 Article VII -- Termination, Amendment and Waiver...................... 32 7.1 -- Termination................................................ 32 7.2 -- Effect of Termination...................................... 33 7.3 -- Fees and Expenses.......................................... 33 7.4 -- Amendment.................................................. 33 7.5 -- Waiver..................................................... 34 Article VIII -- General Provisions.................................... 34 8.1 -- Notice of Breach........................................... 34 8.2 -- Publicity.................................................. 34 8.3 -- Assignment................................................. 34 8.4 -- Interpretation............................................. 34 8.5 -- Notices.................................................... 34 8.6 -- Separability............................................... 35 8.7 -- Specific Performance....................................... 36 8.8 -- Entire Agreement........................................... 36 8.9 -- Governing Law.............................................. 36 8.10 -- Dispute Resolution and Remedies........................... 36 8.11 -- Counterparts.............................................. 36 8.12 -- No Third Party Benefit.................................... 36 Exhibit A............................................................. 38 Exhibit B............................................................. 39
(Copies of attachments to this agreement will be furnished by the Company upon request.) STOCK PURCHASE AGREEMENT ------------------------------ This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of March 19, 1996 is made and entered into by and between CRA Managed Care, Inc., a Massachusetts corporation ("Buyer"), and United Healthcare Services, Inc. (formerly known as UHC Management Company, Inc.), a Minnesota corporation ("Seller"). WHEREAS, Seller owns 100 shares of common stock, par value $.0005 per share, of FOCUS Healthcare Management, Inc. a Tennessee corporation (the "Company"), constituting all of the issued and outstanding shares of capital stock of the Company (such shares being referred to as the "Common Stock"). WHEREAS, Seller desires to sell, and Buyer desires to purchase, the Common Stock on the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I LIST OF DEFINED TERMS ------------------------ For purposes of this Agreement, the following terms shall be defined as follows: A. "AFFILIATE" shall mean with respect to any person (as hereinafter defined), any person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such person. B. "COMMON STOCK" shall mean the Company's common shares, $.0005 par value per share. C. "DISCLOSURE SCHEDULE" shall mean the documents prepared and delivered by the Company upon the execution of this Agreement with respect to its representations and warranties under this Agreement. D. "PERSON" shall mean an individual, a group, a corporation, a partnership, an association, a trust or any other entity or organization. E. "SUBSIDIARY" shall mean any corporation or partnership of which at least 50% of the outstanding voting securities or ownership interests are directly or indirectly owned by the Company. Unless the context otherwise requires, the terms "the Company" shall include 1 such entities and their respective Subsidiaries. For purposes of this Agreement, unless otherwise provided for, Genesys Cost Management Systems, Inc. ("Genesys") shall not be deemed to be a Subsidiary of the Company. F. "TO THE KNOWLEDGE OF" shall mean, to the extent related to the representations and warranties made in Articles III and IV, information which is known or should have been known by the officers of the Seller or the Buyer, as the case may be, listed on Exhibit A to this Agreement, as such knowledge has been obtained in the normal conduct of the business and following, unless otherwise stated, a reasonable investigation or inquiry by Buyer or Seller, as the case may be, for the express purpose of making such representations and warranties. ARTICLE II SALE OF SHARES AND CLOSING ------------------------------- Section 2.1 Purchase and Sale. Seller agrees to sell to Buyer, and Buyer ------------------------------ agrees to purchase from Seller, all of the right, title and interest in and to all of the outstanding Common Stock of the Company (the "Common Stock") on the terms and subject to the conditions set forth in this Agreement. Section 2.2 Purchase Price. The purchase price for the Common Stock is --------------------------- $21,000,000 (Twenty-one million dollars) (the "Purchase Price"). Section 2.3 The Closing. - ------------------------ (a) The closing of the transactions contemplated by this Agreement (the "Closing") will take place at the offices of Hutchins, Wheeler & Dittmar, at 10:00 a.m. on April 1, 1996 (the "Closing Date"), or at such other place and at such other date as is mutually agreeable to Buyer and Seller. The purchase and sale of the Common Stock will be effective as of 5:00 p.m. EST on the Closing Date or such other date designated by the parties. (b) Subject to the conditions set forth in this Agreement, the parties agree that at the Closing: (i) Buyer shall deliver to Seller the Purchase Price by Federal Funds wire transfer of immediately available funds to the account designated by Seller; (ii) Seller shall deliver to Buyer a stock certificate, free and clear of all liens and encumbrances and restrictions, evidencing the Common Stock and registered in Buyer's name; 2 (iii) Each of the parties shall deliver to the other the documents required to be delivered pursuant to Agreement; and (iv) Buyer shall pay to Seller $12,000 (Twelve thousand dollars) in consideration of certain agreements of Seller made pursuant to Section 5.8 herein. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER ----------------------------------------------- Buyer represents and warrants to the Seller as follows that, except as set forth in a Disclosure Schedule: Section 3.1 Organization. Buyer is a corporation duly incorporated, validly ------------------------- existing and in good standing under the laws of its jurisdiction of incorporation and has the requisite corporate power to carry on its respective business as it is now being conducted. Section 3.2 Authority Relative to this Agreement. - ------------------------------------------------- (a) Buyer has the requisite corporate power to enter into this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized, to the extent required, by the Board of Directors of Buyer, and no other corporate proceedings on the part of Buyer are necessary to authorize the execution, delivery and performance of this Agreement, and the transactions contemplated by hereby and thereby. This Agreement has been duly and validly executed and delivered by Buyer and is a valid and binding obligation of Buyer enforceable against it in accordance with its terms. (b) Buyer is not subject to or obligated under: (i) any charter or by-law; (ii) to the knowledge of Buyer, any provision of any material contract, mortgage, indenture, lease or other instrument or agreement or any material license, franchise or permit; or (iii) any material order or decree, which would be breached or violated or in respect of which a right of acceleration would be created adversely affecting its ability to comply with its obligations and commitments hereunder, by its executing, delivering and carrying out this Agreement. (c) To the knowledge of Buyer: 3 (i) there is no legal impediment to the execution and delivery of this Agreement by Buyer and (ii) except as referred to herein, and except for compliance with the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "H-S-R Act"), (x) there is no legal impediment to the consummation of the transactions contemplated hereby by Buyer, (y) no filing, notice to, or registration with, or authorization, consent or approval of, any public body or authority and (2) no notice to, consent or approval of any third party or entity, is necessary for the consummation by Buyer of the transactions contemplated hereby. Section 3.3 Brokers and Finders. No broker, finder or financial advisor is -------------------------------- acting or has acted on behalf of Buyer or is entitled to receive any brokerage fees, commissions, finders' fees or financial advisory fees in connection with the transactions contemplated herein. Section 3.4 Accuracy of Representations and Warranties. No representation ------------------------------------------------------- or warranty made by Buyer to the Seller in this Agreement is false or misleading with respect to any material fact, or omits or fails to state a material fact necessary to make the statements contained therein not misleading. Section 3.5 Funding of the Transaction. Buyer will have sufficient cash on --------------------------------------- hand and available through bank facilities in effect and approved for the purchase of the Common Stock to pay the Purchase Price as required by this Agreement without any contingency or approval by a third party. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER ------------------------------------------------ Except as set forth and described in the Disclosure Schedule (which shall specifically reference the applicable Section of this Agreement), the Seller represents and warrants to Buyer as follows: Section 4.1 Organization. The Company is a corporation duly incorporated, ------------------------- validly existing and in good standing under the laws of the State of Tennessee and has the requisite corporate power to carry on its business as it is now being conducted. The Company is duly qualified and licensed to conduct business as a foreign corporation, and is in good standing in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary other than where failure to be so qualified would not materially adversely effect the Company's ability to carry on its business as currently conducted. All jurisdictions where the Company or any Subsidiary is required to be or is qualified to do business as a foreign corporation due to the nature of its operations are listed in Section 4.1 of the Disclosure 4 Schedule. The Company has previously furnished to Buyer true and complete copies of the articles of incorporation and by-laws, each as amended to date, of the Company. Section 4.2 Subsidiaries. The Company has no Subsidiaries. ------------------------- Section 4.3 Capitalization of the Company. - ------------------------------------------ (a) As of the date of this Agreement, the authorized capital stock of the Company consists of the following: (i) 20,000,000 shares of Common Stock, of which: (1) 100 shares are issued and outstanding and owned by the Seller; (2) 19,999,900 shares are reserved for future issuance. (ii) 102,000 shares of Preferred Stock, par value .01, none of which is issued or outstanding All of the issued and outstanding shares of Common Stock are duly authorized, validly issued, fully paid and non-assessable and free of preemptive rights. At Closing there will be, no options, warrants, rights, agreements, commitments or outstanding securities obligating the Company to issue, transfer or sell, or to redeem, purchase or otherwise acquire, directly or indirectly, any shares of Common Stock and no obligations to issue, transfer or sell any Shares of Common Stock. All of the Common Stock is held by the Seller and the Seller will transfer the Common Stock to the Buyer free and clear of all liens, encumbrances and restrictions. Section 4.4 Governmental Authorization and Regulations. Section 4.4 of the ------------------------------------------------------- Disclosure Schedule lists all material governmental licenses, permits, certificates, consents, certificates of authority, bonds, orders or other approvals currently held by the Company. The Company holds all governmental licenses, permits, certificates, consents, certificates of authority, bonds, orders, approvals and other authorizations, whether foreign, federal, state or local, necessary for the operation of its business, as currently conducted and as contemplated by this Agreement to be conducted and to own, hold under lease or operate its properties where the absence of such items would have a material adverse effect on the business or financial condition of Company. Section 4.5 Authority Relative to this Agreement. - ------------------------------------------------- (a) Seller has the requisite corporate power to enter into this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and have been duly authorized, to the extent required, by the Board of Directors of the Seller and, no other corporate proceedings on the part of the Seller 5 will be necessary to authorize this Agreement, and the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Seller and is a valid and binding obligation of the Seller enforceable against the Seller in accordance with its terms. (b) The Seller is not subject to or obligated under: (i) its charter or bylaws; (ii) any provision of any material obligation or right, whether a contract, mortgage, indenture, lease or other instrument or agreement or any license, franchise or permit; or (iii) any order or decree, which, to the knowledge of Seller, would be breached or violated in any material respect or in respect of which a right of acceleration or termination would be created, adversely affecting its ability to comply with its obligations and commitments hereunder, by the execution, delivery and carrying out of this Agreement. (c) To the knowledge of the Seller: (i) there is no legal impediment to the Company's execution and delivery of this Agreement; and (ii) except as referred to herein or in the Disclosure Schedules, and except for compliance with the provisions of the H-S-R Act, (x) there is no legal impediment to the Company's consummation of the transactions contemplated hereby, and (y) no filing or registration with, or authorization, consent or approval of, any public body or authority and no consent or approval of any third party or entity, is necessary for the consummation by the Company of the transactions contemplated hereby. Section 4.6 Financial Statements. - --------------------------------- (a) Section 4.6(a) of the Disclosure Schedule sets forth the unaudited balance sheet of the Company as of December 31, 1994 and the unaudited income statement for the year then ended (the "1994 Financials") and unaudited balance sheet as of December 31, 1995 and the unaudited income statement for the year then ended (the "1995 Financials"). The 1994 Financials and the 1995 Financials are sometimes collectively referred to as the "Financial Statements". (b) The Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis (except as may be indicated in any audited financial statements or in the notes thereto) and fairly present the financial position of the Company as at the dates thereof and the results of their operations and changes in financial position for the periods then ended. 6 (c) The accounts receivable balance and related reserve for doubtful accounts shown on the Financial Statements are reported in accordance with GAAP and as of the date of this Agreement, the Company has no knowledge that any such receivables are currently not collectible in the normal course of business consistent with past practice, except to the extent reserved against as being uncollectible. Section 4.7 Employment Understandings and Labor Relations. - ---------------------------------------------------------- (a) There are no written or oral employment agreements or contracts relating to employment to which the Company is a party or for which the Company has any liability. Each of the written contracts or agreements is, to the knowledge of the Company, valid, binding and enforceable in accordance with its terms, and none of the parties thereto is, to the knowledge of the Company, in default of any of its obligations thereunder. (b) Section 4.7(b) of the Disclosure Schedule contains a complete listing of all unfair labor practice complaints, labor disturbances or other controversies respecting employment, whether pending or, to the knowledge of the Company, threatened, or proposed against the Company, or to the best of Seller's knowledge, any current employee, officer, or director. The Company is in material compliance with all laws materially affecting employment and employment practices, terms and conditions of employment and wages and hours and is not engaged in any unfair labor practice. The Company is not a party to or bound by any collective bargaining agreement with any labor union or organization nor, to the knowledge of the Company, are any of its employees represented by any labor union or organization. To the knowledge of the Company there are no union organization attempts underway with respect to the employees of the Company. To the knowledge of the Company, no employee of the Company is subject to any secrecy or noncompetition agreement or any agreement or restriction of any kind with any third party that would impede in any material way the ability of such employee to carry out fully all activities of such employee in furtherance of the business of the Company. (c) Section 4.7(c) of the Disclosure Schedule contains a complete listing of all written or oral agreements or understandings relating to individuals or entities providing services to the Company as independent contractors and which provide for annual payments in excess of $100,000.00. Section 4.8 Absence of Certain Changes or Events. Except as described in ------------------------------------------------- the Financial Statements (or in the notes thereto), or as otherwise agreed to in this Agreement or in writing by Buyer, since the date of the 1995 Financials: (a) the Company has conducted its business only in ordinary and usual course; (b) there has not been any material adverse change in the condition (financial or otherwise), results of operations, businesses, properties, assets, liabilities or earnings of the 7 Company taken as a whole and the Company is not aware of any information (excluding public information regarding economic conditions and similar matters of general application) which reasonably could be expected to result therein; (c) neither the Seller nor the Company has entered into any employment or severance agreements, or granted any increase in compensation, bonuses, severance pay, or other employee benefits, payable to or with respect to any Company Employee (as defined in Section 5.8 of this Agreement), except for any increase in compensation granted in the ordinary course of business consistent with past practices for the Company Employees or as required under Sections 5.8 or 5.9 of this Agreement. (d) the Company has not made any loans or advances to any officer, director, shareholder or Affiliate of the Company (except for ordinary travel and business expense payments); (e) the Company has not declared or paid, or accrued any liability for the payment of, any dividends or made any other distributions to its shareholders with respect to shares of Common Stock; (f) the Company has not entered into any material commitment or transaction (including without limitation any borrowing or capital expenditure) other than in the ordinary course of business; (g) there has not been any material change in the accounting methods or practices followed by the Company except as required by GAAP and disclosed to Buyer; (h) the Company has not incurred any debt, liability or obligation, whether accrued, absolute, contingent or otherwise, which is material to the business or financial condition of the Company other than in the ordinary course of business; (i) the Company has not sold, assigned, transferred or granted any exclusive license with respect to any trademark, trade name, service mark, copyright, trade secret or other intangible asset; (j) the Company has not issued, redeemed or repurchased any stock, bond or other corporate security; (k) the Company has not experienced any material damage, theft or loss; (l) the Company has not relinquished any material contract or contract right; (m) the Company has not entered into any commitment (contingent or otherwise) to do any of the foregoing. 8 Section 4.9 Employee Benefit Plans. - ------------------------------------ (a) Section 4.9(a) of the Disclosure Schedule sets forth any pension, retirement, savings, disability, medical, dental, health, life, severance pay, Internal Revenue Code Section 125 "cafeteria" or "flexible benefit", vacation pay, sick pay, stock purchase, stock option, deferred compensation, incentive compensation, fringe benefit, stay-with-bonus, change of control agreement or other employee benefit plan, program or arrangement (including without limitation, any employee pension benefit plan as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and any employee welfare benefit plan as defined in Section 3(1) of ERISA), under which Company Employees (as defined in Section 5.8 of this Agreement) are entitled to participate or benefit, whether or not any of the foregoing is funded and whether insured or self-funded (the "Employee Benefit Plans"). (b) Each Employee Benefit Plan maintained by the Seller in connection with the Company is in substantial compliance with applicable law and has been administered and operated in all material respects in accordance with its terms. Each Plan which is intended to be "qualified" within the meaning of Section 401(a) of the Internal Revenue Code of 1986, as amended, has received a favorable determination letter from the Internal Revenue Service and no event has occurred and no condition exists which could reasonably be expected to result in the revocation of any such determination. (c) A true and complete copy of each Employee Benefit Plan, and where applicable, a copy of the most recent IRS Form 5500 annual report, IRS determination letter, trust agreement or other funding arrangement, and summary plan description with respect to each such Employee Benefit Plan has been furnished to Buyer. (d) None of the Employee Benefit Plans provide benefits with respect to current or former Company Employees (or their beneficiaries) beyond their retirement or other termination of employment, other than (i) coverage for benefits mandated by applicable law, (ii) death benefits or retirement benefits under an employee pension benefit plan (as defined by section 3(2) of ERISA), (iii) benefits, the full cost of which is borne by the current or former Company Employee, or beneficiary; or (iv) severance or disability plans identified on Section 4.9(a) of the Disclosure Schedule. (e) None of the Employee Benefit Plans is or has been subject to Title IV of ERISA. None of the Seller, the Company, or any entity required to be aggregated with the Seller or the Company for purposes of section 414 of the Code or section 4001 of ERISA has (while so aggregated) terminated an employee pension benefit plan (as defined in section 3(2) of ERISA) that is or has been subject to Title IV of ERISA, nor has any such employee pension benefit plan ever been the subject of termination proceedings by the Pension Benefit Guaranty Corporation. No Person has engaged in any transaction in connection with any Employee Benefit Plan that 9 could reasonably be expected to result in the imposition of a penalty pursuant to section 502(i) of ERISA, damages pursuant to section 409 of ERISA, or a tax pursuant to section 4975(a) of the Code. No liability, claim, action, or litigation has been incurred, made, commenced, or threatened in connection with any Employee Benefit Plan against the Company, its officers, or directors, or any Employee Benefit Plan, or any fiduciary or administrator thereof (other than for routine claims for benefits and administrative expenses payable in the ordinary course). (f) All required contributions to, and all payments with respect to, the Employee Benefit Plans have been timely made. (g) The consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former Company Employee to any severance or termination pay, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation due any such Company Employee, except as specifically provided in Sections 5.8 and 5.9 of this Agreement with respect to Seller's 401(k) Plan (as defined in Section 5.8). Section 4.10 Litigation and Liabilities. - ----------------------------------------- (a) Section 4.10 of the Disclosure Schedule lists and briefly describes all claims, actions, suits, disputes, proceedings or governmental or regulatory investigations involving, pending or, to the knowledge of the Company threatened against the Company. Except as noted in Section 4.10 of the Disclosure Schedule, none of the matters listed therein may reasonably be expected to have a materially adverse effect upon the Company's operations as currently conducted. (b) To the knowledge of the Seller, there are no judgments, consents, decrees, injunctions or any other judicial or administrative mandates outstanding against the Company. Section 4.11 Compliance with Laws and Orders. - ---------------------------------------------- (a) The Company is in compliance in all material respects with all laws, regulations and orders and governing instruments applicable to it and to the conduct of its business and the Company has not received any notice of any material noncompliance with any laws, regulations and orders and governing instruments applicable to it and the conduct of its business, and (b) The Company is not in default under, and no event has occurred which, with the lapse of time or action by a third party, could result in the default under, the terms of any judgment, order, writ, decree, permit or license of any agency of any government or court, whether federal, state, municipal or local and whether at law or in equity except where such default would not materially adversely effect the Company's ability to carry on its business as it is now being conducted. 10 Section 4.12 Tax Returns and Reports. - -------------------------------------- (a) All federal, state, local and foreign tax returns, declarations, report estimates, statements and information return required to be filed in respect of Taxes, as defined in Section (m) below ("Tax Returns") required to be filed for the periods through the Closing Date by the Company have been or will be filed with the appropriate governmental authorities in all jurisdictions in which such Tax Returns are required to be filed, and all such Tax Returns and reports properly reflect in all material respects the taxes, reporting requirements and responsibilities of the Company for the periods shown thereon. All Taxes shown to be due by the Tax Returns, or which are otherwise claimed to be due, to any taxing authority from the Company have been paid or provided for. All Taxes required to be withheld, collected or deposited by the Company have been timely withheld, collected, or deposited and, to the extent required, have been paid to the relevant Tax Authority. The liabilities for Taxes, other than deferred Tax liabilities, provided for in the Financial Statements are in all material respects sufficient for payment of all unpaid Taxes accrued for or applicable to the Company through the periods reflected in such Financial Statements. The Company has not received any notice of audit, assessment or investigation by the Internal Revenue Service or any other taxing authority in connection with any Tax Returns and there are no pending tax examinations of or Tax claims asserted against the Company, or any of its properties. There are no Tax liens on any of the properties or assets of the Company or its Subsidiaries except for liens of current Taxes not yet due and payable. The Company has not waived any law or regulation fixing, or consented to the extension of, any period of time for assessment of any Taxes which waiver or consent is currently in effect. (b) The Company is not a party to any agreement, contract, arrangement or plan that has resulted or would result in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code. (c) The Company has not received any outstanding subpoenas or requests for information with respect to any federal income tax returns of the Company or the Taxes reflected on such returns. (d) No consent under Section 341(f) of the Code has been filed with respect to the Company. (e) The Company has not been at any time a member of any partnership or joint venture or the holder of a beneficial interest in any trust for any period for which the statute of limitations for any Tax potentially applicable as a result of such membership or holding has not expired. (f) The Company was not acquired in a qualified stock purchase under Section 338(d)(3) of the Code and no elections under Section 338(g) of the Code, protective carryover basis 11 elections, offset prohibition elections or other deemed or actual elections under Section 338 of the Code are applicable to the Company or any Subsidiaries. (g) The Company is not nor has been subject to the provisions of Section 1503(d) of the Code. (h) There are no outstanding waivers or agreements extending the statute of limitations for any period with respect to any Tax, other than real or personal property Taxes; to which the Company may be subject. (i) The Company has provided to Buyer a complete and accurate list of locations by city and state or country in which the Company presently does business, is qualified to do business or files any state, local or foreign income, payroll or franchise tax returns. (j) The Company's net operating losses have been limited under Section 382 of the Code, as described in the Disclosure Schedule, as a result of changes in ownership of the Common Stock or Preferred Stock occurring prior to Closing. (k) The Company has no liability for the Taxes of any person other than the Seller and its affiliates (i) under Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract, or (iv) otherwise. (l) Seller is a wholly-owned subsidiary of the "common parent" of an "affiliated group" of corporations (as those terms are used in section 1504(a) of the Code and the Treasury regulations promulgated under section 1502 of the Code) that includes the Company (the "Seller Group"). The Seller and the Company will be included in the consolidated federal income Tax Return filed by Seller's owner for the Taxable Period including the Closing Date. (m) For purposes of this Agreement, the term "Taxes" means all taxes, charges, fees, levies or other assessments, including, without limitation, all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll employment, social security, unemployment, excise, estimated, severance, stamp, occupation, property or other taxes, customs duties, fees assessments or charges of any kind whatsoever, including, without limitation, all interest and penalties thereon and additions to tax or additional amounts imposed by any taxing authority, domestic or foreign, upon the Company or any subsidiary. Section 4.13 Insurance. Section 4.13 of the Disclosure Schedule contains a ------------------------ list of all the insurance policies maintained by or on behalf of the Company, on its respective properties, assets, business, operations or personnel. To the knowledge of the Company, its business operations and all insurable properties and assets are insured in all material respects for their benefit against all risks that are customarily insured against in the industry and that are usually insured against by 12 businesses operating similar businesses or properties in the localities where such businesses or properties are located, in each case: (a) under policies issued by insurers of recognized responsibility, in such amounts with such deductibles and against such risks and losses as are, in the reasonable opinion of the Seller, adequate for the business engaged in by the Company, or (b) by self-insurance or self-retention by the Company as described in the Disclosure Schedule. All such policies are in full force and effect and neither the Company is in default (A) thereunder in any manner which could result in the denial of coverage or cancellation of a policy, or (B) in the payment of any premium. Except for the Texas Association of School Boards litigation, there currently is no outstanding material claim with respect to such insurance coverage. Neither the Company nor any Subsidiary has received notification of, and, to the knowledge of the Company, no grounds exist for, the cancellation or proposed cancellation of any such policies. To the knowledge of the Company there is no reason why any such policies would not be valid, binding and enforceable in all material respects, except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, is subject to the discretion of the court before which any proceeding thereof may be brought. The Company has not failed to give any notice or present any claim thereunder in accordance with such policies, such as would permit the insurer to deny coverage under such policies. Section 4.14 No Defaults. The Company is not nor, to the Company's -------------------------- knowledge is any other party thereto, in material violation or breach of, and, to the knowledge of the Seller, no event exists which constitutes or would (after notice or lapse of time or both) constitute a material default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any Company Contract, (as defined in Section 4.17). Section 4.15 Brokers and Finders. No broker, finder or financial advisor ---------------------------------- is acting or has acted on behalf of Seller or is entitled to receive any brokerage fees, commissions, finders' fees or financial advisory fee in connection with the transactions contemplated herein. Section 4.16 Real Estate. - -------------------------- (a) The Company does not own any real property. The leased property listed in Section 4.16 of the Disclosure Schedule constitutes all of the real property, in excess of 5,000 square feet, occupied by the Company (the "Real Property"). The Real Property has access sufficient for the conduct of the Company's business as now conducted or as presently proposed to be conducted to public roads and to all utilities, including electricity, sanitary and storm sewer, potable water, 13 natural gas and other utilities, used in the operation of the business of the Company at that location. (b) To the knowledge of the Seller, the leases described in Section 4.16 the Disclosure Schedule are in full force and effect, and the Company holds a valid and existing leasehold interest under each of the leases for the term set forth in Section 4.16(b) of the Disclosure Schedule. The Company has delivered to Buyer complete and accurate copies of each of the leases described in Section 4.16 of the Disclosure Schedule, and none of such leases has been modified in any material respect, except to the extent that such modifications are disclosed by the copies delivered to Buyer. The Company is not in material default, and to the knowledge of the Company no circumstances exist which, if unremedied, would, either with or without notice or the passage of time or both, result in the Company's material default under any of such leases; nor, to the knowledge of the Seller, is any other party to any of such leases in material default. (c) The buildings, machinery, equipment and other tangible assets used in the conduct of the Company's business are in good condition and repair, ordinary wear and tear excepted, and are usable in the ordinary course of business. There are no material defects in such assets or other conditions relating thereto which, in the aggregate, materially adversely affect the operation value of such assets. The Company owns, or leases under valid leases, all buildings, machinery, equipment and other tangible assets reasonably necessary for the conduct of its business. (d) The Company is not in violation in any material respect of any applicable zoning ordinance or other law, regulation or requirement including laws relating to hazardous waste disposal, relating to the operation of any properties used in the operation of its business, and the Company has not received any notice of any such violation, or the existence of any condemnation proceeding with respect to any of the Real Property, except, in each case, with respect to violations or proceedings the potential consequences of which do not or will not materially impair the use of any of the Company's Real Property. Section 4.17 Contracts. - ------------------------ (a) Section 4.17(a) of the Disclosure Schedule sets forth as of the date of this Agreement a list of each contract or agreement of the Company including, without limitation, contracts or agreements between the Company, on the one hand, and any person or entity, on the other hand (together with the contracts and agreements listed in Section 4.17(b) of the Disclosure Schedule, the "Company Contracts"): (i) involving an aggregate payment or commitment per contract or agreement on the part of either of the parties thereto of more than $100,000 during the 12-month period ended December 31, 1995; (ii) concerning a material partnership or joint venture with another person; 14 (iii) pursuant to which assets or services are provided to or from an affiliate in excess of $10,000 in any 12-month period; or (iv) which is otherwise material to the Company. To the Company's knowledge, all the Company Contracts are valid and in full force and effect on the date hereof. Correct and complete copies of all written Company Contracts have been made available to Buyer and the terms of all oral Company Contracts have been disclosed to Buyer. (b) Section 4.17(b) of the Disclosure Schedule lists each Company Contract to which the Company or any Subsidiary is a party and which limits the right of the Company prior to the Closing Date or any of its subsidiaries at or after the Closing Date, to engage in, or to compete with any person in, any business, including each contract or agreement containing exclusivity provisions restricting the geographical area in which, or the method by which, any business may be conducted by the Company prior to the Closing Date, or Buyer or any of its subsidiaries after the Closing Date. (c) As of the date of this Agreement, to the knowledge of the Company, the relationships of the Company with their customers are good commercial working relationships. During 1995, no material customer of the Company or its Subsidiaries has canceled or otherwise terminated its relationship with the Company or such Subsidiaries and to the Company's knowledge no material customer of the Company or any Subsidiary currently intends to cancel or otherwise terminate its relationship with the Company or its Subsidiaries. Section 4.18 Bank Accounts, Guarantees and Powers. Section 4.18 of the --------------------------------------------------- Disclosure Schedule sets forth: (a) a list of all accounts maintained by the Company at any bank or other financial institution; (b) all agreements or commitments of the Company guaranteeing the payment of money or the performance of other obligations or contracts by any third persons (other than endorsements of negotiable instruments in the ordinary course of the Company's or any Subsidiary's business); and (c) the names of all persons, firms, associations, corporations or business organizations holding general or special powers of attorney from the Company or any Subsidiary together with a summary of the terms thereof. Section 4.19 Intellectual Property Rights. Section 4.19 of the Disclosure ------------------------------------------- Schedule sets forth (a) all material patents, trademarks, service marks, tradenames, slogans, registered copyrights, and 15 commercially significant unregistered copyrights owned, used, or licensed by the Company (the "Marks and Rights"), including all titles, registration numbers, application numbers, dates of registration and application, inventors, licensor, and licensees, as applicable; and (b) all litigation and claims currently outstanding or brought or made by the Company or by a third party against the Company since January 1, 1994, involving the Marks and Rights or trade secrets, including all conflicting claims of ownership and claims of infringement of the Marks and Rights or the trade secrets. The Company or Seller's parent company owns or possesses the right to use all Marks and Rights Company currently uses, and to the knowledge of the Company, there are no conflicts with the rights of others with respect to such use. Section 4.20 Insider Interests. No present officer or director or employee -------------------------------- of the Company (a) owns, directly or indirectly, in whole or in part, any of the material properties used in the business of the Company, (b) has received a loan or advance from the Company (other than with respect to business and travel expenses) which is currently outstanding, (c) has the right to borrow from the Company (other than with respect to business travel), (d) has any obligation to make any loan to the Company, or (e) has any other material business relationship with the Company other than in his or her capacity as an officer, director, shareholder, employee, health care provider, provider of legal services or subscriber. Section 4.21 Absence of Certain Business Practices. Neither the Company ---------------------------------------------------- nor, to the knowledge of the Company, any officer, employee or agent of the Company, nor any other person or entity acting on its behalf, has, directly or indirectly, given or agreed to give any gift or similar benefit to any customer, supplier or governmental employee or other person who is or may be in a position to help or hinder the business of the Company (or assist the Company in connection with any actual or proposed transaction) which (a) might subject the Company, to any material damage or penalty or to any material civil, criminal or governmental litigation or proceeding, (b) if not given in the past, might have materially adversely affected the assets, business or operations of the Company as reflected in the Financial Statements, or (c) if not continued in the future, might materially adversely affect the Company's assets, business or operations or which might subject the Company to suit or penalty in any private or governmental litigation or proceeding. Section 4.22 No Interest in Competitors. No officer, director or, to the ----------------------------------------- knowledge of the Seller, employee of the Company directly or indirectly owns any interest in, or controls or is a participant in or consultant to, any corporation, partnership, limited partnership, joint venture, association or other entity which is a competitor, landlord, or tenant of the Company, other than an ownership interest involving less than five percent (5%) of the equity securities of any entity which is traded on a recognized stock exchange or quoted on a consolidated reporting system. Section 4.23 Disclosure. To the knowledge of the Seller, it has not ------------------------- withheld any material facts relating to the ongoing business or financial condition of the Company from Buyer, and copies of all documents which have been delivered or made available to Buyer are true, correct and 16 complete copies thereof, and include all material amendments, supplements or modifications thereto or material waivers thereunder. Section 4.24 Genesys. - ---------------------- (a) Section 4.24(a) of the Disclosure Schedule sets forth with respect to Genesys as of January 28, 1994: (i) the authorized capital stock; (ii) the number of shares issued and outstanding; (iii) the identity of the holders of all such shares of issued and outstanding shares of stock; and (iv) the number of shares held in treasury of Genesys. As of the date hereof, all of the shares of capital stock of Genesys held by the Company are duly authorized, validly issued, fully paid and non-assessable. (b) Genesys ceased all active business operations on July 31, 1993, and since that time has had no ongoing business operations and is currently inactive. (c) The Amended and Restated Stockholder Agreement, dated as of December 31, 1992, by and between the Company and Corporate Systems, Ltd. (the "Stockholder Agreement"), a copy of which has been delivered to Buyer and which is listed in the Disclosure Schedule, is valid, in full force and effect and has not been superseded or amended in any way. (d) The cessation of Genesys' operations was performed in material compliance with (i) all applicable laws and regulations, including requirements relating to regulatory approvals or notifications and employee terminations; and (ii) all applicable client or provider agreements and employee benefit plans or programs. (e) Other than compliance with the Stockholder Agreement, the Company has no current or future obligations, financial or otherwise, whether accrued or not, known or unknown, with respect to Genesys or its prior business or employees. Section 4.25 Accuracy of Representations and Warranties. No representation --------------------------------------------------------- or warranty made by the Seller and Buyer in this Agreement is false or misleading with respect to any material fact, 17 or omits or fails to state a material fact necessary to make the statements contained therein not misleading. ARTICLE V COVENANTS ----------- Section 5.1 Affirmative Covenants of the Seller. The Seller hereby ------------------------------------------------- covenants and agrees that, unless otherwise agreed in writing by Buyer or as otherwise contemplated by this Agreement, from the date hereof through the Closing Date, the Company will: (a) Operate its business in the ordinary and usual course and consistent with past practices; (b) Use best efforts to preserve intact its business organization and assets, maintain its rights and franchises, retain the services of its respective officers and key employees and maintain the relationships with its respective customers and suppliers; (c) Use best efforts to keep in full force and effect its property and liability insurance and bonds comparable in amount and scope of coverage to that currently maintained; and (d) Confer with Buyer at its request to report operational matters and general status of the ongoing operations of the business of the Company. The Company shall promptly inform Buyer of any unexpected emergency or other change in the normal course of business or in the operations of the business, of any investigation or review pending or threatened by any governmental entity and of submissions to the Company's Board of Directors involving any material business, asset or property, and of any material litigation, investigation, review or audit instituted or threatened by any party, and shall keep Buyer fully informed of developments with respect to such events and permit Buyer's representatives access to all materials prepared by, or delivered to, the Company in connection therewith. Section 5.2 Negative Covenants of the Seller. Except as expressly ---------------------------------------------- contemplated by this Agreement or as otherwise agreed to in writing by Buyer, from the date hereof through the Closing Date, the Seller covenants that the Company shall not do any of the following: (a) amend its charter or bylaws; (b) except for the payment of bonuses for 1995 performance (which are funded by Seller), increase the compensation payable or to become payable to any director, officer or employee (including any Company Employee), except for increases in salary or wages payable or to become payable in the ordinary course of business and consistent with past practice for Company Employees; 18 (c) grant or increase any severance or termination pay (other than pursuant to the normal severance policy of the Company in effect on the date of this Agreement as disclosed to Buyer on Disclosure Schedule 4.9(a)) to, or enter into any severance agreement; (d) enter into any employment agreement except in accordance with Section 5.8 of this Agreement; (e) establish, adopt, enter into or amend any employee benefit plan, program or arrangement, except as may be required to comply with applicable law, or as required under Section 5.8 of this Agreement with respect to the Company's adoption of Seller's 401(k) Plan; (f) declare or pay any dividend on, or make any other distribution in respect of, outstanding shares of capital stock; (g) redeem, purchase or otherwise acquire any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock, or any options, warrants or conversion or other rights to acquire any shares of its capital stock or obligations; (h) effect any reorganization or recapitalization; (i) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for, shares of its or its respective Subsidiaries' capital stock; (j) issue, deliver, award, grant, or sell, or authorize the issuance, delivery, award, grant or sale (including the grant of any security interests, liens, claims, pledges, limitations in voting rights, charges or other encumbrances) of, any shares of any class of its capital stock (including shares held in treasury), any securities convertible into or exercisable or exchangeable for any such shares, or any rights, warrants or options to acquire any such shares or amend or otherwise modify the terms of any such rights, warrants or options the effect of which shall be to make such terms more favorable to the holders thereof; (k) acquire or agree to acquire, by merging or consolidating with, by purchasing an equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets of any other person (other than the purchase of assets from suppliers or vendors in the ordinary course of business and consistent with past practice); (l) sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of any material amount of 19 any of its assets, except for dispositions in the ordinary course of business and consistent with past practice; (m) initiate, solicit or encourage (including by way of furnishing information or assistance) any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Competing Transaction (as such term is defined below), or authorize any of the officers or directors of the Company to take any such action, and the Company shall use its reasonable efforts to cause the directors, officers, employees, agents, and representatives of the Company (including, without limitation, any investment banker, financial advisor, attorney or accountant retained by the Seller) not to take any such action. Seller shall promptly notify Buyer if any such inquiries or proposals are received by the Company or any of its or their other respective officers, directors, investment bankers, financial advisors, attorneys, accountants or other representatives; PROVIDED, HOWEVER, that nothing in this Section 5.2(m) shall limit the Seller from taking any actions required of it by applicable law. For purposes of this agreement, "Competing Transaction" shall mean any of the following involving the Company (other than the transactions contemplated by this Agreement): (i) any merger, consolidation, share exchange, business combination or other similar transaction; (ii) any sale, lease, mortgage, pledge, transfer or other disposition of twenty percent or more of the assets of the Company in a single transaction; (iii) any person shall have acquired beneficial ownership or the right to acquire beneficial ownership of, or any "group" (as such term is defined under Section 13(d) of the Securities Exchange Act of 1934) shall have been formed which beneficially owns or has right to acquire beneficial ownership of twenty percent or more of the then outstanding shares of capital stock of the Company; or (iv) any agreement to, or public announcement by the Seller of a proposal, plan or intention to, do any of the foregoing; (n) make or rescind any express or deemed election relating to Taxes, settle or compromise any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, or change any of its methods of reporting income or deductions for federal income tax purposes from those employed in the preparation of the federal income tax returns for the taxable year ending December 31, 1995, except in either case as may be required by law, the IRS, or GAAP; (o) incur any obligation for borrowed money or purchase money indebtedness, whether or not evidenced by a note, bond, debenture or similar instrument; 20 (p) fail to maintain its books and records in the ordinary and usual course of business in accordance with past practices, except for such changes as are necessary to comply with GAAP or regulatory accounting principles, consistently applied; (q) make any investment of a capital nature in excess of $50,000 singly or $250,000 in the aggregate, either by purchasing stock or securities, contributions to capital, property transfers or otherwise, or by the purchase of any property or assets of any other individual, firm or corporation, except transactions in the ordinary course of business; (r) enter into any new material lease, amend or modify the terms of any existing material lease, or terminate any existing material lease; (s) release or relinquish any material contract rights or forgive any indebtedness without Buyer's consent; (t) increase the compensation to be paid to any provider or group of providers, except in the ordinary course of business; (u) make any loans or advances to any officer, director, shareholder or Affiliate of the Company (except for ordinary travel and business expense payments); (v) engage in any transaction or take any other action which would cause or result in a breach of any representation or warranty of the Seller set forth in Article IV hereof; and (w) agree in writing or otherwise to any of the foregoing. Section 5.3 Access and Information. - ------------------------------------ (a) Seller shall afford to Buyer, and their respective affiliates and accountants, counsel, other representatives, and prospective lenders and investors and investor representatives access during normal business hours throughout the period prior to the Closing Date to all of Company's officers, directors, employees, properties, offices, books, contracts, commitments and records (including but not limited to Tax Returns and Regulatory filings) and the Company shall use its best efforts to cause access to accountants' work papers, during such period, shall furnish promptly to any of them all other information concerning its business, properties and personnel as may be reasonably requested in writing. No investigation by Buyer prior to or following the execution of this Agreement shall affect the representations and warranties of the Company as contained herein. Section 5.4 Additional Arrangements. Subject to the terms and conditions ------------------------------------- of this Agreement, each of the parties agrees to use all reasonable efforts to take, or cause to be taken, all action and 21 to do, or cause to be done, as promptly as practicable, all things necessary, proper or advisable under applicable laws and regulations to assure the satisfaction of each condition to, and to consummate and make effective, the transactions contemplated by this Agreement, including using its best efforts to obtain all necessary waivers, consents and approvals. Section 5.5 Continuing Nature of Representations and Warranties. The ----------------------------------------------------------------- Seller agrees, until the earlier of the Closing Date or termination of this Agreement, to provide Buyer with notice of any material information which comes to the knowledge of the Seller and which affects the truth and accuracy, or continuing truth and accuracy, of the warranties and representations made by the Seller herein or which has the effect of rendering any of the covenants contained in this Article VI incapable of performance. Buyer agrees, until the earlier of the Closing Date or termination of this Agreement, to provide the Seller with notice of any material information which comes to the knowledge of Buyer and which affects the truth and accuracy, or continuing truth and accuracy, of the warranties and representations made by Buyer herein. Section 5.6 Tax Matters. Following the date of this Agreement: ------------------------- (a) Seller shall file any Tax Returns, elections or information statements with respect to any liabilities for Taxes of the Company or other matters relating to Taxes of the Company which, pursuant to applicable law must be filed for taxable years ending on or prior to Closing. Buyer agrees to cooperate with Seller for the purpose of completing and filing such returns. Seller shall have the sole right and responsibility to respond to and resolve any Tax audits related to taxable years ending on or prior to Closing and shall be responsible for any additional Tax liabilities related to Tax periods ending on or before Closing and shall receive any Tax refunds or reductions related to Tax periods, other than refunds attributable to the carry-back of Tax attributes, such as loss carryovers from a Tax period after the Closing Date. Buyer will provide any necessary information and other reasonable assistance to Seller for the purpose of responding to and resolving such audits. Buyer shall be responsible for all Tax filings and for all Tax liabilities relating to the Company for periods commencing after the Closing Date. (b) Any Tax sharing agreement between or among the Seller Group and the Company is terminated as of the Closing Date and will have no further effect for any taxable year (whether the current year, a future year, or a past year). (c) Seller will immediately pay to the Buyer any Tax refund (or reduction in Tax liability) resulting from a carryback of a postacquisition Tax attribute of the Company into a Seller consolidated federal or state Tax Return, when such refund or reduction is realized by the Seller group. Seller will cooperate with the Company in obtaining such refunds (or reduction in Tax liability), including through the filing of amended Tax returns or refund claims. 22 (d) Seller will not elect to retain any net operating loss carryovers or capital loss carryovers of the Company under Regulation Section 1.1502-20(g) without Buyer's written approval. (e) All transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement (including any New York State Gains Tax, New York City Transfer Tax and any similar tax imposed in other states or subdivisions), shall be paid by Seller when due, and Seller will, at its own expense, file all necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and other Taxes and fees, and if required by applicable law, Buyer will, and will cause its affiliates to, join in the execution of any such Tax Returns and other documentation. (f) For purposes of Section 5.6 and 5.11, where applicable law permits, the Closing Date shall be treated by Buyer and Seller as the end of a taxable year, and in any case where applicable law does not permit the Company to treat the Closing Date as the end of a taxable year of the Company, then whenever it is necessary to calculate the liability for income or franchise taxes of the Company for a portion of a taxable year, such determination will (unless otherwise agreed to in writing by Seller and Buyer) be determined by a closing of the Company's books at the end of the Closing Date. In order appropriately to apportion any Taxes, other than income or Closing Date, (i) AD VALOREM Taxes (including, without limitation, real and personal property Taxes) will be accrued on a monthly basis over the period for which the Taxes are levied, or if it cannot be determined over what period the Taxes are being levied, over the fiscal period of the relevant taxing authority, in each case irrespective of the lien or assessment date of such Taxes, and (ii) franchise and other privilege Taxes not measured by income will be accrued on a monthly basis over the period in which the privilege relates. (g) Buyer will make no election under Section 338(h)(10) of the Internal Revenue Code without the written approval of Seller. If, notwithstanding this provision, Buyer makes such an election, Buyer shall fully reimburse Seller any additional tax liability or costs incurred by Seller as a result of such election by Buyer. Seller shall provide necessary information and other reasonable assistance to Buyer for purposes of making a permitted election under this Section. (h) Buyer will make no election without Seller's written approval to ratably allocate income and expenses pursuant to Regulation Section 1.1502-76(b)(2)(ii). Both Buyer and Seller agree to work together to determine if said election is advantageous for both parties. (i) Any intercompany balances due to Seller from the Company which are not paid prior to the Closing Date shall be canceled and treated by Seller as an additional capital contribution to Company by Seller. 23 Section 5.7 Appropriate Action; Consents; Filings. - -------------------------------------------------- (a) Buyer and Seller shall use all reasonable efforts to (i) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper or advisable under applicable law or otherwise to consummate and make effective the transactions contemplated by this Agreement as promptly as practicable; (ii) obtain from any governmental entities any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by Seller, Buyer, or the Company or any of their respective Subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated herein, including; and (iii) make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement required under (A) the H-S-R Act, and (B) any other applicable law; PROVIDED that, Buyer, and Seller shall cooperate with each other in connection with the making of all such filings, including providing copies of all non-confidential portions of such documents to the non-filing party and its advisors prior to filing and to discuss additions, deletions or changes suggested in connection therewith. The Seller and Buyer shall furnish to each other all information required for any application or other filings to be made pursuant to the rules and regulations of any applicable law in connection with the transactions contemplated by this Agreement. (b) The Disclosure Schedule identifies each of the Company Contracts which would require notice of or consent of a third party in order to maintain the Company's relationship with such party or to avoid the Company's being in breach or default under such Contract, including any policies of insurance. Any such notices and consents or approvals shall be obtained prior to Closing unless (x) the failure to deliver such notice and obtain all such consents would not materially affect the Company's business or its ability to consummate the transactions contemplated in this Agreement, or (y) Buyer is advised of and consents in writing to the foregoing failure to deliver such notices or receive such consents. (c) From the date of this Agreement until the Closing Date, the Company shall promptly notify Buyer in writing of any pending or, to the knowledge of the Company, threatened action, proceeding or investigation by a governmental entity or any other person (i) challenging or seeking damages in connection with this transaction, or (ii) seeking to restrain or prohibit the consummation of the transaction contemplated by this Agreement or otherwise limit the right of Buyer to own or operate all or any portion of the businesses or assets of the Company. Section 5.8 Company Employees. As of the date hereof, the Company has no ------------------------------ employees. Seller shall cause the Company to hire on an at-will basis effective as of the business day immediately 24 preceding the Closing Date those employees of Seller assigned to the Company, which employees have been selected by Buyer, and listed in Section 5.8 of the Disclosure Schedule and such other individuals as may be designated as Company employees by mutual written agreement between the Seller and the Buyer prior to the Closing Date ("Company Employees"). Section 5.8 also sets forth those active employees of Seller who previously rendered services related to the Company which Buyer has selected to not be hired by the Company. Those employees marked on Section 5.8 of the Disclosure Schedule with an asterisk are temporary employees and are not entitled to participate in Seller's Severance Plan. Seller shall also cause the Company to become a participating employer under the United HealthCare Corporation 401(k) Savings Plan ("Seller's 401(k) Plan") as of the business day immediately preceding the Closing Date with respect to the Company Employees. On and after the Closing Date, Buyer shall cause the Company to continue to employ the Company Employees (subject to the Company's right to terminate any such Company Employee or any subsequently hired individual at will), subject to the following terms and conditions: (i) effective as of the Closing Date, Buyer or the Company shall cause the Company Employees to be covered by a medical (and dental) plan without limitations based upon pre-existing conditions; (ii) for purposes of any employee benefit plan, program, or arrangement maintained by Buyer or the Company for the Company Employees ("Buyer's Plan") on and after the Closing Date (including any 401(k) Plan ("Buyer's 401(k) Plan")) any years of eligibility service or vesting service credited to such Company Employees under the Employee Benefit Plans as of the Closing Date shall be treated as eligibility or vesting service under Buyer's Plan; and (iii) if Buyer or Company does terminate the employment of any Company Employee prior to the date which is sixty (60) days after Closing Date, Buyer shall provide to any such terminated Company Employee severance benefits which are substantially similar to the benefits such individual would have received under Seller's severance program. Seller agrees to provide Buyer within sixty (60) days of the Closing Date such information as Buyer shall reasonably request in order to implement the provisions of this Section 5.8, including the years of eligibility and vesting service credited to the Company Employees under the Employee Benefit Plans. Section 5.9 Employee Benefits. Effective as of the Closing Date, the ------------------------------ Company shall not be a participating employer in any Employee Benefit Plan. No portion of the assets of any Employee Benefit Plan, heretofore sponsored or maintained by the Seller for the Company Employees (and no amount attributable to any such Employee Benefit Plan), shall be transferred to the Company, and the Company shall not be required to sponsor or contribute to any such Employee Benefit Plan after the Closing Date. With respect to Seller's 401(k) Plan, Seller shall authorize lump sum distributions of vested benefits to Company Employees in connection with the transaction contemplated under this Agreement pursuant to Section 401(k)(10) of the Internal Revenue Code. Effective as of Closing Date, Seller shall treat the Company Employees who are participants in Seller's 401(k) Plan as of Closing Date as being 100% vested in all contributions and earnings under such plan. The amounts payable to the Company Employees on account of all benefit arrangements (including, but not limited to, all accrued, but unpaid sick leave) shall be either maintained in such Employee Benefit Plans or paid to the Company Employees, in each 25 case, in accordance with the applicable Employee Benefit Plan documents. The Seller shall not be liable for any claim for insurance, reimbursement or other benefits incurred after the Closing Date. Section 5.10 Employment Agreements. Prior to the Closing Date, Buyer may ----------------------------------- negotiate to enter into an employment agreement with the individual listed on Exhibit B. Section 5.11 Indemnification. - ----------------------------- (a) Seller agrees to indemnify Buyer and the Company from all costs and expenses, including reasonable attorneys' and auditors' fees, relating to or resulting from suits, claims, liability, judgments, investigations, loss, penalties, fines or damage, of any type and whether asserted by or incurred as a result of action by a governmental body or a private party, asserted against or incurred by the Buyer or Company as a result of the matters described below (the "Claims"), provided that Buyer gives written notice of the facts giving rise to and the alleged basis for such Claim and, if known or reasonably ascertainable, the amount of the liability asserted or which may be asserted by reason thereof, during the period following the Closing specified below: (i) Any inaccurate or erroneous representation or warranty, misrepresentation, breach of warranty or nonfulfillment of any covenant or agreement to be performed by the Seller or Company under this Agreement at or prior to the Closing Date or from any misrepresentation by the Company in or omission by the Seller or Company from the Disclosure Schedule pursuant to this Agreement; (ii) (1) Any and all Taxes of the Company for all tax periods ending on or before the Closing Date; (2) Taxes attributable to other members of an affiliated group (as defined in Section 1504(a) of the Code or any analogous provision under foreign, state or local law) to which the Company has belonged on or prior to the Closing Date attributable to any Tax period. (3) Any and all Taxes incurred in connection with or arising out of any inaccuracy; breach, or nonfulfillment by the Seller of any representation, consent, covenant or agreement of the Seller made in this Agreement including, without limitation, Section 4.12, 5.6 and Article V hereof. (4) Taxes arising out of, resulting from or attributable to a Section 338(h)(10) Election by Seller. (iii) Claims relating to or resulting from any litigation or disputes with respect to the operation of the Company prior to the date of this Agreement. 26 (iv) Claims relating to any employee benefit plan, program or arrangement maintained or contributed to by the Seller or any entity which is or has been aggregated with the Seller or the Company for purposes of section 414 of the Code or section 4001 of ERISA, including any Claims relating to or arising from the Seller's transfer of the Company Employees to the Company under Section 5.8 of this Agreement, but excluding Claims relating to any employee benefit plan, program or arrangement maintained or contributed to by the Buyer or the Company after the Closing Date. (v) Claims relating to or resulting from any litigation or dispute with respect to Genesys, including but not limited to the lawsuit involving the Texas Association of School Boards ("Genesys Claims"). (b) Buyer agrees to indemnify Seller from all costs and expenses, including reasonable attorneys' and auditors' fees, relating to or resulting from suits, claims, liability, judgments, investigations, loss, penalties, fines or damage, of any type and whether asserted by or incurred as a result of action by a governmental body or a private party, asserted against or incurred by the Buyer or the Seller, as the case may be, as a result of the matters described below (the "Claims"), provided that the Seller gives written notice of the facts giving rise to and the alleged basis for such Claim and, if known or reasonably ascertainable, the amount of the liability asserted or which may be asserted by reason thereof, during the period following the Closing specified below: (i) Any inaccurate or erroneous representation or warranty, misrepresentation, breach of warranty or nonfulfillment of any covenant or agreement to be performed under this Agreement at or prior to the Closing Date or from any misrepresentation in or omission from the Disclosure Schedule pursuant to this Agreement; (ii) (1) Any and all Taxes of the Buyer for all tax periods beginning after the Closing Date; (2) Any and all Taxes incurred in connection with or arising out of any inaccuracy, breach, or nonfulfillment by the Buyer of any representation, consent, covenant or agreement of the Buyer made in this Agreement including, without limitation, Section 3.4. (3) Taxes arising out of, resulting from or attributable to a Section 338(h)(10) Election by Buyer. (iii) Claims relating to or resulting from any litigation or disputes with respect to the operation of the Company or Buyer after the date of this Agreement. (c) In the event of the assertion of a Claim which may give rise to a claim for indemnification hereunder, the indemnified party shall notify the other party as stated above, and Claims shall not include any such matters as to which proper notice is not given within the 27 following periods after Closing: (x) fifteen (15) months for Claims described in subparagraphs (a)(i) and (b)(i) above; (y) three (3) years for claims described in subparagraphs (a)(ii), (a)(iii), (a)(iv), (b)(ii) and (b)(iii) above; and (z) no limit on the time in which Genesys Claims may be asserted. As soon as practical after becoming aware of a Claim subject to indemnification under this Agreement, the indemnified party shall provide the other party with written notice stating the nature, basis and (to the extent known or reasonably estimated) amount thereof. In the event an indemnified party becomes aware of a Claim it shall promptly notify the other party and seek instructions as to the defense thereof. The indemnifying party shall control the defense and settlement of any Claim. The indemnifying party shall keep the indemnified party apprised of the status of such Claim, shall consult with the indemnified party as appropriate as to the handling of a Claim and shall not unreasonably refuse to defend, compromise or settle any Claim. The indemnified party shall cooperate fully in the defense of any Claim, including but not limited to the defense of the Texas Association of School Board litigation. The indemnifying party shall reimburse the indemnified party for the reasonable cost of such cooperation. The indemnified party shall have the right at its own expense to employ separate counsel to monitor such Claim. (d) The first $5,000 (including the reasonable cost of defense thereof) of any Claim individually, or an aggregate of $25,000 for multiple Claims each of which is less than $5,000 shall be the responsibility of the indemnified party. Once the $5,000 limit for an individual Claim or the $25,000 limit for multiple Claims in the aggregate is reached, the full amount of all Claims (including the reasonable costs of defense thereof) shall be paid by the indemnifying party. To the extent that a Claim has been paid for by an insurance payment on behalf of or insurance recovery on behalf of the Company payment shall not be the responsibility of the indemnifying party. To the extent that a Claim has been reserved against in the Company's Financial Statements (by means of a liability accrual or payable or a valuation allowance or reserve against current assets), Seller shall have no liability. (e) Any indemnification paid under this Section 5.11 shall, as to the extent permitted by law, be an adjustment to the Purchase Price. Section 5.12 Survival of Indemnifications, Representations and Warranties. -------------------------------------------------------------------------- All statements made by the Seller and the Company herein or in the Disclosure Schedule shall be deemed representations and warranties of the Company, and all representations, warranties and agreements made by any party to this Agreement shall not be deemed to be waived or otherwise affected by any investigation made by any other party. The representations and warranties of the parties contained herein shall survive the Closing for the time periods set forth in Section 5.11(c). Section 5.13 Funding of the Transaction. Buyer shall maintain sufficient ---------------------------------------- cash on hand and available through bank facilities in effect and approved for the purchase of the Common Stock to pay the Purchase Price as required by this Agreement without any contingency or approval by a third party. 28 Section 5.14 Insurance. Effective as of the Closing Date, the Seller shall ------------------------ terminate all insurance coverage with respect to the Company, at which time it will be the exclusive responsibility of the Buyer or the Company to provide insurance coverage with respect to the Company and its operations. Subject to commercial availability, from and after the Closing Date, the Seller, at Seller's expense, shall maintain for the benefit of the Company until the expiration of all applicable periods of limitation under relevant statutes of limitations the right to file claims against insurance with respect to a pre-Closing Date acts or omissions of the Company, its officers and directors and employees, in amounts and in such types as which insure the Company, its officers and directors and employees, immediately prior to the Closing Date. Section 5.15 Network Access. Consistent with the letter dated February 23, ----------------------------- 1996 from Gregg Strott to Tom Cox regarding MetraComp, Buyer shall use its best efforts to cause Company to continue to perform after the Closing Date in accordance with the provisions of such letter. Section 5.16 Audited Financials. At its expense, the Buyer shall use its --------------------------------- best efforts to arrange to have the Company's balance sheet as of December 31, 1993, and related statement of income for the year then ended, the 1994 Financials and the 1995 Financials audited by Arthur Andersen, Boston, prior to March 31, 1996. These audited financial statements shall be referred to as the "1993 Audited Financials", "1994 Audited Financials" and "1995 Audited Financials", respectively. The Seller shall cooperate with this audit of the Company's financial statements. Section 5.17 Trademarks. Prior to the Closing, Seller shall have caused ------------------------- all of the service marks listed on Disclosure Schedule 4.19 to be assigned to the Company. Section 5.18 Cost Reimbursement Agreement. - ------------------------------------------- (a) Prior to the Closing Date, Seller and Company shall, consistent with past practices, comply with the terms of the Cost Reimbursement Agreement, dated January 28, 1994 between the Company and Seller ("Cost Reimbursement Agreement") including the practice whereby the Seller processes expenses incurred in the operation of the Company and Seller receives all available funds paid to the Company to be applied to reimburse Seller for all expenses incurred on behalf of the Company, including any balances due Seller for prior periods. This practice of processing expenses and applying funds received against amounts due to the Seller shall be referred to as the "Settlement". (b) Buyer and Seller agree that if the Closing Date is on or prior to April 5, 1996, the last Settlement prior to Closing will take place on March 29, 1996. Specifically for the March 29, 1996 settlement, Seller will: (i) process for payment all invoices received by its Accounts Payable Department from the Company on March 29, 1996. Responsibility for payment of these invoices will be 29 retained by the Seller and added to the intercompany payable balance due Seller from Company as of the Closing Date; (ii) be responsible for payment of the April 5, 1996 payroll which covers services provided to Company by the Seller's employees for the two week period ended March 29, 1996 and added to the intercompany payable balance due Seller from Company; and (iii) withdraw via Federal wire transfer all available funds from the Company's bank accounts on March 29, 1996 and deducted from the intercompany payable balance due Seller from Company. All invoices for expenses not processed by Seller on or before March 29, 1996, whether the related expenses were incurred prior to or after March 29, 1996 shall become the financial responsibility of the Buyer. Buyer shall be responsible for payment of salary and related expenses for Company Employees for March 30, 1996 and thereafter. Seller will cease daily withdrawal of available funds from Company bank accounts after March 29, 1996. (c) If the Closing Date is after April 5, 1996, then the last Settlement prior to Closing shall take place on the last business day of a month, or such other date as the parties shall mutually agree upon using procedure consistent with those described above. ARTICLE VI CLOSING CONDITIONS ---------------------- Section 6.1 Conditions to Each Party's Obligation. The respective --------------------------------------------------- obligations of each party pursuant to this Agreement shall be subject to the fulfillment at or prior to the Closing Date of the following conditions: (a) No temporary, preliminary or permanent injunction or other order by any federal or state court which prevents the consummation of the transaction contemplated by this Agreement shall have been issued and remain in effect; (b) No action shall have been taken nor any statute, rule, regulation or executive order have been enacted, promulgated or enforced by any court or the government (or any governmental body or agency) that makes the consummation of the transaction contemplated by this Agreement illegal; (c) The applicable waiting period, if any, under the H-S-R Act shall have expired or been terminated; 30 (d) Any third party consents and governmental, regulatory or administrative consents, approvals or notices necessary for the Company, Seller or Buyer to consummate the transaction contemplated by this Agreement shall have been received or given, as appropriate, and filings made; (e) No suit, action or other proceeding or investigation shall, to the knowledge of the Company or to the knowledge of Seller or Buyer, be threatened or pending by any third party questioning the legality of this Agreement, or the consummation of the transactions contemplated hereby in whole or in part; and Section 6.2 Conditions to Obligation of the Seller. The obligation of the ----------- Company pursuant to this Agreement shall be subject to the fulfillment at or prior to the Closing Date of the following additional conditions (unless waived by the Company): (a) The representations and warranties of Buyer contained in this Agreement shall be true in all material respects on and as of the Closing Date with the same force and effect as though made on and as of such date and time, except as affected by the transactions contemplated hereby and except that any such representation and warranty made as of a specified date shall have been true on and as of such date; (b) Buyer shall in all material respects have performed each obligation and agreement and complied with each covenant to be performed or complied with by it hereunder on or before the Closing Date; (c) The Seller shall have received such closing certificates of Buyer and of governmental authorities as are customary for the type of transaction contemplated and which are satisfactory to the Company's counsel; and (d) The Seller shall have received a legal opinion from counsel to the Buyer in form reasonably satisfactory to the Seller. Section 6.3 Conditions to Obligations of Buyer. The obligations of Buyer ------------------------------------------------ pursuant to this Agreement shall be subject to the fulfillment at or prior to the Closing Date of the following additional conditions (unless waived by Buyer): (a) The representations and warranties of the Seller contained in this Agreement and as limited, modified or supplemented by the Disclosure Schedule, shall be true in all material respects on and as of the Closing Date with the same force and effect as through made on and as of such date and time, except as affected by the transactions contemplated hereby and except that any such representation or warranty made as of a specified date shall have been true on and as of such date; 31 (b) The Company shall in all material respects have performed each obligation and agreement and complied with each covenant to be performed or complied with by it hereunder on or before the Closing Date; (c) Buyer shall have received such closing certificates of the Seller and of governmental authorities as are customary for the type of transaction contemplated and which are satisfactory to Buyer's counsel; (d) Since the date of this Agreement and prior to Closing, there shall have been no material adverse change in the condition (financial or otherwise), assets, liabilities, earnings, business or of the Company; (e) Company shall have received the resignations of each of the members of Boards of Directors and the officers of the Company, in each case to be effective as of the date immediately following the Closing Date; (f) The Buyer shall have received a legal opinion from counsel to the Seller and the Company in form reasonably satisfactory to the Buyer; (g) The Seller and Company shall have terminated, as of the Closing Date, the Cost Reimbursement Agreement such that neither the Seller or Company will have any further obligation under the Cost Reimbursement Agreement, including but not limited to payment of any intercompany balance as of the Closing Date; (h) Buyer shall have received the audited 1993, 1994 and 1995 Audited Financial Statements, as provided for in Section 5.16, and, with respect to the 1994 and 1995 Audited Financial Statements, Arthur Andersen shall have issued an unqualified opinion, without material adverse audit adjustments; provided that any necessary audit adjustments for restatement of restructuring expenses shall not be considered a material adverse audit adjustment; and (i) Seller shall have caused the assignment to Company all rights in the service marks listed on Disclosure Schedule 4.19. ARTICLE VII TERMINATION, AMENDMENT AND WAIVER ----------------------------------------- Section 7.1 Termination. This Agreement may be terminated and the ------------------------- transaction abandoned at any time prior to the Closing Date: (a) by mutual written consent of the parties; 32 (b) by any party, by notice to the other parties, if at any time prior to the Closing Date, (i) another party shall have materially breached its representations, warranties or covenants contained herein and, upon receiving notice, is unwilling or unable to remedy such breach within ten (10) days following receipt by the breaching party of notice of such breach from the non-breaching party; provided that, in the case of any such breach that is susceptible of cure but that cannot with diligence be cured within such ten (10) day period, if the party in breach shall promptly have commenced to cure the same and shall thereafter prosecute the curing thereof with reasonable diligence, the period within which such breach may be cured shall be extended by the shorter of thirty (30) days or for such further period as shall be necessary for the curing thereof with reasonable diligence, or (c) By any party, if the transaction contemplated by this Agreement shall not have been consummated prior to May 31, 1996, provided that no party who has caused such transaction not to have been consummated may terminate this Agreement pursuant to this clause (c). Section 7.2 Effect of Termination. In the event of the termination of this ----------------------------------- Agreement under Section 7.1, this Agreement shall have no further force or effect and there shall be no further obligation hereunder on the part of Buyer and Seller or their respective officers or directors, except for compliance with the provisions of any and all confidentiality agreements executed by Buyer or any of its Affiliates and the Seller prior to the execution of this Agreement, and claims for breach of this Agreement. Section 7.3 Fees and Expenses. - ------------------------------- (a) The Buyer shall pay all H-S-R Act filing fees. All other Expenses incurred by the Buyer shall be borne solely and entirely by the Buyer and all Expenses of the Company, the Seller and their affiliates shall be borne by the Seller. For the purposes of this paragraph, apportionment of salaries for time spent by Company Employees as part of their duties for the Company shall not be considered Expenses. (b) "Expenses" as used in this Agreement shall include all reasonable out-of-pocket expenses (including, without limitation, all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a party hereto and its Affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this Agreement and all other matters related to the closing of the transactions contemplated herein. Section 7.4 Amendment. This Agreement may not be amended except by an ----------------------- instrument in writing signed on behalf of each of the parties. 33 Section 7.5 Waiver. At any time prior to the Closing Date, any term, ------------------- provision or condition of this Agreement may be waived in writing (or the time for performance of any of the obligations or other acts of the other parties may be extended) by the party which is, or the party the shareholders of which are, entitled to the benefits thereof. Any agreement on the part of a party to any such extension or waiver, shall be valid if set forth in an instrument in writing signed on behalf of such party by a duly authorized officer. ARTICLE VIII GENERAL PROVISIONS ---------------------- Section 8.1 Notice of Breach. Each party will promptly give written notice ----------------------------- to the other parties upon becoming aware of the occurrence, or impending or threatened occurrence, of any event which would cause or constitute a material breach of any of its representations, warranties or covenants contained or referred to in this Agreement and will use its best efforts to prevent or promptly remedy the same. Section 8.2 Publicity. So long as this Agreement is in effect, neither the ---------------------- Seller, Company nor the Buyer, or any of their respective Affiliates, shall issue or cause the publication of any press release or other public announcement with respect to this Agreement without prior consultation with the other party, except as may be required by law. Section 8.3 Assignment. Buyer shall have the right to assign to one or more ----------------------- of its Affiliates all but not less than all of its rights together with all of its obligations under this Agreement. Buyer may not otherwise assign this Agreement or any of its rights or obligations hereunder without prior written consent of the Seller. The Seller may not assign this Agreement or any of its rights hereunder without the prior written consent of Buyer. Notwithstanding any assignment by Buyer, Buyer shall continue to be liable under this Agreement to the same extent as if the assignment were not made to the extent Buyer's assignee fails to perform or comply with any provision of this Agreement. Section 8.4 Interpretation. The headings contained in this Agreement are --------------------------- for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. The Disclosure Schedule shall be deemed to be a part of this Agreement. Section 8.5 Notices. All notices and other communications hereunder shall -------------------- be in writing and shall be deemed to have been duly given when delivered personally or by cable, telex, telecopier or telegram or by certified mail (return receipt requested) to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice): 34 (a) To Seller: United Healthcare Services, Inc. 300 Opus Center 9900 Bren Road East Minnetonka, Minnesota 55343 Attention: William W. McGuire, M.D. Telecopier No.: (612) 936-0044 With copies to: United HealthCare 8330 Boone Boulevard, Suite 300 Vienna, Virginia 22182 Attention: James M. Michener Telecopier No.: (703) 918-4057 (b) To Buyer: CRA Managed Care, Inc. 312 Union Wharf Boston, Massachusetts 02109 Attention: John McCarthy Telecopier No.: (617) 367-8519 With copies to: Hutchins, Wheeler & Dittmar A Professional Corporation 101 Federal Street Boston, Massachusetts 02110 Attention: James Westra, Esq. Telecopier No.: (617) 951-1295 Section 8.6 Separability. Any term or provision of this Agreement which is ------------------------- invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, such provision shall be interpreted to be only so broad as is enforceable. 35 Section 8.7 Specific Performance. Each of Seller and Buyer acknowledge that --------------------------------- (a) they will not have any adequate remedy at law if the other fails to perform any of its obligations hereunder; and (b) each shall have the right, in addition to any other rights it may have, to obtain in any court of competent jurisdiction injunctive relief to restrain any breach or threatened breach or otherwise specifically to enforce any of the obligations of the other under this Agreement if the other shall fail to perform any of its obligations hereunder. Section 8.8 Entire Agreement. This Agreement shall be construed together to ----------------------------- constitute the entire agreement and to supersede all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof and thereof. Section 8.9 Governing Law. This Agreement shall be governed by, and -------------------------- construed and enforced in accordance with, the laws of the State of Minnesota without giving effect to the conflict of law principles thereof. Section 8.10 Dispute Resolution and Remedies. Any dispute arising between --------------------------------------------- the parties relating to this Agreement or the transactions contemplated hereby, including any dispute relating to termination of this Agreement, shall be resolved by binding arbitration pursuant to the Rules of the American Arbitration Association. In no event may the arbitration be initiated more than one year after the date one party first gave written notice of the dispute to the other party. The arbitrators shall have no power to award any punitive or exemplary damages or to ignore or vary the terms of this Agreement and shall be bound by controlling law. The provisions of this Section 8.10 shall survive any termination of this Agreement. Section 8.11 Counterparts. This Agreement may be executed in one or more -------------------------- counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same instrument. Section 8.12 No Third Party Benefit. This Agreement is solely for the ------------------------------------ benefit of, and shall be enforceable by and against only, the parties and their respective successors, and permitted assigns, and does not and shall not be construed to confer on or provide to any other person any obligations, privileges, rights or remedies. [INTENTIONALLY LEFT BLANK] 36 IN WITNESS WHEREOF, the Seller and Buyer have caused this Agreement to be signed by their respective officers thereunto duly authorized all as of the date first written above. UNITED HEALTHCARE SERVICES, INC. By: /s/ David P. Koppe --------------------------- Its: CFO --------------------------- CRA MANAGED CARE, INC. By: /s/ Donald J. Larson --------------------------- Its: CEO --------------------------- 37 EX-2.2 4 EXHIBIT 2.2 AGREEMENT AND PLAN OF MERGER AMONG CRA MANAGED CARE, INC., PAI ACQUISITION CORP. (A WHOLLY OWNED SUBSIDIARY OF CRA MANAGED CARE, INC.), PROMPT ASSOCIATES, INC. AND THE OTHER SIGNATORIES HERETO DATED AS OF OCTOBER 28, 1996 TABLE OF CONTENTS PAGE ARTICLE I DEFINITIONS...............................................................1 ARTICLE II THE MERGER................................................................6 2.01. The Merger......................................................6 (a) THE MERGER.................................................6 (b) EFFECTIVE TIME.............................................6 2.02. SURVIVING CORPORATION...........................................7 (a) CERTIFICATE OF INCORPORATION...............................7 (b) BYLAWS.....................................................7 (c) DIRECTORS AND OFFICERS.....................................7 2.03. THE CLOSING.....................................................7 2.04. CONVERSION OF COMMON STOCK AND PREFERRED STOCK; OPTIONS; TREASURY STOCK.........................................7 (a) COMMON STOCK...............................................7 (b) PREFERRED STOCK............................................7 (c) OPTIONS....................................................7 (d) TREASURY STOCK.............................................8 2.05. DELIVERIES BY THE COMPANY TO THE BUYER..........................8 2.06. DELIVERIES BY CRA TO THE COMPANY................................8 2.07. ACTIONS OF THE SURVIVING CORPORATION............................9 (a) CERTIFICATE OF MERGER......................................9 (b) PAYMENT OF CASH PURCHASE PRICE.............................9 (c) ESCROW.....................................................9 (d) CANCELLATION OF CERTIFICATES AND OPTION AGREEMENTS.........9 2.08. ADJUSTMENT OF CASH PURCHASE PRICE...............................9 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................11 3.01. ORGANIZATION...................................................11 3.02. AUTHORIZATION OF TRANSACTION...................................11 3.03. NON-CONTRAVENTION..............................................11 3.04. OWNERSHIP OF STOCK.............................................12 3.05. TITLE TO TANGIBLE ASSETS.......................................12 3.06. FINANCIAL STATEMENTS...........................................12 3.07. LEGAL COMPLIANCE...............................................12 3.08. TAX MATTERS....................................................12 3.09. REAL PROPERTY..................................................14 3.10. CONTRACTS......................................................14 3.11. LITIGATION.....................................................14 3.12. EMPLOYEE BENEFITS..............................................15 (i) 3.13. INTELLECTUAL PROPERTY..........................................16 3.14. SUBSIDIARIES...................................................16 3.15. INSURANCE......................................................16 3.16. AFFILIATED TRANSACTIONS........................................16 3.17. BROKERS' FEES..................................................17 3.18. UNDISCLOSED LIABILITIES........................................17 3.19. SUBSEQUENT EVENTS..............................................17 3.20. DISCLOSURE.....................................................18 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS AND THE OPTIONHOLDERS....................................................18 4.01. ORGANIZATION OF CERTAIN STOCKHOLDERS...........................18 4.02. AUTHORIZATION OF TRANSACTION...................................19 4.03. NON-CONTRAVENTION..............................................19 4.04. OWNERSHIP OF STOCK AND OPTIONS.................................19 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE BUYER AND CRA......................19 5.01. ORGANIZATION...................................................19 5.02. AUTHORIZATION OF TRANSACTION...................................19 5.03. NON-CONTRAVENTION..............................................20 5.04. LITIGATION.....................................................20 5.05. INVESTMENT.....................................................20 5.06. BROKERS' FEES..................................................20 ARTICLE VI COVENANTS................................................................20 6.01. TAX MATTERS....................................................20 (a) TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE..........20 (b) TAX PERIODS BEGINNING BEFORE AND ENDING AFTER THE CLOSING DATE...............................................21 (c) REFUNDS...................................................21 (d) COOPERATION ON CERTAIN TAX MATTERS........................22 (e) COOPERATION REGARDING GOVERNMENTAL CERTIFICATES...........22 (f) COOPERATION REGARDING REPORTING OBLIGATIONS...............22 6.02. FURTHER ASSURANCES.............................................22 6.03. BOOKS AND RECORDS; PERSONNEL...................................22 6.04. WAIVER OF APPRAISAL RIGHTS.....................................23 6.05. EMPLOYEE BONUSES...............................................23 6.06. ESTIMATED CLOSING DATE WORKING CAPITAL STATEMENT...............23 ARTICLE VII INDEMNIFICATION..........................................................23 7.01. INDEMNIFICATION BY THE STOCKHOLDERS AND OPTIONHOLDERS..........23 7.02. INDEMNIFICATION BY THE BUYER AND CRA...........................24 (ii) 7.03. SURVIVAL.......................................................24 7.04. LIMITATIONS ON INDEMNITY CLAIMS................................24 7.05. NOTICE AND OPPORTUNITY TO DEFEND...............................26 ARTICLE VIII STOCKHOLDER REPRESENTATIVE...............................................27 ARTICLE IX MISCELLANEOUS............................................................28 9.01. NO THIRD-PARTY BENEFICIARIES...................................28 9.02. ENTIRE AGREEMENT...............................................28 9.03. SUCCESSION AND ASSIGNMENT......................................28 9.04. COUNTERPARTS...................................................28 9.05. HEADINGS.......................................................28 9.06. NOTICES........................................................28 9.07. GOVERNING LAW..................................................30 9.08. AMENDMENTS AND WAIVERS.........................................30 9.09. SEVERABILITY...................................................30 9.10. CERTAIN TAXES..................................................30 9.11. CONSTRUCTION...................................................31 9.12. EXPENSES.......................................................31 9.13. GENDER, NUMBER.................................................31 (iii) EXHIBITS Exhibit A -- Allocable Percentages Exhibit B -- Selling Percentages Exhibit 2.01(b) -- Certificate of Merger ATTACHMENTS Disclosure Schedule (Copies of attachments to this agreement will be furnished by the Company upon request.) (iv) AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is entered into as of October 28, 1996 by and among CRA Managed Care, Inc., a Massachusetts corporation ("CRA"), PAI Acquisition Corp., a newly formed Delaware corporation and a wholly owned subsidiary of CRA (the "BUYER"), Prompt Associates, Inc., a Delaware corporation (the "COMPANY"), Summit Ventures II, L.P. ("SV-II"), Summit Investors II, L.P. ("SI-II"), James T. Roberto ("ROBERTO"), Michael Thalasinos ("THALASINOS"), Richard Proctor ("PROCTOR" and together with SV-II, SI-II, Roberto and Thalasinos, the "STOCKHOLDERS"), Robert Patterson, John Bonkoske, Renee Flaherty, John Ward, Richard Gabel, Lloyd Roberts, Brad Hansen, Ann Pope, Adele Hansen, Sharon Breon, Pat Wolfe, Vicki Cerva-Mousley, Charlie Ricevuto, Paul Glover and Stephen Coady. Capitalized terms used herein are defined in Article I of this Agreement. WHEREAS, CRA, the Buyer, the Company, the Stockholders and the Optionholders desire that the Buyer merge with and into the Company upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, covenants and indemnitees herein contained, the Parties agree as follows: ARTICLE I DEFINITIONS "ACCOUNTANTS" means any nationally recognized firm of independent certified public accountants, excluding Arthur Andersen and Ernst & Young LLP. "ACTUAL CLOSING DATE WORKING CAPITAL STATEMENT" means a statement setting forth the Company's Total Current Assets and Total Current Liabilities as of the Closing Date, which statement shall be prepared in a manner consistent with the preparation of the Company's unaudited balance sheet as of September 30, 1996; PROVIDED, HOWEVER, that the percentage for allowances in respect of chargebacks, bad debts and adjustments to accounts receivable shall be the same as the percentage for allowances in respect of chargebacks, bad debts and adjustments to accounts receivable used in such unaudited balance sheet as of September 30, 1996. "ACTUAL WORKING CAPITAL AMOUNT" means the difference between (a) the amount of Total Current Assets set forth on the Actual Closing Date Working Capital Statement and (b) the amount of Total Current Liabilities set forth on the Actual Closing Date Working Capital Statement. "AFFILIATE" means as to any Person, any other Person directly or indirectly controlling, controlled by or under common control with that Person. "AFFILIATED GROUP" means any affiliated group within the meaning of Section 1504(a) of the Code or any similar group defined under a similar provision of state, local, or foreign law. "AGREEMENT" has the meaning set forth in the preface hereof. "ALLOCABLE PERCENTAGE" means, with respect to any Stockholder, the percentage set forth next to such Stockholder's name on EXHIBIT A hereto. "ASSETS" has the meaning set forth in Section 3.05 hereof. "BASKET" has the meaning set forth in Section 7.04(a) hereof. "BUSINESS DAY" means a day other than Saturday, Sunday and any other day on which commercial banks in Boston, Massachusetts are authorized or required to close. "BUYER" has the meaning set forth in the preface hereof. "BUYER INDEMNITEES" has the meaning set forth in Section 7.01 hereof. "CAP" has the meaning set forth in Section 7.04(a) hereof. "CASH PURCHASE PRICE" means $30,000,000. "CERTIFICATE OF MERGER" has the meaning set forth in Section 2.01(b) hereof. "CLOSING" has the meaning set forth in Section 2.03 hereof. "CLOSING DATE" has the meaning set forth in Section 2.03 hereof. "CODE" means the Internal Revenue Code of 1986, as amended and the regulations promulgated thereunder. "COMMON SHARES" has the meaning set forth in Section 3.04(b) hereof. "COMMON STOCK" has the meaning set forth in Section 3.04(b) hereof. "COMPANY" has the meaning set forth in the preface hereof. "COMPANY INDEMNITEES" has the meaning set forth in Section 7.02 hereof. "CRA" has the meaning set forth in the preface hereof. "DAMAGES" has the meaning set forth in Section 7.01 hereof. "DISCLOSURE SCHEDULE" has the meaning set forth in Section 3.01 hereof. -2- "EFFECTIVE TIME" has the meaning set forth in Section 2.01(b) hereof. "EMPLOYEE BENEFIT PLAN" means (a) each "employee benefit plan" (as such term is defined in Section 3(3) of ERISA) contributed to, maintained or sponsored by the Company, and (b) each other retirement, savings, deferred compensation, severance, stock, performance, bonus, cafeteria, incentive, vacation or holiday pay, travel, fringe benefit, disability, life or other insurance, or other employee benefit plan or arrangement contributed to, maintained or sponsored by the Company. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ESCROW AMOUNT" means $554,728. "ESTIMATED CLOSING DATE WORKING CAPITAL STATEMENT" means a statement delivered at the Closing setting forth the Company's good faith estimate of the Company's Total Current Assets and Total Current Liabilities as of the Closing Date, which statement shall be prepared in a manner consistent with the preparation of the Company's unaudited balance sheet as of September 30, 1996; PROVIDED, HOWEVER, that the percentage for allowances in respect of chargebacks, bad debts and adjustments to accounts receivable shall be the same as the percentage for allowances in respect of chargebacks, bad debts and adjustments to accounts receivable used in such unaudited balance sheet as of September 30, 1996. "EXERCISE PRICE" means, with respect to an Option, the price per share of Common Stock the applicable Optionholder must pay to the Company upon exercise of such Option. "FINANCIAL STATEMENTS" has the meaning set forth in Section 3.06 hereof. "GAAP" means United States generally accepted accounting principles as in effect for the period for which it is referred to herein. "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereof. "INCOME TAX" means any federal, state, local, or foreign income tax, including any interest, penalty, or addition thereto, whether disputed or not. "INCOME TAX RETURN" means any return, declaration, report, claim for refund, or information return or statement relating to Income Taxes, including any schedule or attachment thereto. "INDEBTEDNESS FOR MONEY BORROWED" means indebtedness incurred by the Company for borrowed money but does not include accounts payable or other accruals in the ordinary course of business. "INDEMNIFYING PARTY" has the meaning set forth in Section 7.05(a) hereof. -3- "INTELLECTUAL PROPERTY RIGHTS" means all of the following used by, owned by, issued to or licensed to the Company: (i) patents and patent applications, and any reissuances, continuations, continuations-in-part, revisions, extensions or reexaminations thereof; (ii) trademarks, service marks, trade dress, logos, trade names and corporate names, together with all goodwill associated therewith; (iii) copyrights and copyrightable works; mask works; and registrations, applications and renewals for any of the foregoing; (iv) trade secrets; (v) computer software; and (vi) all copies and tangible embodiments of the foregoing (in whatever form or medium). "KNOWLEDGE" means (a) with respect to the Company, the actual knowledge of Roberto or Robert Patterson, and (b) with respect to the Buyer or CRA, the actual knowledge of any of Donald J. Larson, John McCarthy or Joseph F. Pesce. "LIEN" means any mortgage, pledge, lien, charge, security interest, adverse claim, option, right, restriction on transfer or other encumbrance of any nature. "MATERIAL ADVERSE EFFECT" means (a) when used in Article III hereof, a material adverse effect on the operations, assets, liabilities or condition (financial or otherwise) of the Company or on the ability of the Company to consummate the transactions contemplated by this Agreement and (b) when used in Article IV hereof, a material adverse effect on the ability of a Stockholder or Optionholder to consummate the transactions contemplated by this Agreement. "MERGER" has the meaning set forth in Section 2.01(a) hereof. "OBJECTION PERIOD" has the meaning set forth in Section 2.08(b). "OPTION" means the option to acquire shares of Common Stock granted to an Optionholder pursuant to such Optionholder's Option Agreement. "OPTION AGREEMENTS" means (a) the Time Accelerated Stock Option Agreement dated December 29, 1994 between the Company and Roberto, and (b) the Stock Option Agreements between the Company and each of Robert Patterson, John Bonkoske, Renee Flaherty, John Ward, Richard Gabel, Lloyd Roberts, Brad Hansen, Ann Pope, Adele Hansen, Sharon Breon, Pat Wolfe, Vicki Cerva-Mousley, Charlie Ricevuto, Paul Glover and Stephen Coady entered into pursuant to the Company's 1995 Stock Option Plan. "OPTIONHOLDER" means each of Roberto, Robert Patterson, John Bonkoske, Renee Flaherty, John Ward, Richard Gabel, Lloyd Roberts, Brad Hansen, Ann Pope, Adele Hansen, Sharon Breon, Pat Wolfe, Vicki Cerva-Mousley, Charlie Ricevuto, Paul Glover and Stephen Coady, each in his or her capacity as an Optionholder. "OPTION SHARES" has the meaning set forth in Section 2.04(c)(ii) hereof. "PARTY" means any of CRA, the Buyer, the Company, the Stockholders or the Optionholders. -4- "PERSON" means an individual, a partnership, a corporation, an association, a limited liability company, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). "PREFERRED SHARES" has the meaning set forth in Section 3.04(a) hereof. "PROCTOR" has the meaning set forth in the preface hereof. "PURCHASE PRICE DECREASE" has the meaning set forth in Section 2.08(a)(ii) hereof. "PURCHASE PRICE INCREASE" has the meaning set forth in Section 2.08(a)(i) hereof. "PURCHASE PRICE PER SHARE" means the quotient of (a) the sum of (i) the difference between (A) the Cash Purchase Price and (B) the sum of (1) the product of (x) $100 and (y) the number of Preferred Shares outstanding immediately prior to the Effective Time and (2) the Escrow Amount, and (ii) $81,444.50 divided by (b) 554,728. "ROBERTO" has the meaning set forth in the preface hereof. "SELLING PERCENTAGE" means, with respect to any Stockholder or Optionholder, the percentage set forth next to such Stockholder's or Optionholder's name on EXHIBIT B hereto. "SEPTEMBER FINANCIALS" means the unaudited balance sheet of the Company as of September 30, 1996 and the unaudited statements of operations, stockholders' equity (deficiency) and cash flows of the Company for the nine months then-ended. "SERIES A PREFERRED STOCK" has the meaning set forth in Section 3.04(a) hereof. "SHARES" means, collectively, the Preferred Shares and the Common Shares. "SI-II" has the meaning set forth in the preface hereof. "STOCKHOLDER REPRESENTATIVE" has the meaning set forth in Article VIII hereof. "STOCKHOLDERS" has the meaning set forth in the preface hereof. "SUBSIDIARY" means any corporation or partnership of which securities or other ownership interests representing more than fifty percent of the ordinary voting power or more than fifty percent of the general partnership interests are owned, directly or indirectly, by the Company. "SURVIVING CORPORATION" has the meaning set forth in Section 2.01(a) hereof. "SV-II" has the meaning set forth in the preface hereof. -5- "TAX" means any federal, state, local or foreign income, gross receipts, franchise, estimated, alternative minimum, add-on minimum, sales, use, transfer, registration, value added, excise, natural resources, severance, stamp, occupation, premium, windfall profit, environmental, customs, duties, real property, personal property, capital stock, social security, unemployment, disability, payroll, license, employee or other withholding, back-up withholding or other tax, of any kind whatsoever, including any interest, penalties or additions to tax or additional amounts in respect of the foregoing (whether disputed or not). "TAX RETURNS" means returns, declarations, reports, claims for refund, amended returns, information returns or other documents (including any related or supporting schedules, statements or information) filed or maintained or required to be filed or maintained in connection with (a) the determination, assessment or collection of Taxes of any party or (b) the administration of any laws, regulations or administrative requirements relating to any Taxes. "THALASINOS" has the meaning set forth in the preface hereof. "TOTAL CURRENT ASSETS" means cash and cash equivalents, accounts receivable (net of reserves), and prepaid expenses (including prepaid Income Taxes) (but not including the current portion of the deferred Tax asset). "TOTAL CURRENT LIABILITIES" means accounts payable, and wages and vacation payable (but not including the current portion of Taxes payable). "TRANSFER TAXES" has the meaning set forth in Section 9.10 hereof. "TRANSFER TAX RETURNS" has the meaning set forth in Section 9.10 hereof. ARTICLE II THE MERGER 2.01. The Merger. (a) THE MERGER. On the terms and subject to the conditions contained in this Agreement, the Buyer will merge with and into the Company (the "MERGER") with the Company being the surviving entity of the Merger (the "SURVIVING CORPORATION"). The Merger shall have the effect set forth in the Delaware General Corporation Law. The Surviving Corporation may, at any time after the Effective Time, take any action (including executing and delivering any document) in the name and on behalf of either the Buyer or the Company in order to carry out and effectuate the transactions contemplated by this Agreement. (b) EFFECTIVE TIME. The Merger shall become effective at the time (the "EFFECTIVE TIME") that the Buyer and the Company file a certificate of merger in the form attached hereto as EXHIBIT 2.01(B) (the "CERTIFICATE OF MERGER") with the Secretary of State of the State of Delaware. -6- 2.02. SURVIVING CORPORATION. (a) CERTIFICATE OF INCORPORATION. The Certificate of Merger shall amend and restate the certificate of incorporation of the Surviving Corporation in its entirety at and as of the Effective Time to read as did the certificate of incorporation of the Buyer immediately prior to the Effective Time. (b) BYLAWS. The bylaws of the Surviving Corporation shall be amended and restated in their entirety at and as of the Effective Time to read as did the bylaws of the Buyer immediately prior to the Effective Time. (c) DIRECTORS AND OFFICERS. The directors and officers of the Buyer shall become the directors and officers of the Surviving Corporation at and as of the Effective Time (retaining their respective positions and terms of office). 2.03. THE CLOSING. The closing (the "CLOSING") of the transactions contemplated in this Agreement shall take place at the offices of Hutchins, Wheeler & Dittmar, at 101 Federal Street, Boston, Massachusetts, commencing at 10:00 a.m., local time on October 28, 1996 (the "CLOSING DATE"). 2.04. CONVERSION OF COMMON STOCK AND PREFERRED STOCK; OPTIONS; TREASURY STOCK. (a) COMMON STOCK. At and as of the Effective Time, each outstanding share of Common Stock shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive, and become exchangeable for, cash in the amount of the Purchase Price Per Share. After the Effective Time, no share of Common Stock shall be deemed to be outstanding or to have any rights other than those set forth in this Section 2.04(a) and Section 2.08. (b) PREFERRED STOCK. At and as of the Effective Time, each outstanding share of Series A Preferred Stock shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive, and become exchangeable for, cash in the amount of One Hundred Dollars ($100) per share. After the Effective Time, no share of Series A Preferred Stock shall be deemed to be outstanding or to have any rights other than those set forth in this Section 2.04(b). (c) OPTIONS. Notwithstanding any provision to the contrary contained in the Option Agreements, the Company, the Stockholders and the Optionholders agree that, in consideration of the transactions contemplated by this Agreement, immediately prior to the Effective Time, each Option shall become fully vested and immediately exercisable, without any further action on the part of the Company or the Optionholders. At and as of the Effective Time, each Optionholder shall be entitled to receive, in respect of his Option, an amount in cash equal to the product of (i) the Purchase Price Per Share LESS the Exercise Price for such Option and (ii) the number of shares of Common Stock issuable upon exercise of such Optionholder's Option (after giving effect to the first sentence of this Section 2.04(c)) (the "OPTION SHARES"). The Surviving -7- Corporation shall withhold all withholding Taxes applicable to said payments. After the Effective Time, no Option shall be deemed to be outstanding or to have any rights other than those set forth in this Section 2.04(c) and Section 2.08. (d) TREASURY STOCK. Notwithstanding any provision of this Agreement to the contrary, each share of Common Stock held in the treasury of the Company immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof and no payment shall be made with respect thereto. 2.05. DELIVERIES BY THE COMPANY TO THE BUYER. At the Closing, the Company shall deliver or cause to be delivered to the Buyer the following: (a) certificates executed by the Secretary of the Company certifying as to resolutions of the board of directors of the Company and the Stockholders authorizing the execution, delivery and consummation of the transactions contemplated by this Agreement; (b) a certificate of the Secretary of the Company certifying as to the incumbency of the officers of the Company and as to the signatures of such officers who have executed documents delivered at the Closing on behalf of the Company; (c) a certificate, dated within three Business Days of the Closing Date, of the Secretary of State of the State of Delaware establishing that the Company is in existence and otherwise is in good standing to transact business in its state of incorporation; (d) certificates, dated within twenty days of the Closing Date, of the Secretaries of State of the states in which the Company is qualified to do business, to the effect that the Company is qualified to do business and is in good standing as a foreign corporation in each of such states; (e) an opinion, dated as of the Closing Date, from Kirkland & Ellis, special counsel to the Company, in a form reasonably acceptable to CRA and its counsel; (f) the Estimated Closing Date Working Capital Statement (which shall be prepared in good faith by the Company); and (g) a general mutual release of claims between the Company and each of Thalasinos and Proctor. 2.06. DELIVERIES BY CRA TO THE COMPANY. At the Closing, CRA shall deliver or cause to be delivered to the Company the following: (a) certificates executed by the Secretary of each of the Buyer and CRA, certifying as to resolutions of the boards of directors of the Buyer and CRA (on its own behalf and as sole stockholder of the Buyer), as the case may be, authorizing the execution, delivery and consummation of this Agreement; -8- (b) a certificate of the Secretary of each of the Buyer and CRA certifying as to the incumbency of the officers of the Buyer or CRA, as applicable, and as to the signatures of such officers who have executed documents delivered at the Closing on behalf of the Buyer or CRA, as applicable; (c) a certificate, dated within three Business Days of the Closing Date, of the Secretary of State of the State of Delaware establishing that the Buyer is in existence and otherwise is in good standing to transact business in its state of incorporation; and (d) an opinion, dated as of the Closing Date, from Hutchins, Wheeler & Dittmar, a Professional Corporation, counsel to CRA and the Buyer, in a form reasonably acceptable to the Company and its special counsel. 2.07. ACTIONS OF THE SURVIVING CORPORATION. (a) CERTIFICATE OF MERGER. At the Closing, the Buyer and the Company will file with the Secretary of State of the State of Delaware the Certificate of Merger. (b) PAYMENT OF CASH PURCHASE PRICE. At the Effective Time, the Surviving Corporation shall deliver the cash payments due to each of (i) the Stockholders pursuant to Sections 2.04(a) and (b) by wire transfer of immediately available funds to an account designated by such Stockholder and (ii) the Optionholders pursuant to Section 2.04(c) by wire transfer of immediately available funds to an account designated by such Optionholder or, within three Business Days of the Closing Date, by check of the Surviving Corporation, such means of payment being determined by CRA in its sole discretion. (c) ESCROW. On the Closing Date, the Escrow Amount shall be delivered by the Surviving Corporation, on behalf of the Stockholders and the Optionholders, by wire transfer of immediately available funds to an account designated by the Stockholder Representative, to be held by the Stockholder Representative as escrow agent under an Escrow Agreement dated as of the Closing Date among the Stockholder Representative, as escrow agent, and the Stockholders and the Optionholders. (d) CANCELLATION OF CERTIFICATES AND OPTION AGREEMENTS. In addition, at the Effective Time, the Company shall deliver or cause to be delivered certificates evidencing the Shares and the Option Agreements to the Surviving Corporation for cancellation. 2.08. ADJUSTMENT OF CASH PURCHASE PRICE. (a) As promptly as practicable, but in any event within thirty (30) calendar days following the Closing Date, the Surviving Corporation shall deliver to the Stockholder Representative the Actual Closing Date Working Capital Statement. The Cash Purchase Price shall be adjusted based on the Actual Working Capital Amount shown on the Actual Closing Date Working Capital Statement, as follows: -9- (i) if the Actual Working Capital Amount is in excess of $500,000, the Cash Purchase Price shall be increased by such excess (the "PURCHASE PRICE INCREASE"), and within three (3) Business Days after the later of the expiration of the Objection Period and the date upon which any disputes are resolved as provided in clause (b) of this Section 2.08, such Purchase Price Increase shall be paid in cash to the Stockholder Representative by the Surviving Corporation for distribution among the Stockholders and Optionholders in accordance with their respective Selling Percentage; provided, however, that the maximum amount of such Purchase Price Increase shall be the amount of cash and cash equivalents of the Company on October 28, 1995 less $50,000; or (ii) if the Actual Working Capital Amount is less than $500,000, the Cash Purchase Price shall be reduced by the amount by which such actual Working Capital Amount is less than $500,000 (the "PURCHASE PRICE DECREASE"), and within three (3) Business Days after the later of the expiration of the Objection Period and the date upon which any disputes are resolved as provided in clause (b) of this Section 2.08, such Purchase Price Decrease shall be paid in cash to CRA by the Stockholder Representative from the Escrow Amount on behalf of the Stockholders and the Optionholders as provided in the Escrow Agreement; PROVIDED that if the Purchase Price Decrease exceeds the Escrow Amount, such excess shall be payable by the Stockholders and the Optionholders in accordance with their respective Selling Percentage. In the event there is a Purchase Price Decrease pursuant to this Section 2.08 and CRA is not paid from the Escrow Amount, the Stockholder Representative shall be personally liable to CRA (which liability shall not be duplicative of its obligations pursuant to the immediately preceding sentence) for such Purchase Price Decrease; PROVIDED that the Stockholder Representative shall only be liable, pursuant to its obligations under this sentence, for an amount equal to the lesser of (x) such Purchase Price Decrease and (y) the Escrow Amount. (b) The Stockholder Representative shall have thirty (30) Business Days after delivery by the Surviving Corporation of the Actual Closing Date Working Capital Statement (the "OBJECTION PERIOD") to object to any item or items shown on the Actual Closing Date Working Capital Statement. During the Objection Period, the Stockholder Representative shall have access to, and shall be entitled to receive copies of, all work papers of the Surviving Corporation which were used in the preparation of the Actual Closing Date Working Capital Statement. If the Stockholder Representative does not object during the Objection Period, the Actual Closing Date Working Capital Statement received by the Stockholder Representative shall be conclusive and binding on the parties hereto and may not be challenged by any of them in any forum. If the Stockholder Representative does object during the Objection Period, and thereafter the Stockholder Representative and the Surviving Corporation are unable to resolve such dispute with respect to the Actual Closing Date Working Capital Statement within thirty (30) Business Days after delivery by the Stockholder Representative of its objections, the matter or matters in dispute shall be submitted to such firm of Accountants as the Surviving Corporation and the Stockholders Representative may agree. If they cannot so agree, the Surviving Corporation shall select one such firm and the Stockholder Representative shall select another, and the two Accountants so chosen shall select a third firm of Accountants to which such dispute shall be submitted. The Accountant chosen, whether by agreement of the Surviving Corporation and the Stockholder Representative or by their -10- respective Accountants, shall be limited to determining a value for those items on the Actual Closing Date Working Capital Statement that are disputed by the Surviving Corporation and the Stockholder Representative in accordance with this Section 2.08(b) and are not resolved by agreement between the Surviving Corporation and the Stockholder Representative. The decision of such Accountant shall be conclusive and binding upon the Surviving Corporation and the Stockholder Representative and may not be challenged by either of them in any forum, and the fees and costs therefor shall be borne equally by the Surviving Corporation, on the one hand, and the Stockholders and the Optionholders, on the other hand (in accordance with their respective Selling Percentage). ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Buyer and CRA as follows: 3.01. ORGANIZATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Section 3.01 of the disclosure schedule attached hereto (the "DISCLOSURE SCHEDULE") sets forth a list of all jurisdictions in which the Company is qualified to do business, as well as complete and correct copies of the certificate of incorporation of the Company and the bylaws of the Company, in each case with all amendments thereto. The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership, use or occupancy of its assets or the conduct of its business requires such qualification, EXCEPT where the failure to be so licensed, qualified or in good standing would not be reasonably likely to have a Material Adverse Effect. 3.02. AUTHORIZATION OF TRANSACTION. The Company has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Without limiting the generality of the foregoing, the board of directors of the Company and the Stockholders have duly authorized the execution, delivery, and performance of this Agreement by the Company. This Agreement constitutes the valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms and conditions. No Stockholder has perfected his or its appraisal rights under the Delaware General Corporation Law with respect to the Merger. 3.03. NON-CONTRAVENTION. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (a) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, or other restriction of any government, governmental agency, or court to which the Company is subject, (b) violate any provision of the certificate of incorporation or bylaws of the Company, or (c) except as set forth in Section 3.03(c) of the Disclosure Schedule, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any Person the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement which is required to be disclosed under Section 3.09 or 3.10 of this Agreement. The Company is not required to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order for the Company to consummate the transactions contemplated by this Agreement, EXCEPT (i) for filings under the HSR -11- Act, which filings have already been made and with respect to which all applicable writing periods have expired or been terminated, and the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, and (ii) as listed in Section 3.03 of the Disclosure Schedule. 3.04. OWNERSHIP OF STOCK. The authorized capital stock of the Company consists of (a) 78,000 shares of Series A Preferred Stock, par value $.001 per share (the "SERIES A PREFERRED STOCK"), all of which were issued and outstanding prior to the redemption of a certain portion of such shares immediately prior to the Effective Time (the "PREFERRED SHARES"), and (b) 1,500,000 shares of Common Stock, par value $.001 per share (the "COMMON STOCK"), of which only 500,000 shares are issued and outstanding (the "COMMON SHARES"). Except for Options representing 54,728 Option Shares, at the Effective Time, there will be no outstanding subscriptions, options, warrants, calls, rights, contracts, commitments, understandings or arrangements relating to the issuance, sale or transfer of any Series A Preferred Stock or Common Stock. The Shares are fully paid, nonassessable and free of preemptive rights. 3.05. TITLE TO TANGIBLE ASSETS. The Company has good title to, or a valid leasehold interest in, the material tangible assets it uses regularly in the conduct of its business as presently conducted (the "ASSETS"). The Assets that are owned by the Company are free and clear of Liens, other than the Liens set forth in Section 3.05 of the Disclosure Schedule. 3.06. FINANCIAL STATEMENTS. Section 3.06 of the Disclosure Schedule sets forth the following financial statements (collectively the "FINANCIAL STATEMENTS"): (a) the audited balance sheets of the Company as of December 31, 1995 and 1994, respectively, and the audited statements of operations, stockholders' equity (deficiency) and cash flows of the Company for the fiscal years ended December 31, 1995 and 1994, respectively, and (b) the September Financials. The Financial Statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby and present fairly in all material respects the financial condition of the Company as of such dates and the results of operations of the Company for such periods; PROVIDED, HOWEVER, that the September Financials are subject to normal year-end adjustments and lack footnotes. Immediately prior to the Effective Time, the Company will have no Indebtedness for Money Borrowed. 3.07. LEGAL COMPLIANCE. Except as set forth in Section 3.07 of the Disclosure Schedule, the Company is in material compliance with all applicable laws (including rules and regulations thereunder) of federal, state, local, and foreign governments (and all agencies thereof). 3.08. TAX MATTERS. (a) Except as set forth in Section 3.08(a) of the Disclosure Schedule, the Company has filed all Income Tax Returns that it was required to file. All such Income Tax Returns are complete and correct in all material respects. All Income Taxes owed by the Company, whether or not reflected on said Income Tax Returns, have been paid. (b) Section 3.08(b) of the Disclosure Schedule sets forth all Income Tax Returns filed with respect to the Company for taxable periods ended on or after December 31, 1992, indicates -12- those Income Tax Returns that have been audited, and indicates those Income Tax Returns that currently are the subject of audit. The Company has made available to the Buyer correct and complete copies of all federal Income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by the Company since December 31, 1992. (c) Except as set forth in Section 3.08(c) of the Disclosure Schedule, since June 30, 1992, the Company has not waived any statute of limitations in respect of Income Taxes or agreed to any extension of time with respect to an Income Tax assessment, deficiency or liability. (d) The Company is not a party to any Income Tax allocation or sharing agreement. (e) Since June 30, 1992, the Company has not been a member of an Affiliated Group filing a consolidated federal Income Tax Return. (f) To the best knowledge of the Company, no claim has ever been made by any authority in a jurisdiction where the Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. (g) The Company has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party. (h) No officer or director (or employee responsible for Tax matters) of the Company expects any authority to assess any additional Taxes for any period for which a Tax Return has been filed. There is no dispute or claim concerning any Tax liability of the Company whether (i) claimed or raised by any authority in writing, or (ii) as to which any of the officers and directors (and any employee responsible for tax matters) of the Company have knowledge based upon personal contact with any agent of such authority. (i) The Company has not filed a consent under Section 341(f) of the Code concerning collapsible corporations. (j) The Company has not made any payments, and is not a party to any agreement that, under any circumstances, could obligate it to make any payment that will not be deductible under Section 280G of the Code or that would be subject to an excise tax under Section 4999 of the Code. (k) The Company has disclosed on its Income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal Income Tax within the meaning of Section 6662 of the Code. (l) The Company has no liability for the Taxes of any person under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law) as a transferee or successor by contract or otherwise. -13- (m) The Company has properly made all required adjustments under Section 481 of the Code (or any comparable provisions of state, local or foreign law) by reason of a change in accounting method. (n) During the period commencing on or about April 23, 1991 and ending on December 28, 1994, the Company was an S Corporation within the meaning of Subtitle A, Chapter 1, Subchapter S of the Code for federal Income Tax purposes. (o) The Company has not been a United States Real Property Holding Corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. 3.09. REAL PROPERTY. The Company owns no real property. Section 3.09 of the Disclosure Schedule sets forth the addresses and uses of all real property that the Company leases or subleases, and any Lien on the Company's leasehold interest therein, specifying in the case of each such lease or sublease, the name of the lessor or sublessor, as the case may be, and the lease term. Except as set forth on Section 3.09 of the Disclosure Schedule, to the Knowledge of the Company, there is no material violation of any law, regulation or ordinance (including without limitation laws, regulations or ordinances relating to zoning, city planning or similar matters) relating to any real property leased or subleased by the Company. The Company is not, and to the Knowledge of the Company, no other party to any lease referenced in Section 3.09 of the Disclosure Schedule, is in material breach or default, and no event has occurred which with notice or lapse of time would constitute a material breach or default by the Company, or to the Company's Knowledge, by any other party, under any lease listed in Section 3.09 of the Disclosure Schedule. 3.10. CONTRACTS. Section 3.10 of the Disclosure Schedule sets forth all written contracts and other written agreements (other than leases or subleases of real property) and all legally binding oral agreements to which the Company is a party or by which it is subject, the performance of which will involve consideration in excess of $100,000 per annum and each written contract or other written agreement and each legally binding oral agreement regarding the provision of consulting services to the Company under which the Company will pay consideration in excess of $50,000 per annum. Except as otherwise provided in Section 3.10 of the Disclosure Schedule, the Company has made available to the Buyer a correct and complete copy of each written contract or other written agreement (as amended to date) set forth in Section 3.10 of the Disclosure Schedule. Each contract or agreement listed in Section 3.10 of the Disclosure Schedule is a legal, valid, binding, and enforceable obligation of the Company, and in full force and effect. The Company is not, and to the Company's Knowledge, except as set forth in Section 3.10 of the Disclosure Schedule, no other party thereto is, in material breach or default, and no event has occurred which with notice or lapse of time would constitute a material breach or default by the Company, or to the Company's Knowledge, by any other party, under any contract or agreement listed in Section 3.10 of the Disclosure Schedule. 3.11. LITIGATION. Except as set forth in Section 3.11 of the Disclosure Schedule, there are no claims, actions, suits, arbitrations, proceedings or investigations pending (or, to the Company's Knowledge threatened) against the Company which, if adversely determined, would be -14- reasonably likely to result in payments by the Company in excess of $50,000 in the aggregate for all such claims, actions, suits, arbitrations, proceedings or investigations, or $10,000 in the case of any individual claim, action, suit, arbitration, proceeding or investigation, and there are no outstanding court orders, court decrees, court stipulations or settlement agreements to which the Company is a party. 3.12. EMPLOYEE BENEFITS. (a) Section 3.12(a) of the Disclosure Schedule lists or describes each Employee Benefit Plan. (b) Each such Employee Benefit Plan (and each related trust, insurance contract, or fund) complies in all material respects in form and in operation with the applicable requirements of ERISA and the Code. (c) The Company does not maintain, contribute to, or have any liability or contingent liability with respect to (i) any "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA) that is subject to Section 302 of ERISA or Section 412 of the Code, or (ii) any "multiemployer plan" (as such term is defined in Section 3(37) of ERISA). (d) Each Employee Benefit Plan that is intended to be qualified within the meaning of Section 401(a) of the Code has received a determination from the Internal Revenue Service that such Employee Benefit Plan is so qualified, and to the Knowledge of the Company, nothing has occurred which could cause the loss of such qualification. (e) The Company has made available to the Buyer current, correct and complete copies of the plan documents and summary plan descriptions and all amendments thereto (or to the extent no such copy exists, an accurate written description thereof), the most recent determination letter received from the Internal Revenue Service, the most recent Form 5500 Annual Report and all written trust agreements, insurance contracts and other funding agreements which implement or are related to each Employee Benefit Plan. (f) No actions, suits or claims (other than routine claims for benefits made in the ordinary course of plan administration) are pending with respect to any Employee Benefit Plan, or, to the Knowledge of the Company, threatened, and no facts or circumstances exist which could give rise to any such actions, suits or claims. Neither the Company nor, to the Knowledge of the Company, any other Person has engaged in a prohibited transaction, as such term is defined under Section 4975 of the Code or Section 406 of ERISA, or breached any fiduciary responsibility, which could subject the Company, its officers or directors to any Taxes, penalties or other liabilities under Section 4975 of the Code or Sections 409 or 502 of ERISA. To the Knowledge of the Company, the Employee Benefit Plans are not, and have not been, the subject of any investigation, examination or audit by the Internal Revenue Service, the United States Department of Labor or any other governmental agency as to which the Company has received written notice. -15- (g) Except as required by applicable law, the Company is under no obligation or liability to provide (i) medical benefits (including through insurance) to retirees or former employees, officers or directors of the Company, or their respective dependents, or (ii) life insurance or other death benefits (including through insurance) to retired or former employees, officers or directors of the Company, or their respective dependents. (h) No Employee Benefit Plan is (or at any time was) funded through a "welfare benefit fund" (as defined in Section 479(a) of the Code). With respect to any insurance policy that provides or has provided funding for benefits under any Employee Benefit Plan, (i) there will be no liability of the Company in the nature of a retroactive or retrospective rate adjustment, loss sharing arrangement, or other actual or contingent liability as of the Closing Date, and (ii) to the Knowledge of the Company, no insurance company issuing any such policy is in receivership, conservatorship, liquidation, or similar proceeding. 3.13. INTELLECTUAL PROPERTY. (a) Section 3.13(a) of the Disclosure Schedule sets forth a list that is complete and correct in all material respects of (i) all patented or registered Intellectual Property Rights and pending applications for registrations of Intellectual Property Rights owned or filed by or on behalf of the Company and (ii) all material Intellectual Property Rights that are owned or licensed by the Company regarding the information contained in the Company's database. (b) Except as set forth in Section 3.13(b) of the Disclosure Schedule, (i) the Company owns and possesses all right, title and interest in and to, or has valid and enforceable license to use, the Intellectual Property Rights necessary for the operation of the Company's business as currently conducted, free and clear of all Liens; (ii) since June 30, 1992, no claim by any third party contesting the validity, enforceability, use or ownership of any of the Intellectual Property Rights has been made in writing which is currently outstanding and, to the Company's Knowledge, no such claim has been threatened; (iii) since June 30, 1992, the Company has not received any written (or to the Company's Knowledge unwritten) notices of any infringement or misappropriation by, or conflict with, any third party with respect to the Intellectual Property Rights; and (v) to the Company's Knowledge, the Company has not infringed, misappropriated or otherwise conflicted with any intellectual property rights or other rights of any third parties. 3.14. SUBSIDIARIES. The Company has no Subsidiaries. 3.15. INSURANCE. Section 3.15 of the Disclosure Schedule sets forth all insurance policies in effect as of the date of this Agreement covering general property and liability, auto, crime, errors and omissions, umbrella and workmen's compensation for the Company. 3.16. AFFILIATED TRANSACTIONS. Except as set forth in Section 3.16 of the Disclosure Schedule, neither the Company nor any of its officers, directors or Stockholders has a material direct or indirect interest in any Person which has a material business relationship or arrangement with the Company. Schedule 3.16 lists all material transactions between the Company and its officers, directors or Stockholders during the period commencing January 1, 1994 and ending on the date -16- hereof other than transactions in the ordinary course regarding the compensation of officers for services rendered, reimbursement of expenses or the payment of directors fees. 3.17. BROKERS' FEES. Except for fees owed to Robertson, Stephens & Company LLC for which the Stockholders and Optionholders are liable pursuant to Section 9.12 hereof, the Company has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement. 3.18. UNDISCLOSED LIABILITIES. Except for those liabilities that have arisen in the ordinary course of business after December 31, 1995, the Company does not have any liability, contingent or otherwise, which is not reflected in or reserved against in the Financial Statements that would materially and adversely affect the Company's condition (financial or otherwise). 3.19. SUBSEQUENT EVENTS. Since December 31, 1995 there has not been any material adverse change in the business, assets, liabilities, condition (financial or otherwise) or operations of the Company. Except for the transactions contemplated by this Agreement or as disclosed in Section 3.19 of the Disclosure Schedule, since September 30, 1996, the Company has conducted its operations in the ordinary course consistent with past practices and has not: (i) incurred any Indebtedness for Money Borrowed or guaranteed any debts, obligations or liabilities, absolute, accrued or contingent, and whether due or to become due; (ii) paid any obligation or liability other than in the ordinary course of business and consistent with past practice, or discharged or satisfied any Liens other than those securing current liabilities in the ordinary course of business and consistent with past practice; (iii) declared or made any direct or indirect payment, set aside, or distribution to stockholders, or directly or indirectly purchased, acquired or redeemed any of its shares of its capital stock or other securities, or obligated itself to do so; (iv) mortgaged, pledged or subjected to Lien any of its property or assets (tangible or intangible, real, personal or mixed), EXCEPT in the ordinary course of business and consistent with past practice; (v) sold, leased, transferred, or otherwise disposed of any of its properties or assets (real, personal or mixed, tangible or intangible), EXCEPT in transactions in the ordinary course of business and consistent with past practice; (vi) canceled or compromised any debt or claim, or waived or released any right of material value, EXCEPT in the ordinary course of business and consistent with past practice; -17- (vii) suffered any material physical damage, destruction or loss (whether or not covered by insurance); (viii) entered into any transaction other than in the ordinary course of business; (ix) encountered any material labor disputes or labor union organizing activities with respect to its employees; (x) issued or sold any shares of capital stock or other securities or granted any options, warrants or other purchase rights with respect thereto; (xi) made any acquisition of any material assets or made any single capital expenditure or commitment in excess of $50,000 for additions to property or equipment; (xii) made any change in any Employee Benefit Plan which would be reasonably likely to increase the cost of maintaining such Employee Benefit Plan by the Company in excess of $50,000 in the aggregate for all such Employee Benefit Plans, or $10,000 in the case of an individual Employee Benefit Plan; (xiii) increased the compensation payable, or to become payable, to any of its employees or directors, or made any bonus payment or similar arrangement with any employees or directors or increased the scope or nature of any fringe benefits provided for its employees or directors; or (xiv) agreed, whether in writing or otherwise, to do any of the foregoing other than pursuant hereto. 3.20. DISCLOSURE. The representations and warranties contained in this Article III and in the Disclosure Schedule taken as a whole do not, to the Knowledge of the Company, contain any untrue statement of a material fact or omit to state any fact necessary in order to make the statements contained in this Article III not misleading in any material respect. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS AND THE OPTIONHOLDERS Each of the Stockholders and the Optionholders hereby severally (and not jointly) represents and warrants, as to himself, herself or itself only, as follows: 4.01. ORGANIZATION OF CERTAIN STOCKHOLDERS. With respect to SV-II and SI-II, such Stockholder is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. -18- 4.02. AUTHORIZATION OF TRANSACTION. Such Stockholder or Optionholder has full power and authority to execute and deliver this Agreement and to perform such Stockholder's or Optionholder's obligations hereunder. This Agreement constitutes the valid and legally binding obligation of such Stockholder or Optionholder, enforceable against such Stockholder or Optionholder in accordance with its terms and conditions. Such Stockholder has not perfected his or its appraisal rights under the Delaware General Corporation Law with respect to the Merger. 4.03. NON-CONTRAVENTION. Neither the execution and the delivery of this Agreement by such Stockholder or Optionholder, nor the performance by such Stockholder or Optionholder of his or its obligations hereunder, will (a) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or other restriction of any government, governmental agency or court to which the Stockholder or Optionholder is subject, EXCEPT where the violation would not be reasonably likely to have a Material Adverse Effect, (b) with respect to SV-II and SI-II, violate any provision of their organizational documents, or (c) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any Person the right to accelerate, terminate, modify, cancel or require any notice under any agreement, contract, lease, license, instrument or other arrangement to which such Stockholder or Optionholder is a party or by which such Stockholder or Optionholder is bound or to which any of such Stockholder's or Optionholder's assets are subject (or result in the imposition of any Lien on any of his or its assets), EXCEPT where the violation, conflict, breach, default, acceleration, termination, modification, cancellation, failure to give notice, or Lien would not be reasonably likely to have a Material Adverse Effect. 4.04. OWNERSHIP OF STOCK AND OPTIONS. (a) The Shares owned by such Stockholder are free and clear of all Liens, other than Liens in favor of the Company and other Liens that will be terminated prior to the Effective Time, and the restrictions imposed by federal and state securities laws. (b) The Option owned by such Optionholder is free and clear of all Liens, other than the restrictions imposed by the applicable Option Agreement or by federal and state securities laws. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE BUYER AND CRA The Buyer and CRA each hereby jointly and severally represent and warrant to the Company and the Stockholders as follows: 5.01. ORGANIZATION. Each of the Buyer and CRA is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation. 5.02. AUTHORIZATION OF TRANSACTION. Each of the Buyer and CRA has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Without limiting the generality of the foregoing, the boards of directors of each of the Buyer and CRA (both -19- for itself and as the sole stockholder of the Buyer) have duly authorized the execution, delivery and performance of this Agreement by the Buyer and CRA, as applicable. This Agreement constitutes the valid and legally binding obligation of each of the Buyer and CRA, enforceable against each of the Buyer and CRA in accordance with its terms and conditions. 5.03. NON-CONTRAVENTION. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (a) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, or other restriction of any government, governmental agency or court to which either the Buyer or CRA is subject, (b) violate any provision of the certificate of incorporation or bylaws of either the Buyer or CRA, or (c) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice under any material agreement, contract, lease, license, instrument, or other arrangement to which either the Buyer or CRA is a party or by which either are bound or to which any of their assets are subject. Neither the Buyer nor CRA is required to give any notice to, make any filing with or obtain any authorization, consent or approval of any government or governmental agency in order for either the Buyer or CRA to consummate the transactions contemplated by this Agreement, EXCEPT for filings under the HSR Act, which filings have already been made and with respect to which all applicable waiting periods have expired or been terminated, and the filing of the Certificate of Merger with the Secretary of State of the State of Delaware. 5.04. LITIGATION. No claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any court, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal is pending or, to the Buyer's and CRA's Knowledge, is threatened, which seeks to delay, prevent, adversely affect or restrict the consummation of the transactions contemplated hereby. 5.05. INVESTMENT. CRA is not acquiring the Shares with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act of 1933, as amended, or in violation of any applicable state securities laws. 5.06. BROKERS' FEES. Neither CRA, the Buyer nor any Affiliate or representative of CRA or the Buyer has any liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which the Stockholders could become liable or obligated. ARTICLE VI COVENANTS 6.01. TAX MATTERS. (a) TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE. The Buyer shall prepare or cause to be prepared and file or cause to be filed all Income Tax Returns for the Company for all periods ending on or prior to the Closing Date which are required to be filed after the Closing Date. -20- Buyer shall permit the Stockholder Representative to review and comment on each such Tax Return described in the preceding sentence prior to filing and shall make such revisions to such Tax Returns as are reasonably requested by the Stockholder Representative to the extent that any requested changes to the Tax Returns are consistent with the past practice of the Company or have substantial authority within the meaning of Section 6662 of the Code. The Stockholder Representative shall have not more than thirty (30) days following its receipt of a draft Income Tax Return for the taxable year ending on the Closing Date to review and make comments thereon. The Stockholder Representative shall have the right to approve, in its sole discretion, the filing of any amended return for any Tax period ending on or prior to the Closing Date for which the Company does not have a legal obligation to file. Notwithstanding Section 7.01 of this Agreement, the Stockholders shall have no indemnification obligation for any Tax Return filed in violation of the preceding sentence. The Stockholders shall advance funds to the Buyer for Taxes of the Company, if any, with respect to such periods, to the extent that such Taxes were not paid on or before the Closing Date, within fifteen (15) days after notice by the Buyer or the Company stating the amount of such Taxes and the date on which such Taxes are due; PROVIDED HOWEVER that no Stockholder shall be required to pay more than his, her or its Allocable Percentage of such Taxes. (b) TAX PERIODS BEGINNING BEFORE AND ENDING AFTER THE CLOSING DATE. The Buyer shall prepare or cause to be prepared and file or cause to be filed any Income Tax Returns of the Company for Tax periods which begin before the Closing Date and end after the Closing Date. The Buyer shall permit the Stockholder Representative to review and comment on each such Tax Return described in the preceding sentence prior to filing and shall make such revisions to such Tax Returns as are requested by the Stockholder Representative. The Stockholders shall pay to the Buyer within fifteen (15) days after the date on which Taxes are paid with respect to such periods, to the extent that such Taxes were not paid on or before the Closing Date, an amount equal to the portion of such Taxes which relates to the portion of such Taxable period ending on the Closing Date; PROVIDED HOWEVER that no Stockholder shall be required to pay more than his, her or its Allocable Percentage of such payments. For purposes of this Section 6.01(b), in the case of any Taxes that are imposed on a periodic basis and are payable for a Taxable period that includes (but does not end on) the Closing Date, the portion of such Tax which relates to the portion of such Taxable period ending on the Closing Date shall (i) in the case of any Taxes other than Taxes based upon or related to income or receipts, be deemed to be the amount of such Tax for the entire Taxable period multiplied by a fraction the numerator of which is the number of days in the Taxable period ending on the Closing Date and the denominator of which is the number of days in the entire Taxable period, and (ii) in the case of any Tax based upon or related to income or receipts be deemed equal to the amount which would be payable if the relevant Taxable period ended on the Closing Date. Any credits relating to a Taxable period that begins before and ends after the Closing Date shall be taken into account as though the relevant Taxable period ended on the Closing Date. All determinations necessary to give effect to the foregoing allocations shall be made in a manner consistent with prior practice of the Company. (c) REFUNDS. Any refunds of Income Taxes (including any interest thereon) received by or credited to the Company attributable to periods ending on or prior to the Closing Date, or attributable to periods which include the Closing Date with respect to which the Stockholders are obligated to indemnify the Buyer pursuant to Section 6.01(b), shall be for the -21- benefit of the Stockholders, and the Buyer shall use its reasonable best efforts to obtain such refunds and shall cause the Company to pay over to the Stockholder Representative any refunds immediately upon receipt thereof, which refunds shall be distributed by the Stockholder Representative to the Stockholders in accordance with their Allocable Percentage. In addition, if the Income Taxes with respect to the pre-Closing portion of any period that begins before and ends after the Closing Date are less than the payments made (or deemed made) by the Company on or before the Closing Date, the Buyer shall cause the Company to pay to the Stockholder Representative the excess of such payments over such Income Taxes immediately upon the Company's receiving the benefit of such excess payments through a reduction in any Tax payment required to by made by the Company after the Closing, which excess shall be distributed by the Stockholder Representative to the Stockholders in accordance with their Allocable Percentage. (d) COOPERATION ON CERTAIN TAX MATTERS. The Buyer, the Company and the Stockholders shall cooperate fully, as and to the extent reasonably requested by the other Party, in connection with the filing of Tax Returns pursuant to this Section 6.01 and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other Party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. CRA and the Buyer agree (i) to retain all books and records with respect to Tax matters pertinent to the Company relating to any Taxable period beginning before the Closing Date until the expiration of the statute of limitations (and any extensions thereof) of the respective Taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (ii) to give the other Parties reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other Parties so request, CRA and the Buyer shall allow the other Parties to take possession of such books and records. (e) COOPERATION REGARDING GOVERNMENTAL CERTIFICATES. The Buyer and the Stockholders agree, upon written request from the other, to use their reasonable best efforts to obtain any certificate or other document from any governmental authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). (f) COOPERATION REGARDING REPORTING OBLIGATIONS. The Buyer and the Stockholders further agree, upon written request from the other, to provide the other Party with all information that either Party may be required to report pursuant to Section 6043 of the Code. 6.02. FURTHER ASSURANCES. From time to time after the Closing Date, without further consideration, the Parties will execute and deliver such documents and take such actions as any Party may reasonably request in order to more effectively consummate the transactions contemplated hereby. 6.03. BOOKS AND RECORDS; PERSONNEL. Until the later of (a) January 15, 2000 and (b) the date on which any and all claims by the Buyer for indemnification have been finally resolved, CRA shall cause the Company to provide to any Stockholder or Optionholder for any purpose -22- relating to such Stockholder's or Optionholder's ownership of any securities of the Company or such Stockholder's rights or obligations under Article VII hereof, access to the books and records of the Company upon reasonable advance written notice during regular business hours for the sole purpose of obtaining information for use as aforesaid and will permit such Stockholder or Optionholder to make such extracts and copies thereof as may be necessary; PROVIDED, HOWEVER CRA shall cause the Company to provide any Stockholder such access and rights for any purpose relating to a claim for indemnification in connection with Section 3.08 hereof until the later of (x) September 30, 2001 and (y) the date on which any and all claims by the Buyer with respect thereto have been finally resolved. 6.04. WAIVER OF APPRAISAL RIGHTS. Each of the Stockholders hereby waives his or its rights under the Delaware General Corporation Law to an appraisal of the fair value of his or its Common Shares. 6.05. EMPLOYEE BONUSES. Consistent with the past practice of the Company, the Surviving Corporation shall (a) pay employee bonuses included in the calculation of the Actual Working Capital Amount (the accrual of which as of the Closing Date equaled approximately $334,434) and (b) make additional accrual for such bonuses (other than in the case of Roberto) from the Closing Date through December 31, 1996; provided, however, the Surviving Corporation shall not include in the determination of any employee bonuses any costs, expenses or other charges which may occur in connection with the transactions contemplated by this Agreement, including without limitation, the payment of any and all bonuses to employees of the Company on or about the Effective Time. 6.06. ESTIMATED CLOSING DATE WORKING CAPITAL STATEMENT. The Estimated Closing Date Working Capital Statement, to be delivered by the Company to the Buyer pursuant to Section 2.05 hereof, shall include not less than $50,000 in cash. ARTICLE VII INDEMNIFICATION 7.01. INDEMNIFICATION BY THE STOCKHOLDERS AND OPTIONHOLDERS. Subject to the limitations set forth in this ARTICLE VII, the Stockholders agree to indemnify, defend and hold the Buyer and its respective officers, directors, agents and Affiliates (collectively, the "BUYER INDEMNITEES"), harmless from and in respect of any and all losses, damages, costs, fines, penalties and reasonable fees and expenses (including, without limitation, reasonable attorney's fees but excluding any consequential damages or lost profits) (collectively,"DAMAGES") that any of them actually incurs arising out of or due to (a) the inaccuracy of any representation or the breach of any warranty made by the Company or the Stockholders in this Agreement, or (b) the breach of any covenant, undertaking or agreement of the Company or the Stockholders contained in this Agreement. Subject to the limitations set forth in this ARTICLE VII, the Optionholders agree to indemnify, defend and hold the Buyer Indemnitees harmless from and in respect of any and all Damages that any of them actually incurs arising out of or due to (x) the inaccuracy of any representation or the breach of any warranty made by the Optionholders in this Agreement, or (y) -23- the breach of any covenant, undertaking or agreement of the Optionholders contained in this Agreement. 7.02. INDEMNIFICATION BY THE BUYER AND CRA. Subject to the limitations set forth in this ARTICLE VII, the Buyer and CRA agree to indemnify, defend and hold the Stockholders and Optionholders, and, to the extent applicable, their respective officers, directors, agents and Affiliates (collectively, the "COMPANY INDEMNITEES"), harmless from and in respect of any and all Damages that they actually incur arising out of or due to (a) the inaccuracy of any representation or the breach of any warranty made by the Buyer or CRA in this Agreement, or (b) the breach of any covenant, undertaking or agreement of the Buyer or CRA contained in this Agreement. 7.03. SURVIVAL. All of the representations, warranties and covenants of the Parties contained in this Agreement shall survive the Closing; PROVIDED HOWEVER, that notwithstanding anything to the contrary contained herein the representations, warranties and covenants of the Company, the Stockholders or the Optionholders contained in this Agreement (other than their indemnification obligations under this Article VII) shall expire in their entirety on the first anniversary of the Closing Date EXCEPT that (a) the representations and warranties contained in Sections 3.04, 3.17, and 5.06 shall survive indefinitely and not expire and (b) the representations and warranties contained in Section 3.08 and the covenants contained in Sections 6.01 and 6.03 shall survive until, and expire in their entirety on, April 15, 2000 (PROVIDED, HOWEVER, the representation and warranty set forth in Section 3.08(a) shall survive until September 30, 2001 with respect to the Company's taxable year ended December 31, 1994); and PROVIDED, HOWEVER, that such representations, warranties and covenants (including the indemnification obligations under this ARTICLE VII) shall survive beyond such date with respect to any inaccuracy therein or breach thereof, notice of which shall have been duly given prior to such date in accordance with Section 7.05 hereof. 7.04. LIMITATIONS ON INDEMNITY CLAIMS. (a) Anything to the contrary contained herein notwithstanding, the Buyer Indemnitees shall not be entitled to recover from the Stockholders or the Optionholders pursuant to Section 7.01 hereof unless and until the total of all Damages entitled to indemnification pursuant to Section 7.01 exceeds $300,000 (the "BASKET"), and once all such Damages have exceeded the Basket, the Buyer Indemnitees shall be entitled to recover from the Stockholders or the Optionholders the amount by which all such Damages exceed the Basket; PROVIDED, HOWEVER, that the foregoing shall not apply to claims made as a result of inaccuracies in or breaches of representations or warranties contained in Section 3.04, the last sentence of Section 3.06, and Sections 3.08, 3.17 and 4.04 hereof or a breach of the covenants contained in Sections 2.08, 6.01 and 6.06. In addition, notwithstanding any other provisions of this Agreement, i) the Buyer Indemnitees shall not be entitled to recover from the Stockholders or the Optionholders pursuant to Section 7.01 hereof with respect to claims made as a result of an inaccuracy in or breach of representations and warranties contained in Section 3.18 hereof unless, and then only to the extent, each such claim is for Damages that are in excess of $10,000; (ii) the total combined liability of the Stockholders and the Optionholders in respect of all Damages entitled to indemnification pursuant to the terms of this Article VII shall be limited to $4,000,000 in the aggregate, including Damages in respect of breaches -24- of Section 3.08 and 6.01 hereof, but excluding Damages in respect of breaches of Section 6.06 hereof (the "CAP") EXCEPT that (A) the total combined liability of the Stockholders and Optionholders in respect of all Damages entitled to indemnification pursuant to the terms of this Article VII in respect of breaches of any representations, warranties and covenants contained in this Agreement (other than those contained in Sections 3.08, 6.01 and 6.06 hereof) shall be limited to $2,500,000 in the aggregate, and (B) with respect to claims made under this Article VII after the first anniversary of the Closing Date, the Cap shall be reduced to an amount equal to $4,000,000 minus the greater of (Y) $500,000 and (Z) the amount of outstanding claims for Damages (to the extent such claims for Damages are actually paid) (plus Damages previously paid) pursuant to the terms of this Article VII in respect of breaches of any representations, warranties and covenants contained in this Agreement other than those contained in Sections 3.08, 6.01 and 6.06 hereof; and (iii) the indemnification obligation of each Stockholder hereunder shall be several (and not joint) and, with respect to each claim for indemnification for which the Buyer Indemnitees are entitled to indemnification hereunder, shall be limited to such Stockholder's Allocable Percentage of the liability related to such claim. Notwithstanding any provision contained in this Agreement to the contrary, each Stockholder and Optionholder shall have sole liability in respect of breaches of his, her or its respective representations, warranties or covenants, which liability shall in all respects be several and not joint, and no other Stockholder or Optionholder shall have any liability of any nature whatsoever (whether under this Agreement, by law or otherwise) for the breaches of any representation, warranty or covenant of another Stockholder or Optionholder. (b) The amount of any Damages for which indemnification is provided under this ARTICLE VII shall be reduced by (i) any amounts recovered by the indemnified Party under insurance policies with respect to such Damages, and (ii) any net Tax benefit realized by the indemnified Person arising from the incurrence or payment of any such Damages. In addition, the amount of Damages shall be increased by any Tax liabilities resulting from indemnification payments hereunder. In computing the amount of any Tax benefit, the indemnified Person shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any loss, deduction or credit arising from the incurrence or payment of any indemnified Damages. Any indemnification payment hereunder shall initially be made without regard to this Section 7.04(b) and shall be reduced to reflect any such net Tax benefit only after the indemnified Person has actually realized such benefit. For purposes of this Agreement, an indemnified Person shall be deemed to have "actually realized" a net Tax benefit to the extent that, and at such time as, the amount of Taxes payable by such indemnified Person is reduced below the amount of Taxes that such indemnified Person would be required to pay but for the incurrence or payment of such Damages. The amount of any reduction hereunder shall be adjusted to reflect any final determination (which shall include the execution of Form 870-AD or successor form issued pursuant to the Code) with respect to the indemnified Person's liability for Taxes and payments between the Stockholders, on the one hand, and CRA and the Buyer, on the other hand, to reflect such adjustment shall be made if necessary. (c) If (and then only to the extent) permitted by applicable law, the Parties shall treat any payment of Damages under this Article VII as an adjustment to the Cash Purchase Price. -25- (d) The indemnification provisions in this Article VII shall be the sole and exclusive remedy of the Parties for the breach of any representation, warranty or covenant contained in this Agreement. (e) Notwithstanding anything to the contrary contained herein, any claim for indemnification based upon any federal, state, local or foreign assessment, deficiency or liability with respect to the Company's taxable year ended October 28, 1996 shall be limited to the Taxes payable with respect to the taxable year ended October 28, 1996 and shall not include any claim for indemnification based upon the disallowance of the net operating loss generated in the Company's taxable year ended October 28, 1996 which was used by a Buyer Indemnitee in a taxable year ending after October 28, 1996. (f) Notwithstanding anything to the contrary in this Section 7.04, in determining Damages in respect of any claim involving Taxes, the Stockholders shall be permitted to carry back the net operating loss generated by the Company in its taxable year ended October 28, 1996, if any, in an amount not exceeding $300,000, to offset any increase in the Company's Income Tax liability for the Company's preceding taxable years to the extent permissible by law and such carryback will not cause the Stockholders to be liable for any claim for indemnification based upon any federal, state, local or foreign assessment, deficiency or liability for Income Taxes because of the reduction in the amount of the net operating loss generated in the Company in its taxable year ended October 28, 1996 resulting from the use by a Buyer Indemnitee in a taxable year ending after October 28, 1996. 7.05. NOTICE AND OPPORTUNITY TO DEFEND. (a) If there occurs an event which a Buyer Indemnitee or a Company Indemnitee asserts is an indemnifiable event pursuant to Section 7.01 or 7.02 hereof, the Buyer, on behalf of such Buyer Indemnitee, or the Stockholder Representative, on behalf of such Company Indemnitee, shall notify the other Party or Parties obligated to provide indemnification (the "INDEMNIFYING PARTY") promptly upon its determination to seek indemnification. (b) If there occurs an event which a Buyer Indemnitee or a Company Indemnitee asserts is an indemnifiable event pursuant to Section 7.01 or 7.02, as applicable, which involves any claim or the commencement of any claim, action or proceeding by a third person, the Buyer, on behalf of such Buyer Indemnitee, or the Stockholder Representative, on behalf of such Company Indemnitee, will give the Indemnifying Parties prompt written notice of such claim or the commencement of such action or proceeding. In case any such action shall be brought against any Party seeking indemnification and it shall notify the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to participate therein and may elect, within fifteen (15) days of receiving such notice, to assume the defense thereof, with counsel reasonably satisfactory to such Party seeking indemnification and, after notice from the Indemnifying Party to such Party seeking indemnification of such election so to assume the defense thereof, the Indemnifying Party shall not be liable to the Party seeking indemnification hereunder for any legal expenses of a Person entitled to indemnification hereunder or any other expenses subsequently incurred by such Person in connection with the defense thereof. The Party seeking indemnification -26- agrees to cooperate fully with the Indemnifying Party and its counsel in the defense against any such asserted liability. The Party seeking indemnification shall have the right to participate at its own expense in the defense of such asserted liability. No settlement shall be effected by the Indemnifying Party without the written consent of the Party seeking indemnification (which consent shall not be unreasonably withheld) unless, in connection with such settlement, the Party seeking indemnification is fully and unconditionally released from such asserted liability (without any liability for payment) and the settlement involves only the payment of money. No settlement shall be effected by a Party seeking indemnification without the written consent of the Indemnifying Party, such consent not to be unreasonably withheld. ARTICLE VIII STOCKHOLDER REPRESENTATIVE Each of the Stockholders and Optionholders hereby appoints SV-II as his, her or its true and lawful representative (the "STOCKHOLDER REPRESENTATIVE") to take such actions on behalf of the Stockholders and Optionholders as are authorized by this Agreement and as otherwise may be necessary following the Closing to more effectively consummate the transactions contemplated by this Agreement. The Stockholder Representative is authorized, in the name and on behalf of each Stockholder and Optionholder in his, her or its capacity as such, to (i) execute and deliver, and accept delivery of such amendments as may be deemed by the Stockholder Representative in its sole discretion to be appropriate to amend this Agreement or any other agreement contemplated hereby, (ii) execute and deliver, and accept delivery of such notices, agreements, instruments and other documents as may be deemed by the Stockholder Representative, in its sole discretion, to be appropriate under this Agreement, (iii) dispute or refrain from disputing any claim made by the Stockholders and Optionholders under this Agreement and the agreements contemplated hereby, (iv) negotiate or compromise any dispute which may arise under and exercise or refrain from exercising remedies available under, and make any determination under, this Agreement and the agreements contemplated hereby, and sign any releases or other documents with respect to such dispute or remedy, (v) waive any condition contained in this Agreement and the agreements contemplated hereby, (vi) give any and all consents under this Agreement and the agreements contemplated hereby and (vii) give such instructions and do such other things and refrain from doing such other things as such Stockholder Representative shall deem appropriate to carry out the provisions of this Agreement and the agreements contemplated hereby. Each of the Stockholders and Optionholders shall be bound by all notices received and agreements and determinations made and documents executed and delivered by the Stockholder Representative under this Agreement and the agreements contemplated hereby. The Parties hereto acknowledge and agree that the Stockholder Representative shall have no liability for acting in its capacity as such, except for such liabilities arising out of its gross negligence or willful misconduct. Each of the Stockholders and Optionholders hereby agrees to indemnify and hold the Stockholder Representative harmless from any claims, liabilities, costs and expenses (including reasonable attorneys' fees) arising out of or relating to its actions as Stockholder Representative hereunder, other than any such claims, liabilities, costs and expenses finally determined by a court of competent jurisdiction to have arisen out of such Stockholder Representative's gross negligence or willful misconduct; PROVIDED, HOWEVER, that no Stockholder or -27- Optionholder shall be liable for more than his, her or its Selling Percentage of such claims, liabilities, costs and expenses. ARTICLE IX MISCELLANEOUS 9.01. NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns. 9.02. ENTIRE AGREEMENT. This Agreement (including the Exhibits, the Disclosure Schedule and the other documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements or representations by or among the Parties, written or oral, to the extent they related in any way to the subject matter hereof. 9.03. SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. No Party may assign either this Agreement or any of such Party's rights, interest or obligations hereunder without the prior written approval of each other Party; PROVIDED, HOWEVER, that CRA and the Buyer may assign (i) their rights hereunder to secure obligations owed to CRA's secured lenders and (ii) the right to receive the proceeds only (and no other related rights) of any claim for indemnification made by CRA or the Buyer under Article VII hereof, in each case without obtaining the prior written approval of any other Party hereto. 9.04. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.05. HEADINGS. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.06. NOTICES. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given by a reputable and recognized overnight delivery service (E.G. Federal Express, etc.), against receipt thereof, by facsimile against a confirmed receipt therefor or by mail (registered or certified mail, postage prepaid, return receipt requested) to the respective parties as follows: -28- If to either the Buyer or CRA: CRA Managed Care, Inc. 312 Union Wharf Boston, MA 02109 (617) 367-8519 (facsimile) (617) 367-2163 (telephone) Attention: Mr. Donald J. Larson President and CEO in each case, with a copy to: Hutchins, Wheeler & Dittmar 101 Federal Street Boston, MA 02210 (617) 951-1295 (facsimile) (617) 951-6677 (telephone) Attention: James Westra, Esquire If to the Company: care of Summit Ventures II, L.P. 600 Atlantic Avenue, Suite 2800 Boston, Massachusetts 02210-2227 (617) 824-1100 (facsimile) (617) 824-1000 (telephone) Attention: Mr. Martin Mannion in each case, with a copy to: Kirkland & Ellis 655 Fifteenth Street, N.W., Suite 1200 Washington, D.C. 20005 (202) 879-5200 (facsimile) (202) 879-5054 (telephone) Attention: Richard L. Perkal, Esquire If to the Stockholders or the Optionholders: To the address specified with respect to such Person on the signature pages hereto. -29- in each case, with a copy to Kirkland & Ellis 655 Fifteenth Street, N.W., Suite 1200 Washington, D.C. 20005 (202) 879-5200 (facsimile) (202) 879-5054 (telephone) Attention: Richard L. Perkal, Esquire or to such other address as any Party hereto may, from time to time, designate in a written notice given in like manner. Any notice given in accordance with the requirements of this Section 9.06 shall be deemed to have been received when delivered in person or via facsimile against receipt thereof, five Business Days after deposit in the U.S. mail against receipt thereof, and one Business Day after deposit with a reputable express overnight courier service against receipt therefor. 9.07. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts without giving effect to any choice or conflict of law provision or rule (whether of the Commonwealth of Massachusetts or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the Commonwealth of Massachusetts. 9.08. AMENDMENTS AND WAIVERS. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by all of the Parties. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder, or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.09. SEVERABILITY. Any provision of this Agreement which is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provision of this Agreement invalid, illegal or unenforceable in any other jurisdiction. 9.10. CERTAIN TAXES. The Buyer shall be responsible for all transfer, documentary, sales, use, stamp, registration and other such taxes and fees (including any penalties and interest) ("TRANSFER TAXES") incurred in connection with this Agreement and for the expenses of filing all necessary Tax Returns and other documentation ("TRANSFER TAX RETURNS") with respect to all such Transfer Taxes. Transfer Tax Returns shall be filed and Transfer Taxes shall be paid when due by the Party normally required by law to file such returns and pay such taxes. If required by applicable law, the Parties will and will cause their Affiliates to, join in the execution of any such Transfer Tax Returns. Within fifteen (15) days after the payment of any Transfer Taxes or the filing of any Transfer Tax Returns by the Stockholders, the Buyer shall reimburse the Stockholders for all such Transfer Taxes and for the Stockholders' expenses in connection with the filing of any such Transfer Tax Returns. -30- 9.11. CONSTRUCTION. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. The word "including" shall mean including without limitation. 9.12. EXPENSES. The Buyer and CRA shall pay all of their expenses arising in connection with the transactions contemplated hereby. The Stockholders and the Optionholders shall pay all of their respective expenses, and their Allocable Percentage of all of the expenses of the Company, that arise in connection with the transactions contemplated hereby; PROVIDED, HOWEVER, that the foregoing shall not prohibit the Company from paying all or part of such expenses. 9.13. GENDER, NUMBER. The masculine gender shall include the feminine, the feminine the masculine, the neuter the masculine and the feminine, the singular the plural and the plural the singular whenever the context or sense of this Agreement may require, as if such words had been fully and properly written in the required number and gender. [END OF PAGE] [SIGNATURE PAGE FOLLOWS] -31- IN WITNESS WHEREOF, the Parties hereto have caused this Agreement and Plan of Merger to be executed as of the date first above written. PAI ACQUISITION CORP. By: /s/ Donald J. Larson --------------------------------------- Name: Donald J. Larson CRA MANAGED CARE, INC. By: /s/ Donald J. Larson ---------------------------------------- Name: Donald J. Larson Title: President PROMPT ASSOCIATES, INC. By: /s/ James T. Roberto ---------------------------------------- Name: James T. Roberto Title: Chief Executive Officer /s/ James T. Roberto ---------------------------------------- James T. Roberto Address: 4 Joann Circle Westport, CT 06880 /s/ Michael P. Thalasinos ---------------------------------------- Michael P. Thalasinos Address: 604 Graham Drive Coppell, TX 75019 /s/ Richard D. Proctor ---------------------------------------- Richard D. Proctor Address: c/o Ron Schneider Great American Mortgage 650 East 4500 South, #340 Salt Lake City, UT 84107 [SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER] SUMMIT VENTURES II, L.P. By: Summit Partners II, L.P. General Partner By: Stamps, Woodsum & Co. II General Partner By: /s/ Martin Mannion ---------------------------------------- General Partner SUMMIT INVESTORS II, L.P. By: /s/ Martin Mannion ---------------------------------------- General Partner /s/ Robert Patterson ---------------------------------------- Robert Patterson Address: 2174 E. Willow Brook Way Sandy, UT 84092 /s/ John Bonkoske ---------------------------------------- John Bonkoske Address: 316 North Grant Street Hinsdale, IL 60521 /s/ Renee Flaherty ---------------------------------------- Renee Flaherty Address: 11606 Old Annapolis Road Frederick, MD 21701 /s/ John Ward ---------------------------------------- John Ward Address: 1481 N. Willow Valley Drive Centerville, UT 84041 /s/ Richard Gabel ---------------------------------------- Richard Gabel Address: P.O. Box 3083 Ogden, UT 84409 /s/ Lloyd Roberts ---------------------------------------- Lloyd Roberts Address: 1504 Mayfair Drive Mesquite, TX 75149 /s/ Brad Hansen ---------------------------------------- Brad Hansen Address: 4977 S. Huntington Road Salt Lake City, UT 84118 /s/ Ann Pope ---------------------------------------- Ann Pope Address: 6757 S. Buckthorn Circle West Jordan, CT 84084 /s/ Adele Hansen ---------------------------------------- Adele Hansen Address: 155 North 600 East Bountiful, UT 84010 /s/ Sharon Breon ---------------------------------------- Sharon Breon Address: 674 North 1250 West Clearfield, UT 84015 /s/ Pat Wolfe ---------------------------------------- Pat Wolfe Address: 16576 Ivy Lane Rogers, AR 72756 /s/ Vicki Cerva-Mousley ---------------------------------------- Vicki Cerva-Mousley Address: 1617 West Cloverdale Appleton, WI 54914 /s/ Charles Ricevuto ---------------------------------------- Charles Ricevuto Address: 103 Woodward Court Neptune, NJ 07753 /s/ Paul Glover ---------------------------------------- Paul Glover Address: 15 Green Ridge Lane West Hartford, CT 06107 /s/ Stephen Coady ---------------------------------------- Stephen Coady Address: 15 Morningside Drive West Granby, CT 06090-0312 [SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER] EX-5.1 5 EXHIBIT 5.1 November 7, 1996 CRA Managed Care, Inc. 312 Union Wharf Boston, MA 02109 Ladies and Gentlemen: We have acted as counsel to CRA Managed Care, Inc., a Massachusetts corporation (the "Company"), in connection with proceedings being taken to register under the Securities Act of 1933, as amended, of up to 2,300,000 shares of the Company's Common Stock, $.01 par value per share (the "Common Stock") pursuant to a Registration Statement on Form S-3 (the "Registration Statement"). Of the Common Stock being registered, up to 800,000 shares are being offered by the Company and 1,500,000 shares are being offered by certain selling stockholders (the "Selling Stockholders"). As such counsel, we have examined (i) certain corporate records of the Company, including its Articles of Organization, its By-laws, stock records and records of the meetings of its Incorporator, Board of Directors and Stockholders; (ii) a Certificate of the Secretary of the Commonwealth of Massachusetts as to the legal existence of the Company; and (iii) such other documents as we have deemed necessary as a basis for the opinions hereinafter expressed. Based upon the foregoing, and having regard for such legal considerations as we deem relevant, we are of the opinion that: 1. The Company is a corporation duly organized and validly existing under the laws of the Commonwealth of Massachusetts. 2. The Company is authorized to issue 40,000,000 shares of Common Stock, par value $.01 per share. 3. When issued and sold under the circumstances contemplated in the Registration Statement, the 800,000 shares of Common Stock offered by the Company will be duly authorized, validly issued, fully paid and nonassessable. CRA Managed Care, Inc. November 7, 1996 Page 2 4. When sold under circumstances contemplated in the Registration Statement, the 1,500,000 shares of Common Stock offered by the Selling Stockholders will be duly authorized, validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the references to us under the caption "Legal Matters" in the Prospectus forming a part of the Registration Statement. Very truly yours, HUTCHINS, WHEELER & DITTMAR A Professional Corporation JW/WBD 115024-1 EX-23.1 6 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our firm) included in or made part of this Registration Statement on Form S-3. ARTHUR ANDERSEN LLP Boston, Massachusetts November 7, 1996 EX-23.2 7 EXHIBIT 23.2 Consent of Ernst & Young LLP, Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report dated April 19, 1996, with respect to Prompt Associates, Inc. included in the Registration Statement (Form S-3) and related prospectus of CRA Managed Care, Inc. for the registration of shares of its common stock filed with the Securities and Exchange Commission. Ernst & Young LLP Salt Lake City, Utah November 6, 1996 EX-27 8 EX-27
5 0000942136 CRA MANAGED CARE, INC. 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 33,585,000 0 33,514,000 1,119,000 0 67,665,000 17,714,000 10,639,000 94,694,000 19,056,000 6,000 0 0 89,000 73,121,000 94,694,000 0 131,032,000 0 107,981,000 10,491,000 183,000 212,000 12,348,000 5,124,000 7,224,000 0 0 0 7,224,000 0.87 0
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